> Mr. Neumann still has allies among the directors and the ability to fire the entire board thanks to shares he controls that carry extra votes.
It defies imagination that a fund would put 10B into a company whose CEO is accountable to no one. I think we may also see new leadership in SoftBank, or at least their next fund.
You can thank loose monetary policy that has created an unbalance between capital seeking returns and the number of investment opportunities. Executives have leveraged this into abusive multi-class share structures that sacrifice shareholder's ability to reign in company behavior. The result is a few tech executives wielding unaccountable authority over incredibly powerful economic resources.
I'm not so sure. WeWork is the product of three capital sources.
One, Mortimer Zuckerman, who was "not just their landlords AND seed investor," but also "happened to own Fast Company and NY Post which were instrumental in propping up WeWork in the press before anybody knew who they were" [1].
Two, MBS, who backed the Vision Fund to the tune of $45 billion [2].
Three, Masa Son.
Mr. Zuckerman's investment was too small to be affected by monetary policy. And I doubt the Saudis invested in the Vision Fund because their bonds weren't yielding enough. The only monetary actor is Son, though that is more based on Japan than dollar dynamics.
WeWork's competition, on the other hand, is juiced by monetary policy in the form of construction loan and mortgage rates. But that doesn't create WeWork, just lots of commercial real estate.
Aren't there also tax strategies/techniques that offer benefits from these investments when they fail as well? That both making and losing money in the VC/FinEng context each have their tax advantages (in the US)?
My impression is that upon this foundation and US interest rate/monetary policies create a perverse incentive where the investor doesn't really have to care too much how the company turns out. Like sure, a success pays off much more, but bankruptcy isn't bad either. Did I dream all this? :)
> Aren't there also tax strategies/techniques that offer benefits from these investments when they fail as well?
The Vision Fund will have a $10bn capital loss to write off against future capital gains taxes. But those losses are worth a hell of a lot less than $10bn in cash.
WeWork has no federal guarantees and basically no assets. Its downside scenario is grim for shareholders. The only one walking away with cash might be Adam, though I expect he'll burn a good amount of it defending against litigious shareholders and possibly prosecutors.
> Aren't there also tax strategies/techniques that offer benefits from these investments when they fail as well? That both making and losing money in the VC/FinEng context each have their tax advantages (in the US)?
Nope. It is always better to have income and pay taxes on it than to have losses and not pay taxes on the losses when we are dealing with entities over certain ( rather small ) size.
I think you are actually illustrating the point. Zuckerman's investment is too far upstream of WeWork's size to take the blame. And the fact that competing companies are able to rely on loans and mortgage easing is exactly why folks with a surplus of capital (Saud + Son) have to accept worse terms - they have more competition.
I think it was an episode of Planet Money a couple of months ago, that had an interview with someone senior in the bond world. She seemed really quite worried about the current state of the market.
There is so much capital desperately trying to find a home that they are having to invest in companies with very little oversight or influence. In the past they would have been the grown-ups in the room, applying some scrutiny and skepticism to everything. But now companies can simply go somewhere else if you turn them down.
She seemed to think that there were a lot of companies being kept afloat by this easy money that could easily go pop in the near future, or companies that should have gone bust ages ago but are limping along with cheap credit.
It does seem that whether or not we are headed for an imminant bust, the economy is in a pretty peculiar place at the moment with negative interest rates etc.
I mean, it sounds like it is abusive, but it's an abusive relationship investors sought out.
At this point it's akin to someone who seeks out abusive partners due to mental health issues. It doesn't make the partners any less abusive, but lets not kid ourselves and think the seeker is a healthy individual.
I think the reality of the situation is that some of these investors actually like the "visionary leader who full control and isn't dragged down by investors" model.
Yeah I don’t understand why people in this thread aren’t entertaining that possibility. It objectively worked for Facebook, at least in terms of financial return.
