WeWork Gave Founder Loans as It Paid Him Rent, IPO Filing Shows(bloomberg.com)
bloomberg.com
WeWork Gave Founder Loans as It Paid Him Rent, IPO Filing Shows
https://www.bloomberg.com/news/articles/2019-08-14/wework-gave-founder-loans-as-it-paid-him-rent-ipo-filing-shows
9 comments
It's almost as if this company was founded with the explicit mandate to maximize grift. I don't understand why any investor would get involved.
All the cultish language around "raising the world's consciousness" is particularly bizarre. Like an episode of Silicon Valley made real.
Referring to a CEO by his first name is a red flag, too.
Referring to a CEO by his first name is a red flag, too.
> Neumann took out a much bigger loan from WeWork a few months ago. The company lent him $362 million in April at 2.89% interest to help him exercise options to buy stock. This month, Neumann repaid the debt by surrendering the shares back to the company. It’s not clear from the filing why these transactions happened.
Can anyone explain a possible motivation for doing this? It seems like it's a completely circular transaction, or is my fraudster-fu just not strong enough to see the upside?
Can anyone explain a possible motivation for doing this? It seems like it's a completely circular transaction, or is my fraudster-fu just not strong enough to see the upside?
We's corporate structure is a bit complicated, but the short answer is that Adam relinquished the options in questions in return for an interest in a different piece of the company. See this in the S-1:
Shortly after the option awards were issued, Adam exercised the time-based option described above in exchange for a $362.1 million full recourse promissory note payable to the Company (with an interest rate of 2.89% and a maturity date of April 11, 2029). In August 2019, Adam repaid the promissory note (including interest) in full by surrendering to the Company all of the shares received in respect of the time-based option described above. Following the settlement of this loan, the Company issued to Adam the number of profits interests equal to the number of shares surrendered by Adam in settlement of the loan.
Shortly after the option awards were issued, Adam exercised the time-based option described above in exchange for a $362.1 million full recourse promissory note payable to the Company (with an interest rate of 2.89% and a maturity date of April 11, 2029). In August 2019, Adam repaid the promissory note (including interest) in full by surrendering to the Company all of the shares received in respect of the time-based option described above. Following the settlement of this loan, the Company issued to Adam the number of profits interests equal to the number of shares surrendered by Adam in settlement of the loan.
I’d think there is upside to the stock speculation vs the loan interest rate. You can also default on the loan should the downside get realized. The other less obvious option afforded with leverage is that with the stock assets he can probably secure other leveraged items against it (real estate, other investments etc).
The reality of this behavior is that free capital/cash should be looked at as fuel for growth. To judge the financial merit of this you have to wonder why WeWork could not have made more than 2.98% on that capital.
I could be missing something, any finance folks please correct me if I’m viewing this wrong or incomplete.
The reality of this behavior is that free capital/cash should be looked at as fuel for growth. To judge the financial merit of this you have to wonder why WeWork could not have made more than 2.98% on that capital.
I could be missing something, any finance folks please correct me if I’m viewing this wrong or incomplete.
This is a perfectly reasonable transaction. He just wants to exercise the options and then sell the stock. The loan was just a formality to make it easier to do that, there's no fraud here.
The confusing part to me was the language that he "surrendered the shares" as payment for the loan, which implies to me he gave it back at the same price, rather than selling it at a profit. But as a sib pointed out there was a further step to the transaction where they gave him a different asset.
That this passes as reasonable transaction is the insane part.
This isn't that unusual, many companies with ESPP's and options offer loans to their normal employees to buy stock or exercise their options.
This is pretty much the same like when a company offers an employee share purchasing program where you can buy say $20,000 worth of restricted stock within the allotted time window which is usually a few weeks but your company then spreads the payment over 6-12 months by deducting your pay each month.
Companies also offer a similar service when you have options vesting they offer to pay the tax for you that month and spread it out over several months so you won't have to immediately convert some of the shares you get to pay for exercising the option.
