16 ms·

Zenefits Scandal Highlights Perils of Hypergrowth at Startups

211 points by tpatke 11y ago

deleted 11y ago
[deleted]
throwaway-zcs 11y ago
It's so convenient for everyone if this is all on Conrad. Mr Sacks did an excellent job of throwing Conrad under the bus, but as COO for 16 months, a board member and with a desk adjacent to Conrad and a seasoned guy, it strains credulity that he didn't know. There's some schaudenfreude here (and an anonymous account) because these guys all acted like they were smarter than everybody else. I hope regulators do a real investigation and I suspect Mr Sacks will come out more culpable than he would have you believe.
- manigandham 11y ago
  This isn't about whether Sacks knows or had involvement - it's about how to repair the situation. Conrad had to be the fall guy and Sacks is the best replacement available: already hired, has leadership experience, knows the business, and has plausible deniability via Conrad.
- mathattack 11y ago
  My guess on this situation... You have a group of people sitting around the table saying, "If we do nothing, the value of the company goes to zero. We have to do something visible and credible." Conrad had to agree to jumping on his sword - as the largest shareholder, he has the most to lose if the company goes under. So he jumps on the sword, and lets everyone kick him while he's down, because it increases the likelihood that the company survives. I have no real information though, so for all I know he could have been stabbed in the back instead.
- bsder 11y ago
  Yeah, I suspect Conrad is falling on the sword to save the company. I suspect if it goes to a real investigation, lots of people at Zenefits are in deep trouble.
coldcode 11y ago
Being good at starting a company and raising funds is no guarantee of being any good at running a company. Add to that growth from 15 to 1600 in two years is also likely to be a massive failure. Add to that insane pressure from investors to do the impossible (that you promised). I've seen a lot of people crumble at a much smaller size.
- deleted 11y ago
  [deleted]
gkoberger 11y ago
It's interesting how Uber, Airbnb and Draftkings blatantly broke laws and won. They set the precedent that if you're growing fast enough, the laws will change to fit you. Didn't work out that way for Zenefits. They seemingly lost.
- paulsutter 11y ago
  Not to defend breaking the law/rules in any case, but there's a big distinction here. Uber broke rules in individual cities, facing the choice of (a) not entering a city, or (b) entering the city by breaking rules. Stretching local rules didn't threaten the survival of Uber the company, it just meant they might be shut down in a single city or area. Zenefits apparently broke rules in such a way that it did threaten the existence of the company. If the news coverage is accurate, insurers could decide or be forced to cut them off as a broker, they could lose their licenses, or have a pile of lawsuits.
- Pxtl 11y ago
  They voluntarily admitted to it. Considering the macro just prevented auto-logout, would that even have ruined them? Im betting they could have quietly stopped using the macro once it was identified as a problem and gotten away with it. I wonder if this is really just the result of infighting more than regulation.
  - jessaustin 11y ago
    Yeah the hack was just a pretext. The explanation for why everybody hates the former CEO isn't difficult to find in TFA: People were given low salaries with the promise of increases when funding came through, but Zenefits didn’t make good on those promises when it raised new investments.
- ___ab___ 11y ago
  I think the reason that {Uber, AirBNB, DraftKings} succeeded in flouting the law is that they operated in industries that are consumer-facing, and where the cost of regulation is obvious to consumers. Many people understand that taxi regulations (for the most part) negatively affect them, and in many cases are extremely frustrated with them: see Washington, DC. Most people aren't familiar with and don't care about the company that manages their health insurance, and as a result there's little public support.
Pxtl 11y ago
Wait, all it did was prevent auto-logout? That's it? Seriously?
- ritchiea 11y ago
  It does seem to be low scale cheating but a culture of writing and distributing internal software to cheat on tests required for certification sounds toxic.
  - jmckib 11y ago
    Someone correct me if I'm wrong, but I believe they were cheating on the broker license course, not the exam. It would be similar to skipping a class with an attendance policy because you already know the material.
    - st3v3r 11y ago
      It still shows an incredible amount of unethical behavior, and more of this pattern of "I'm a startup! I'm special! The law shouldn't apply to me!" Special snowflake syndrome, just exhibited by a company.
    - rfrank 11y ago
      And unlike skipping a class, the people negatively impacted by the cheating aren't the student. That in itself is a vary significant difference, without considering the fact that they sell health insurance.
