Beyond the entire conversation about whether this is legal or illegal, and whether this is typical or atypical, there is a much more significant issue.<p>The entire image and “vibe” of this guy / his team is supposed to be an egalitarian re-invention of the status quo. The kibbutz story. The “community adjusted EBITDA.” The rebranding to “We.” But this sort of real estate self-dealing isn’t a We move, it’s a Me move. And thus, we find ourselves facing a bigger issue that is far more troubling if you’re a shareholder or employee (and somewhat enjoyable if you’re a competitor): the emperor has no clothes and the CEO is full of shit. He is self-serving and isn’t optimizing for the benefit of those around him.<p>As others in the tech industry are only beginning to figure out, once your curated narrative dies and the reality of who you really are comes to the surface, an unstoppable cycle of “bad press” and “negative sentiment” emerges. That’s a hard cycle to work out of, especially if the value of your company is predicated on your image / the image of the company. Hiring Obama’s speech writer and lobbying Congress doesn’t fix the underlying issue, and eventually you’re living in a Reverse Metcalf’s Law situation that’s scaling in the wrong direction.<p>As WeWork is built on an image of selling “a new, better way of working” to companies of all sizes, it becomes extremely problematic if people start to associate the brand with “the rich keep getting richer, and they’re screwing us over and working us to the bone along the way.” An image of a “collaborative enterprise” becomes a laughable fantasy novel next to the reality of, “we are funded by third world despots and our CEO is lining his pockets with as much of our money as possible, while scheming up ways to do petty things such as avoid paying the cleaning staff any sort of decent wages or benefits.”<p>This isn’t the We Company. It’s the Me Company. That’s not very innovative. That doesn’t foster greater productivity. And eventually, a lot of tenants aren’t going to pay for it, because it seems a lot of them really think they’re paying to be part of a progressive, futuristic environment. If their smartest and most progressive employees start telling them they don’t want to visit the office, they’re going to get rid of that office. Companies’ desire to please their knowledge workers — what originally drove WeWork’s success — thus ends up killing it.
<p><pre><code> As part of an investment round for WeWork in 2014, he was
granted Class B shares that gave him 10 votes per share,
and now he has more than 65% of the overall share vote,
according to WeWork corporate filings.
</code></pre>
These multi-class ownership structures need to be reformed. The SEC is already thinking about it [0].<p>[0]- <a href="https://www.sec.gov/news/speech/perpetual-dual-class-stock-case-against-corporate-royalty" rel="nofollow">https://www.sec.gov/news/speech/perpetual-dual-class-stock-c...</a>
There seems to be an archetype in silicon valley today of people viewing companies basically just as convenient extensions of themselves rather than distinct legal entities with separate interests.<p>Why would a WeWork object to paying Neumann's rent? WeWork is bascially Neumann anyway! Why would Tesla object to buying Musk's other companies? Tesla is basically Musk anyway! Why wouldn't levandowski just employ his own company to supply components he was procuring for Google? Why wouldn't Shkreli pay his hedge fund investors back with cash from one of his other companies?<p>It's amazing how often 'innovation' and business success turns into corrupt self-enrichment. Unfortunately justice tends to only come once someone suitably senior gets screwed. With Levandowski that was Google, with Shkreli that was the government. I suspect with WeWork the law suits will come the second the investment value drops - investors won't do a thing until they start losing money, rather than just making less money than they otherwise would have.
This reminds me of the boardgame <i>1830 Railways & Robber Barons</i>. You're an investor buying shares in railroad companies, and personally running any railroad of which you are the largest shareholder. A popular opening strategy is to first buy an expensive private company, then start a public company and have the public company buy your private company at inflated price.<p>It's a great way to shunt some money from the company treasury to your private wallet, which is otherwise impossible to do (except for dividend payments, but those are limited and go to all shareholders and not just to you).<p>It's absolutely a robber baron move.
For the people in this thread wondering whether this is ok: double dipping is never ok.<p>Once you get to a level where you have financial decision making power, don't pick a provider (even a great one, even at a competitive price) if you have a meaningful financial interest in them. The incentives are all wrong and it leads to badly run companies. In this particular case, it's so far over the line, it's pretty bad.<p>The board might not be able or want to force him out right now, but long term the tone has been set.
The ex-CEO at my wife's previous company did this. Signed a multi-year lease for the company on a building she owned a few months before leaving the company.<p>A real dick move for sure. They were growing at the time and being constrained to such a tiny space for so long was quite rough for them.