Just for reference my US employer in the UK offers this, several other companies in the UK i worked for also offered similar services.
Companies here offer loans all the time including for things like seasonal train tickets (some forfeit the loan and you have to pay just the tax value on it after a year of employment for train passes) and other large expenses which are work related.
This is pretty much the same like when a company offers an employee share purchasing program where you can buy say $20,000 worth of restricted stock within the allotted time window which is usually a few weeks but your company then spreads the payment over 6-12 months by deducting your pay each month.
Companies also offer a similar service when you have options vesting they offer to pay the tax for you that month and spread it out over several months so you won't have to immediately convert some of the shares you get to pay for exercising the option.
Just for reference my US employer in the UK offers this, several other companies in the UK i worked for also offered similar services.
Companies here offer loans all the time including for things like seasonal train tickets (some forfeit the loan and you have to pay just the tax value on it after a year of employment for train passes) and other large expenses which are work related.
Why?
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I wouldn't assume it went as planned. Seemed plausible they tried to lend him $362m to exercise his options, and then chickened out amid bad press.
Sometimes CEOs who don't know better treat their corporation like a sole proprietorship. The company's money is "theirs," like a piggy bank. So I will guess stupidity rather than fraud.
I think this is a very similar strategy to what Eddie Lampert did with Sears. Through a network of companies and controlling stakes, Lampert took possession of Sears, sold its assets to his own fund, and then leased the buildings to other tenants.
It's a very interesting network of financial engineering that really is quite intricate since I imagine commercial real estate is a very supply-constrained market, which is why they can charge such high rent with seemingly not much value provided.
It's a very interesting network of financial engineering that really is quite intricate since I imagine commercial real estate is a very supply-constrained market, which is why they can charge such high rent with seemingly not much value provided.
Yet another recent display of aggressive, excessive financial engineering. This is notable in WeWork’s case for being done in a pre-IPO startup, but is inflicted every day upon lesser known companies by legions of PE firms. This is late cycle business tactics - the relentless, desperate pull of any future value - real, imagined or invented - in to the present. The result of greed, hubris, and a decade of overly loose monetary policy. That this shameful IPO is coming to market is a sign the music is coming to a stop. Batten down the hatches.
Can the HN mods point to the preexisting link to this article? This was #1 on the front page when it was marked as [dupe].
I feel like this guy thinks he's playing 5D chess, but his friendly neighborhood SEC agent keeps dropping by and ruining everything and the plan du jour fizzles out.
Articles have been trickling out about We’s shadiness over the past year or two, so what is the average person suppose to do/think? Capitalism gonna capitalism? Don’t buy We stock? Or just watch another episode of “Startup Drama in America” play itself out?
With the turmoil of Uber/Lyft, Tesla and now We, I’m just looking for more popcorn...
With the turmoil of Uber/Lyft, Tesla and now We, I’m just looking for more popcorn...
"Don't buy We stock" is not a bad start. It requires some effort though as you may need to follow up on whether any funds you own are planning to purchase the stock.
It might be useful to have a "name and shame" list of funds which intend to buy into the IPO so investors can easily tell where they need to divest.
It might be useful to have a "name and shame" list of funds which intend to buy into the IPO so investors can easily tell where they need to divest.
No, but lately, SV capitolism seems especially myopic. It seems we may be part of the problem more than the solution right now. Most startups would accept funding from satan himself at this point.
I don't want to watch the world burn, but a few IPOs in flames might be better for us in the long run. Pass the popcorn.
I don't want to watch the world burn, but a few IPOs in flames might be better for us in the long run. Pass the popcorn.
> Don’t buy We stock?
That means forgoing most of the broad based index funds. I don't love that idea either.
That means forgoing most of the broad based index funds. I don't love that idea either.
Which broad based index is going to include WeWork?
VT and VTI certainly. At anything close to its proposed valuation S&P500 funds too.
No, stocks cannot be added to the S&P 500 unless the previous 4 reporting quarters taken in aggregate were profitable.
Good to know, thanks.
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