If they actually had to earn the money they'd treat it different. Free money just enables stupid shit like this at all our expenses. The comment you responded to is on point
The problem is having so much wealth concentrated in the first place. If capital was more evenly spread, then those who control it would have no problems finding worthwhile investments (smaller investments would become worthwhile because collectively the controllers of the capital would have more time to oversee them)
The real question is what is the endgame for our current worldwide incredibly loose monetary policy and deep wealth inequality. Literally nothing good comes to my mind, at best we'll get a slow return to a few % interest rates on major 10yr notes, which means a decade of garbage returns on pretty much any asset class, problems with pension funds, general malaise. At worst, well, last time we had this setup was 1930s and the various world govt stimulus went towards war efforts ...
It's true of some large companies, yes. But it's still extraordinarily uncommon overall. Zuck's Facebook arrangement was essentially unique at the time of the IPO, and Facebook's success led to more founders on unicorn trajectory demanding and receiving similar terms, but it's still far from the norm.
It's not preferred shares that are letting these founders retain control, it's having multiple classes of common stock where either the public investors get no votes for their shares, or the founders have 10+ for each of their shares, so that their vote always wins. This article gives a good overview of some of the changes that have occurred that have allowed this issue to proliferate (although the main issue seems to be a glut of capital and FOMO for these deals):
> Preferred shares existed before Facebook, and it may not the be norm, but there's a reason we no longer see the hostile takeovers from the 80's.
That has nothing to do with preferred shares. Most of public companies adopted poison pills aka shareholder right protection plans which work along the lines of this:
1. If someone acquires a certain percentage of company shares without board of directors agreeing to it, then the company automatically issues a very large number (2x to 3x) of shares and allows shareholders of record of a certain past date before the hostile party launched the acquisition to obtain newly issued shares at a discount.
2. Board members have staggered terms so the acquiring party cannot replace more than a small percentage of board members thereby preventing the one's ability to flood the board one's supporters
It used to be that preferred shares were a special class of equity that paid higher dividends. The funny part is that tech companies tend not to pay any dividends what so ever and now with the special classes of shares that have nearly no voting rights ( compared to the 'preferred shares' that are controlled by the insiders ) the same companies make a virtual mockery out of the concept of a "public company". Facebook is not a public company in any sense other than the name -- it is Mark's personal piggybank that he shares with a few insiders with the crums off the table being given to the people whom he used to call "stupid".
With a single class of shares every shareholder interest is aligned. It is not possible to create a subclass of shareholders among the existing shareholders without existing shareholders agreeing to it. So in a buyout all shares are equal and will receive and equal percentage of distribution of all assets regardless of how those assets are structured.
The moment there are different classes of shareholders, there's a jockeying for a position. It is no different from the plays that can be made by a private company when it is getting a new round of investment/gets bought out -- those with A class shares have certain rights, with B some other rights with C some other rights etc. There's nothing ( apart from a rather complicated regulations that govern a right of minority shareholders not to get totally screwed ) that prevents those that control the voting block via special preferred shares from virtually screwing other shareholders:
Board can just vote to split the company into "icky carcass" with nominal assets, most of the liabilities give most of it to non-voting shares. Give the non-voting shares some tiny percentage of the ownership in the "awesome sauce" part of the company. Voting shares (held by insiders) get the opposite percentage. As the part of this deal the "awesome sauce" company gets sold.
It just has not been tried yet -- in fact I'm very surprised it has not been tried yet. It of course would be challenged in courts but I'm pretty sure it will be found legal -- after all "you have no rights compared to the rights of holders of class SP" has been spelled out in the offering paperwork and investors/employees/shareholders still lapped it.
Still stands for the proposition that directors have a fiduciary duty to shareholders which is subject to judicial scrutiny in the face of self dealing.
That's where I happen to be disagree -- it goes back to the blue sky laws. I think we are going to see it fairly soon - SNAP, in my view, is heading there and it has an insane corporate structure.
