“It’s really bad optics”: What Adam Neumman’s $700M cashout says about The We Company’s future
Investors in the company are split on the unprecedented cashout by enigmatic CEO
UPDATED July 19, 9:00 pm: Startups are valued by their potential to grow, and trust in the business model. In the We Company’s case, its $47 billion valuation is set to be tested by the confidence of public markets ahead of an upcoming IPO.
But the flexible office space company’s freewheeling founder and chief executive, Adam Neumann, has polarized investors, some of whom have puzzled over company decisions in recent years — the purchase of a wave pool company, launching an elementary school, and a questionable arrangement in which he acquired buildings under a personal LLC and then leased them to WeWork, the co-working arm of The We Company.
Again this week, the debate over the company’s prospects was reignited over revelations that Neumann has in recent years sold $700 million worth of WeWork debt and stock.
Since Neumann founded WeWork nine years ago, the company’s core business model — renting office space and subletting it to users at a premium — is yet to turn a profit. Last year, the company took in $1.8 billion revenue, but lost $1.9 billion.
“It’s unseemly at best for a founder executive to be walking off with all this money when the business isn’t profitable,” said R. Christopher Whalen, an investment banker and chairman of Whalen Associates. “It’s really bad optics.”
Neumann’s transactions, which were reported Thursday by the Wall Street Journal, were a combination of stocks sold and debt taken out against his holdings in the company (which were subsequently invested into real estate and startups). Axios reported Friday that $300 million was in stock sales, and $400 million in loans.
The We Company declined to comment.
Neumann’s exact stake in WeWork is unclear, but he is widely reported as the company’s largest single shareholder. The Journal reported that he controls an entity that owns about one-third of the We Company’s stock, which gives him full voting power over the company’s decisions.
Following the report, some investors told The Real Deal that Neumann’s transactions fueled uncertainty about the company’s future.
“It’s either going to be the best bet of all time, or the worst bet of all time,” one investor, who requested anonymity, said of their investment in the company.
But others said they continue to have high confidence in the business. Scott Plank, an early investor in WeWork, said he remained bullish on the startup, in part because of its support from institutional investors. “I trust SoftBank has done a great job working with Adam, and trust Adam is working in the interest of shareholders,” he said.
Plank, who was an executive at Under Armour, the clothing giant founded by his billionaire brother Kevin, added that having a financially secure chief executive is key to running a business. “Adam is bonkers for sure, but he cares about the members, and he cares tremendously about the investors,” he said.
While some critics suggested that Neumann’s sale of company stock signaled a lack of confidence by the founder in the company’s future, Kevin McNeil, of Fitch Ratings, said that Neumann’s borrowing of debt on stock demonstrated the opposite. McNeil added that the $700 million in transactions “seem in context to the overall value of the company.”
Neumann’s transactions are unusual, but it is not unprecedented for a founder to cash out ahead of an IPO. Ahead of discount marketplace Groupon’s IPO in November 2011, founder Eric Lefkofsky cashed out $300 million, against a $16 billion valuation. And Mark Pincus, the founder of social-media gaming firm Zynga, sold $100 million worth of stock ahead of an IPO that valued the company at $8.9 billion. But many investors pointed to those moves when the stocks declined.
In the meantime, another We Company executive appears to be spending big ahead of the IPO. According to Variety, the firm’s vice chairman Michael Gross recently forked out $28 million for a Brentwood tennis court estate.