  - Pxtl 11y ago
    We don't know how formally it was distributed. "Oh crap this is frustrating, I keep trying to do the course while I work and it keeps logging me out. Maybe I can whip up a macro..." "Hey Bob, you getting logged out all the time? No, I made a macro" "So here's the training course newbie, and if you start getting logged out all the time there's a macro on the file share you can use to block that." Obviously they could be evil scofflaws, but this kind of violation can easily happen gradually in a frog-boiling way.
yummyfajitas 11y ago
I wonder why "The Macro" doesn't also highlight the perils of clueless regulators imposing moronic laws on HR departments. The specific law that Zenefits violated was a law insisting that before selling insurance, your employees need to sit at a computer and click "next" for 52 hours. Once they've clicked "next" sufficiently many times, only then are they permitted to take the exam to determine whether they have enough knowledge to sell insurance. Shouldn't this scandal also highlight the perils of a regulatory state?
- maxerickson 11y ago
  Modest amounts of wasted time? Oh no. I suppose one way to estimate how onerous this requirement is (I agree that to the extent it is arbitrary that it is dumb) would be to compare how much compensation the insurance license makes available to how much compensation spending the equivalent time learning a skill like welding makes available. (I think most people wouldn't be very good at welding after 50 hours of training and practice)
  - jessaustin 11y ago
    Welding isn't some mystical craft. Most people would be competent for many welding tasks after that much actual time spent welding. If the "training" consisted mostly of clicking "Next", however...
    - EliRivers 11y ago
      As an aside on the subject of welding, with less then ten hours' experience I could weld together two plates of steel (about 3mm thick) such that they withstood having the crap beaten out of them for a hour with a hammer with no visible issues at the weld. Sure, it's a very simple weld in easy circumstances and matching materials, but as you say, it wasn't anything mystical.
  - yummyfajitas 11y ago
    All you propose measuring is the individual benefit to sitting through training. That's a terrible way to measure the social cost of a bad regulation. The social cost is 52 hours of productive output from moderately skilled employees. (Or moderately less - if learning the material takes 20 hours, then the waste is 32 hours assuming people can simultaneously learn the material and click.) The right thing to do is simply make people take the test, and if the test isn't accurately measuring people's insurance selling ability, fix the test.
amsilprotag 11y ago
If we are to use this [0] definition, then "Hypergrowth at" can be omitted. It seems like a better title would include "in highly regulated industries." It's interesting to note that the essay only includes discussion of law as it relates to defending startups from incumbents, not as a caveat to the advice: "The good news is, if you get growth, everything else tends to fall into place." Is it the case that Zenefits merely failed to grow fast enough to present a more credible threat to state prosecutors? [0] http://www.paulgraham.com/growth.html http://www.paulgraham.com/growth.html
auggierose 11y ago
>Mr. Conrad had overseen a company that had become derelict in its culture and ethics Zoolander much?
financedfuture 11y ago
Regarding unicorns (> U$1 billion valuation), the U.S should implement certain regulations. These startups have market caps that are larger than thousands of public companies that go through several laws and openly disclosure their financial information. Not only does this lack information hurt shareholders that are not "part of the club", but also stakeholders that rely on the company in other matters. http://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2674420 http://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2674420 "Regulation of unicorns should recognize that outsized power."
- deleted 11y ago
  [deleted]
- alexc05 11y ago
  I'm not actually sure I agree with this. Consider that the people & companies investing in pre-IPO U$1B companies are extreme expert investors. They take the risk on. Now if we're talking about post IPO, then actual financial regulations kick in and market-traders are afforded the protections that they have now (which is still sometimes significant) Imposing additional regs on a 'privately held' company simply because they accepted enough money to give them a U$1B valuation punishes them for growth. Additionally, valuations are sometimes voodoo calculations for example (and someone else can check my math) but is someone gave me $1 for 1/10,000,000 of my company, wouldn't that be a billion dollar valuation? Obviously not a credible one - but - where's the line? $1M for 1/1000? It's still not a billion real dollars. If you look at linkedin's valuation it's based on current potential for future revenue. But revenue that is like 10 or 20 years in the future. (reference: my foggy recollection of Peter Thiel's lecture in Sam Altman's startup school) Maybe I'm confused as to how valuations actually work.
  - maxerickson 11y ago
    It wouldn't be to protect just the sophisticated investors but also stakeholders that rely on the company in other matters. How to set the bar would be an issue.