While there are issues with Zuckerberg, I think it bears noting that the FB IPO wasn't done because he needed the money, but rather because they were forced too by law because too many people had ownership. So, he didn't give great terms in the IPO because he didn't really need any cash; FB was already cashflow-positive. This is a marked contrast to WeWork.
> While there are issues with Zuckerberg, I think it bears noting that the FB IPO wasn't done because he needed the money, but rather because they were forced too by law because too many people had ownership.
This isn't entirely true. Once a company passes the shareholder limit they are required to publish public financials similar to what a publicly traded company must provide. However they are not required to sell their stock on the open market, it's just that it's such a small step at this point that most if not all do.
Also - while this is often quoted as the reason for Facebook's IPO, it's worth noting that the investor limit was actually raised (from 500 to 2000) a couple months before Facebook's IPO. If it were really the main reason they could have easily held off on the IPO and carried on as a private company.
That's not correct at all, there's no rule requiring companies to go public.
And even if he didn't need cash, an IPO creates an incredible opportunity to use shares as a currency to fund high-dollar acquisitions, which he has most certainly taken advantage of.
It is a bit more complicated than that - FB investors used SPEs rather than held the shares directly. When the number of SPEs got too high those SPEs themselves reorganized moving the investors more levels down.
I think the Facebook IPO was done for one reason only; public relations.
As is the case with toxic discourse on his website, the nonchalant attitude with private information, Zuck loves to steer clear of taking responsibility for anything. The IPO allows the message to be: it's not my personal responsibility, I'm merely the CEO of the company.
No one put anything close to 10B into Facebook. Their largest single investor was Goldman Sachs at 450MM, after there was already a lot of other money in. Their total funding was 2.3B before IPO.
I think if you are including coffee shops, dry cleaners, and the rest of small businesses that are self-funded, I agree. If you look at VC backed high tech startups, I don't think that is the norm:
What about non-vc backed high tech startups, which are the by far the majority of tech jobs? (my company, fwiw) We have investors sure, but the two founders retain the control. All of the companies we have acquired were in similar situations. In fact it is precisely not until you get to VC-backed startups where this becomes surprising, such as in the GP comment I was referring to.
If you actually make money, have positive cash flow, and have a sustainable business model, you don't have to give up control. The investors will come to you -- foreign concept to the SV-SF "high tech" bubble, I know.
Startups is such a loosely qualified term these days that it practically means any business that has "recently started", so no you don't need a citation because the word in of itself is subjective.
WeWork presents itself as tech startup and is often presented that way. They are really more a real estate business, but in this context their self perception is the only relevant view
That's not the case. For private companies where the founder has the majority share, sure. But what's unusual with WeWork is how the founder has control despite not having a majority share.
As others mention, there are historical reasons why WeWork got this. But things like WeWork and Uber are going to be the new historical reasons why founders don't get that as much.
Assuming you mean just tech companies, yes, this is now the norm. But I suspect it's mainly due to backlash over the previous period, where many ignorant investors would oust founders and replace them with "professional managers" who would then either run the company into the ground, or sell it for scraps.
So I completely understand why founders, now given the opportunity, would write these sorts of share class structures into their business. It's definitely gone too far, though. But that's usually what happens.
This is awesome, it might force the private sector to regulate governance structures more strictly.
The exchanges and indexes already do this, but haven't gotten around to cultish companies that consider themselves tech. The exchanges and indexes say things like “minimum X% of float needs to be in the market”, so you dont have 1% of the company trading with the CEO now being a billionaire on paper from 99% of shares. Ive seen Chinese exchange allows for shenanigans like that, for example, while US ones dont. They could easily dictate share class structures, ultimate beneficial ownership rules, and more.
This would force VCs and PE to require changes no matter how much FOMO they have.
It defies imagination that a fund would put 10B into a company whose CEO is accountable to no one. I think we may also see new leadership in SoftBank, or at least their next fund.