This is basically the textbook definition of conflict of interests.<p>Given that WeWork is also a very unprofitable business it raises serious fiduciary duty questions regarding his role at WeWork (it would be a big issue even if they were profitable but seems crazy bad when they are not).
"The building’s value, meanwhile, has gone up, and the owners have been able to borrow more money by refinancing the property’s debt. Late last year, Messrs. Neumann and Tahari took out a $77.5 million loan, according to loan adviser Meridian Capital Group, $7.5 million more than the prior loan to buy the building."<p>I'm amazed. When does this information about self-leasing show up in due diligence by investors? The prospect of return to the investors must overshadow such data? Is the real-estate market just so inflated at the moment that if you can play it why not do so?<p>The self-leasing strategy + WeWork makes the property value higher (presumably because the rent-ability of the property is proven when a WeWork tenant moves in). Then the property owners can leverage the property. Others have raised the point of conflict of interest and fiduciary responsibility and the not-so-sound financials of the business (e.g. Softbank backs down from $16B to $2B in new investment (still a big number)). I'm curious what is going on here or is it obvious?
This needs to called what it is, corruption. "Self-dealing is the conduct of a trustee, attorney, corporate officer, or other fiduciary that consists of taking advantage of his position in a transaction and acting in his own interests rather than in the interests of the beneficiaries of the trust, corporate shareholders, or his clients." This is supposedly why boards exist in the first place.<p><a href="https://en.wikipedia.org/wiki/Self-dealing" rel="nofollow">https://en.wikipedia.org/wiki/Self-dealing</a>
That is quite common in retail. Usually the family owns all the stores and just rent them to the retailer. (At least in Brazil)<p>Although it sounds bad, not sure how it is perceived in real estate
This is like paying for your startup with a credit card and being called out on it by reporters when the bill gets paid by the company rather than the individual, but on a much larger scale. There are perfectly valid, ethical reasons why you're using alternative sources of credit to fund a startup!<p>Here's why this article is an opinion piece searching for scandal that fails to reveal one:<p>Consider the legal definition of "self-dealing":
"One important duty of a fiduciary is to act in the best interests of the
benefited party. When a fiduciary engages in self-dealing, she breaches
this duty by acting in her own interests instead of the interests of the
represented party. For example, self-dealing occurs when a trustee uses
money from the trust account to make a loan to a business in which he has
a substantial personal interest. <i>A fiduciary may make such a transaction
with the prior permission of the trust beneficiary, but if the trustee
does not obtain permission, the beneficiary can void the transaction and
sue the fiduciary for any monetary losses that result</i>."[1]<p>Every decision WeWork made to lease new commercial space was made with board support. The CEO and family members conducted deals with WeWork that he or family personally benefited by, but it was done in a transparent manner and with board support.<p>WeWork is navigating uncharted territory. This makes those working in finance apprehensive. Underwriters have certain requirements that a borrower must meet before a loan is approved. A rapidly expanding, growth-oriented business like WeWork may not qualify to lease new space as quickly as it requires. However, perhaps individuals who pledge their own collateral might. Commercial space was leased by individuals (or other entities) and then re-leased to WeWork.<p>I could be wrong about this case, but if I am then this will likely grow into a scandal and self-dealing will be revealed.<p>[1] <a href="https://legal-dictionary.thefreedictionary.com/Self-Dealing" rel="nofollow">https://legal-dictionary.thefreedictionary.com/Self-Dealing</a>
I remember in my first job our CEO was quite proud that he bought the whole office building himself and then rented out to his company. He said whole mortgage will be repaid in 8 years... :) I guess the only difference was that it is a small company and not a 'unicorn'.
Although it doesn't sound right, on the other hand why would Neumann rent his commercial real estate assets to WeWork competitors?<p>Maybe the question should be, why the hell Neumann bought properties directly instead of using the WeWork vehicle?<p>We all know the answer to that I think.
This is just the start/continuation of the WeWork world unraveling. I am familiar with the internals and there is a lot more being hidden that has yet to come out.<p>When the 2010's documentary gets made and they get to the section about the start-up world unraveling and being exposed, it's gonna be Theranos, Fyre and WeWork highlighted throughout. 2019 is perfect timing.
This kind of conflict indeed looks sketchy, and I don't think Neumann should do it, but the risk and opportunity still run both ways.<p>Neumann is assuming the capital risk. Does WeWork and its investors (including Neumann!) want these assets and associated liabilities on its books? Probably not. Is Neumann making money from this transaction long term? No way to tell; he himself probably doesn't even know if these deals are profitable for him now.<p>What he is definitely doing is increasing his levered bet on WeWork, which could be good or bad for WeWork, and good or bad for him, depending on how everything turns out.
