We Company Bailout by Softbank Raises More Governance Questions

On September 18, I posted a LinkedIn article on The We Company (parent company of the popular WeWork office-sharing business). It was called Corporate Governance: Where’s The We Company Board Been? In it, I questioned how The We Company board could have been so late in recognizing and tackling the financial and governance issues that cratered the company’s highly-anticipated IPO. Since the IPO came off the rails, We’s condition and public awareness of that position have become progressively worse—to the point that it’s very survival has been in question. Today, the Wall Street Journal reported that The We Company board has approved a bailout package from SoftBank, We’s largest investor, that will essentially enable the huge fund to take control of We. It will also give We co-founder and former CEO Adam Neumann roughly $1.7 billion and end most of his connections with the company.

By way of a reminder, We recorded a valuation of some $47 billion in their last private fund-raising round (earlier this year) before moving forward with their planned IPO. Investors were expecting a block-buster IPO that was initially expected to be valued above that figure. After backing the expected IPO valuation down into the low $20 billion range (and according to some reports, exploring even lower numbers), in mid-September We finally admitted it was delaying the offering, saying it expected to close the IPO by year end. From that point forward, analysts and the business press piled on We’s business model, operating losses and what some called a corporate governance nightmare. NYU Biz-School Professor Scott Galloway’s article on WeWork (At What Point Does Malfeasance Become Fraud?) is a good example. As the flack rained down, We’s board finally reacted with some substantive governance changes. Neumann reduced his supermajority voting rights and he and his wife stepped down from the leadership.

One month later, we have the bailout deal with SoftBank, which the We board apparently selected over a competing proposal from J.P. Morgan. SoftBank’s new financing and an offer to Neumann and other employees and investors will give the fund majority control of the business at a valuation of approximately $8 billion. (Just for clarity, yes, that’s the same SoftBank that invested at the $47 billion valuation in January.) According to the Wall Street Journal, Neumann will walk away with a $185 million consulting fee, $500 million in credit to help repay a loan facility of the same amount led by JPMorgan, as well about $1.0 billion in proceeds from the shares he’ll be selling to SoftBank. Nice departing compensation for a train wreck. (The details here deserve to be checked once We puts out a press release.)

Corporate and securities attorneys will recognize several elements in the deal structure that are designed to show compliance with fiduciary obligations to minority shareholders and the like. But the real question about fiduciary duty here is best assessed across the entire history of The We Company’s extraordinary ride, and that assessment, regrettably, will likely expand from fiduciary issues and self-dealing to fraud.

My question is not so much where the Board of Directors was in this latest bailout deal. At best, they were between a rock and a hard place. I’ll leave it to the plaintiffs’ lawyers to make the allegations about breach of fiduciary duty, self-dealing and the other usual claims, which will doubtless be leveled against management, directors and SoftBank. My question is where the board was over time, while the actions and inactions leading to The We Company meltdown were festering across years of hype fueled by ego, unconstrained optimism and failure to challenge basic business fundamentals.

But there’s a bigger question about governance that also needs to be asked: Private company boards are designated by their investors. Where were The We Company investors, and what does that say about SoftBank’s approach to investing? The SoftBank Vision Fund is the largest venture fund in the world by a considerable measure, with $100 billion raised. SoftBank Group’s Masayoshi Son has changed the venture model by investing huge sums in portfolio companies that enable them to outstrip (some might simply say “crush”) any serious competitors. It’s an aggressive style that requires aggressive founders who share his vision of “full speed ahead.” Successful as it may have been in other investments, the We experience suggests Masayoshi Son’s style still needs some basic business sense to balance the hubris of the founders, board and investors.

There's a message here for founders as well: Startup success requires grounding as well as optimism. Your investors should help you manage both.