  - financedfuture 11y ago
jmckib 11y ago
Alternative title: "Zenefits Scandal Highlights Perils of Excessive Occupational Licensure". What exactly is the purpose of requiring a license for selling insurance? If consumers desire some assurance of quality in their insurance brokers, then certification, not licensure, would be sufficient. The only justification for licensure over certification is a paternalistic one: consumers are simply too ignorant to choose their own insurance brokers, even if some are certified and some are not. As Milton Friedman said in Chap 9 of Capitalism and Freedom, this argument "amounts to saying that we in our capacity as voters must protect ourselves in our capacity as consumers against our own ignorance." This isn't to say that Zenefits hasn't made a huge misstep for seemingly little benefit (bypassing a 56 hour course?), but I wish there was some discussion of the absurdity of the law that was broken alongside the bashing of Zenefits for breaking it.
- CPLX 11y ago
  Insurance is important. Unlike many other consumer products you really don't have any idea what you're buying until after you've bought it. Making an incorrect or misled choice in health insurance is sufficient -- literally -- to completely ruin your life financially in a matter of hours, or cause unnecessary death via untreated illness. If you want to claim that you can read a health insurance policy binder and understand it be my guest. I am a frequent writer and editor of technical literature and capable of writing code and I have a pilots license and I find health insurance policies almost incomprehensible. We make sure that you don't get a bad haircut by requiring licenses for barbers. You can't fix my sink or chimney without licensing. We require licensing and testing to act on someone's behalf in the legal system, and in nearly all sales of securities, and of financial products, of which insurance is one mind you. If Zenefits wanted to make an in-public argument that these rules are not necessary they were free to do so. I would have disagreed, and I'm sure others would have shared my opinion. Maybe they could have won the argument. They didn't do that. They aren't righteous crusaders passionate about consumer choices and regulatory issues, they're opportunistic business people who broke the law and committed fraud instead of following the rules or working to change them.
  - yummyfajitas 11y ago
dpweb 11y ago
Had some personal experience in bending the rules (a very ugly experience) - and its better to follow the laws, even if the laws don't make sense. In a B2B business especially, follow very closely and to the letter.
chillingeffect 11y ago
Come on now, NYT, there is virtually no evidence of corruption at startups being any worse than any other business or human endeavor. NYT, you're just spreading FUD because people look to you for guidance and you need to respond to their fear. Yes, these guys (Zenefits) were, in one area, dishonest and cheated. But it's not like Cigna, PacTel, BoA, Citizens and zillion other companies are paragons of virtue. Nevermind Volkswagen. [1] https://en.wikipedia.org/wiki/Accounting_scandals https://en.wikipedia.org/wiki/Accounting_scandals [2] https://en.wikipedia.org/wiki/List_of_corporate_collapses_and_scandals https://en.wikipedia.org/wiki/List_of_corporate_collapses_an...
Fede_V 11y ago
What I found particularly illuminating was this: 'Some investors said Mr. Dalgaard was as instrumental as Mr. Conrad in pushing for steep revenue targets, and that both men’s ambition pointed in the same direction — toward hypergrowth.' (in fairness, later on, the article says this: Another person familiar with the board disputed this, saying Mr. Dalgaard, who formerly ran the cloud software company SuccessFactors, was among those asking Mr. Conrad to restrain Zenefits’ growth plans and fix the culture. ) This is the same person that had a glowing profile written about them in the NYT: http://www.nytimes.com/2015/10/18/business/lars-dalgaard-build-trust-by-daring-to-show-that-youre-human.html http://www.nytimes.com/2015/10/18/business/lars-dalgaard-bui... With this beautiful paragraph: 'I learned so many things from my dad, but in particular he taught me about ethics and that there is no easy way to get to your goal. You’ve got to be like Lambeau Field in Green Bay and build for bad weather. That’s basically the only way to achieve any type of success. But you often see with some companies, particularly start-ups, that they’re telling themselves and others a bit of a story, and not being honest about what the real issues are. Instead of taking all that energy and focusing on the core outcomes, they’re just glazing over it and hoping it will be O.K. There is no such thing as a quick fix.' There's no way to know what the real truth actually is - but, wow, that's quite a contrast between the two articles.
- poof131 11y ago
  The most telling quote for me was “The two men also differed over whether to address employee morale by re-pricing stock options to the new lower valuation, according to people familiar with the matter. Mr. Conrad favored the move, but Mr. Dalgaard believed it would train employees to expect a re-pricing any time the company’s fortunes changed.” So the “we support founders” mantra may also mean we support founders and ourselves at the expense of employees. Despite all Conrad’s miss-steps, such as the ill-mannered Quora response, I now have a new respect for him. At least he was trying to fight for the employees. Sad to see a16z in this light. With fantasy valuations crashing to reality, repricing options should become the standard. Or you can follow the current SV playbook and hope employees don’t really understand what’s going on with equity.