This sort of self benefiting deals should not be acceptable in any organization from their executives, just as they are not acceptable from democratic government officials.
I thought it was a very common practice. I know daycare owners who complained about high lease prices for the house/building. What they usually do is take a mortgage, buy a building and don't pay the lease just the mortgage. It's cheaper this way and you end up owning the building after finishing paying the mortgage.
Thinking out loud here, it seems like this behaves very similarly to leverage in that it kind of magnifies his gains or losses from wework. If Wework succeeds he can squeeze the company for more rent. If Wework fails, suddenly he also has a bunch of broken leases. (Although he has a floor to his losses from the real estate since he can eventually rerent it, maybe at a lower price)<p>Another interesting aspect of this is that he can basically insider trade with impunity since real estate isn't a security. Who knows when/where WeWork will open an office next? Well, he does, and can buy a place cheaply (I don't imagine WeWork presence affects the real estate price much, but in principle it could).
I'm not a subscriber of WSJ, so I can only read the first paragraph. Based on the headline and the first paragraph, I don't see the problem. Wouldn't WeWork have to lease the space from someone? Why is it a problem if that someone is the CEO of WeWork? If WeWork is paying above market rent, then sure, that is corrupt.<p>A lot of people hop on the band-wagon of bashing "rent-seeking", mostly misusing the term in the process, confusing rent-seeking with leasing/renting land or capital. WeWork's whole business is built on renting as far as I can tell.
This unfortunately is not uncommon outside of silicon valley either. The recent Sears debacle was helped along quite a bit by a CEO that was self-dealing to his own personal financial interests. And in a case very similar to the CEO of WeWork I recall the CEO of a restaurant holding corporation personally purchased the land where he knew he'd direct his company to build restaurants and lease it back to the company at exorbitant rents. (Though he was also jailed for criminal conduct as well, basically soliciting outright bribes from vendors.)
Just something to remember the next time a startup CEO tells you that "we" have to "work hard and give up some of our compensation" to "make a positive change in the world".
If I were an investor in WeWork, I would be concerned about this as well. Except that I'm not an investor, and I'm assuming 99% of angry commenters aren't either.<p>Devil's advocate: Conflicts of interest are absolutely everywhere and can never be avoided completely. For example, here's a conflict of interest in my own job: I want my employer to pay me as much money as possible, and my employer wants to pay me as little as possible.<p>And if I were a manager/director/executive, I would want to hire as many people as possible to boost my stature. And the company would want to hire as few people as possible to keep their expenses low.<p>The fact that a conflict of interest exists, isn't in itself a irreconcilable problem. It only becomes one if one party tries to hide it from the other, and deceives them to get what they want. Presumably that isn't happening at WeWork.<p>If you're an investor in WeWork, I can understand your concern, and your wanting your board representatives to take a close look at these agreements. From what I hear though, the investors and board of directors are all perfectly happy with the arrangements that have been made. Perhaps a little less soapboxing from the peanut gallery is in order.
We should add two mandatory clauses to cooperate law:
1. Major shareholders must disclose any business relationships between the company and shareholders' other business interests.
2. Shareholders can demand a vote on whether an above-mentioned business relationship causes a conflict of interest. If so, the relationship must be terminated.
I am more surprised that Neumann allows his name to be known in these investment groups<p>Just form the Wyoming Series LLC or BVI segregated portfolio company, no beneficial owner information will be in public records, but even the state and registered agent can be kept in the dark if you want.<p>I expect value has been extracted this way for centuries.<p>Oops!
Reminder: the Saudi Sovereign Wealth Fund is the majorly of money in SoftBank’s Vision Fund. And SoftBank is by far the largest investor in WeWork.<p>I have to admire Neumann’s balls in trying to play Mohammed bin Salman for a chump. But I don’t think this will end well for him.
The article states:<p>>"Mr. Neumann owes his personal wealth largely to sales of WeWork stock. It is unclear how much WeWork stock he has sold, but he has told some friends it is in the hundreds of millions of dollars."<p>Honest question - are investors OK with this? Isn't he essentially enriching himself with VC money that has yet to see a return realized?<p>Couldn't this be seen as a hedge that even if investor loose their shirts he himself has managed to enrich himself with a real-estate portfolio?
It was amusing to me that this sorry of thing is seen as potentially quite a big issue in tech yet is totally common in the real estate industry. I was made aware of this by today's Matt Levine piece <a href="https://www.bloomberg.com/opinion/articles/2019-01-16/even-cheaters-don-t-always-win" rel="nofollow">https://www.bloomberg.com/opinion/articles/2019-01-16/even-c...</a>
"Adam Neumann, WeWork’s chief executive, who leased the property to WeWork after buying it.." Is this even legal? I smell conflict of interest.
My wife’s family did this also. They owned the buildings and leased them back to the company.<p>It saved their butts when a partner they took on tried to take over their very valuable company.<p>I don’t see the problem unless there’s obvious overpricing, corruption, or failures to disclose. At some point it makes better sense to put property under a holding company or similar.
See... this is apparently quite legal but insider trading gets you prison. This is arguably more of a conflict of interest/questionable act than insider trading.<p>I imagine the company could also find cheaper places/better terms for leasing than the CEO owned properties which, to me, is mismanagement if not low-level fraud.
I don't see a problem with this if it's properly disclosed to investors, workers, and users of the service. If you don't like it, literally nobody is making you give your wealth to him, and there are plenty of alternatives that would benefit the local economy wherever you are.
Who said it - "No conflict, no interest"?<p>Edit: Fred Wilson attributes it to John Doerr - <a href="https://avc.com/2010/04/no-conflict-no-interest/" rel="nofollow">https://avc.com/2010/04/no-conflict-no-interest/</a>
Ah yeah, the old McDonalds farming-scheme. Buy some land, raise some cattle under your flag and milk them till they are dry. They have all the work and risk and you get all the fat money. At least a good farmer knows how to maintain them well for longterm-milking.
Often the operating business is floated and the vendors keep the buildings, this is nothing new and much more endemic than appears.<p>You're only just seeing an article on this behavior because a high profile tech company is doing it rather than a factory or a shop.
I can understand (but definitely wouldn't approve) if this happened early in the company's life but given when it happened and what the company has been valued at in the past few years, I really do not understand what this guy is doing.
Oh, self dealing. Shocking. For what happens when this gets rampant enough, please see DOMO. Wouldn't be surprised if Neumann owned a coffeeshop or fast casual restaurant ala Cubby's and mandated that said eatery cater all locations.
Classic Ponzi Scheme. People have been wondering how WeEork has't gone bankrupt yet. Well you don't go bankrupt if you can keep raising/lending more to pay up your losses. Until the day you can't anymore.
How is this wrong? Is WeWork publicly funded? Either way, is he withholding his status as landlord from investors? How is this even a conflict of interest? This sounds like a normal real estate deal: sale-leaseback to a management company.
Bloomberg is saying that this was disclosed in last year's bond prospectus. To me that's the minimum required but it's probably just better to avoid the appearance of any sort of conflict of interest.
Just look at WeWork's WEWORK COMP. 18/25 REGS bond. Total junk. Can't wait for an economic slowdown in 2019/20, and see WeWork default on its debt holders.
Matt Levine today: <a href="https://www.bloomberg.com/opinion/articles/2019-01-16/wework-ceo-adam-neumann-is-also-a-landlord" rel="nofollow">https://www.bloomberg.com/opinion/articles/2019-01-16/wework...</a><p>"Yes it really does seem like a conflict of interest! “A WeWork spokesman said all related-party deals are reviewed and approved by the board or an independent committee and disclosed to investors,” so that is good, but on the other hand, “Mr. Neumann, the 39-year-old executive who founded WeWork in 2010, is WeWork’s largest individual shareholder and has voting control over the company,” so it is not clear that the board can say no. (He got that control in 2014 with some super-voting stock; before that, he once tried to do a related-party deal and got turned down by the board.)<p>"One thing I will say, though, is that if you told me that a privately owned real estate company was engaging in transactions with its controlling shareholder and CEO that raised possible conflicts of interest, I would be like “ha, yeah, that’s the real estate industry for you.” Conflicts of interest are more common there, as everyone knows these days after years of stories about Donald Trump’s business dealings, and it is not surprising for a founder/controller/CEO to be involved in a deal with his company on multiple sides and in multiple ways. Private tech startups, on the other hand, tend to be a bit more pristine. They are not complex moneymaking structures for their founders but mission-driven enterprises where everyone’s incentives are ostentatiously and lavishly aligned: If the company gets big, the founder becomes a zillionaire; if not, he walks away with only his modest salary and a track record for failing ambitiously. WeWork is a weird company because it is a real estate company that thinks it’s a tech startup; it seems to have the culture and New-Age-y patter and grandiose ambition and valuation of a tech company. But what if, deep down in its heart, it really is a real estate company?"