  - JoeAltmaier 11y ago
wslh 11y ago
It is very interesting to read about other approaches for growth. For example, Google waited patiently several years until a business model worked. Imagine Google starting today with a protoversion of PageRank.
deleted 11y ago
[deleted]
manishsharan 11y ago
So what will Zenefits eventual business model look like if they survive this ? I don't think they can be an insurance broker; customers would have to be incredibly stupid to buy insurance from them. If they are going to be an HR software company, then do they even deserve that kind of valuation, as their current valuation seems to be base on an expectation of hypergrowth. HR s/w companies rarely have hypergrowth , what with SAP and Oracle owning large chunks of the enterprise market.
rifung 11y ago
It seems like a recurring theme in these "scandals" is that if you put too much pressure on your executives, they end up either quitting or doing something they shouldn't be doing in order to keep up with your demands. Another example is with VW and their diesel emissions. I feel like people just have a difficult time saying they were wrong or pushing back and saying they can't do something. I am guilty of this myself.
- jaxomlotus 11y ago
  It's because VCs would rather their investments would take risks then not. With risks, at least there is a chance you will accomplish great things (and there is only a chance you will get caught if your risk wasn't fully above the board). But if you don't take risks, there is no chance of accomplishing great things. I think boards should be held responsible for encouraging these kinds of risks, but let's be honest - by focusing VC returns on maximizing investment outcomes, the system is set up this way.
- mcguire 11y ago
  "You" who? The system can be as rotten as you like, but in any particular case, at some point, someone said, "Let's start cutting corners."
  - bsder 11y ago
    > The system can be as rotten as you like, but in any particular case, at some point, someone said, "Let's start cutting corners." Yes, but... Normally things like this build up gradually from "just one step" on something that is patently stupid. And, let's face it, if you can get a certification from an online course, it's stupid, prima facie. So, you need to get one more person online to file benefits. Get them certified. Okay, these certifications are stupid and any idiot can sit through these. Okay, let's get the same idiot to sit through each one. Okay, we're still not getting certified fast enough. Okay, hire more idiots to sit through this. Okay, but they'll have to learn this. Okay, let's put some programmers on this so we only need one idiot to do things on multiple sessions. Okay, now that we have the macro, we don't need the idiot anymore. etc. If the feds weren't clamping down on this, everybody would be singing their praises like Uber and AirBnB. It's all about the bandwagon, baby.
deleted 11y ago
[deleted]
GCA10 11y ago
Rhetoric aside, isn't this really just another example of "... Highlights Perils of Hard-Charging CEOs"? It's that simple. We can wander far from fast-growing startups and find the same kind of conduct anywhere in business. The guy running my corner grocery store decided to set up a sit-down cafe without getting a city license. The folks running a nearby office suite are in no hurry to put in city-mandated sprinklers. Business founders/owners like to get things done without asking permission. That's how they roll. Trying to invoke unicorn valuations, VCs, etc. is silly. It's a classic case of finding an exciting anecdote and trying to attach causality theories after the fact.
- unoti 11y ago
  > The guy running my corner grocery store decided to set up a sit-down cafe without getting a city license. The guy at the corner grocery store isn't discussing my employee's private medical records with me in between slamming down hits on the beer bong.
  - mdonahoe 11y ago
    Are you referencing something in particular with this beer bong comment, or just being hyberbolic?
    - untog 11y ago
      Reasonably sure it is exaggeration for comic effect. We are not in a court room.
      - mcguire 11y ago
        Bam! mdonahoe is overruled!
    - bronson 11y ago
      It's FTFA: "There was a laxity about rules and decorum. Zenefits offered beer kegs in its offices, and in the Scottsdale, Ariz., office, people freely imbibed during the workday."
whoknowsnotme 11y ago
It is unfortunate that the public doesn't know much about insurance or how it's regulated. While what Zenefits did was wrong in several cases, there are some important things to understand: - This macro program didn't have anything to do with whether an agent would/could pass an insurance exam. That's separate and in order for someone to practice, they need to pass the test. - If this training program were so critical to understanding and effectively selling insurance, why wouldn't all state adopt it? - The unfortunate fact is that the details you must study and know to pass the test have very little do with how you will sell insurance. The study packets, courses etc. do not prepare you in any way to sell these products better. Actually a lot of the test talks about annuities and things completely unrelated to medical insurance. - The licensing issues largely relate to non-resident licenses, not the actual resident license where the test is required to pass. It's a common practice in brokerages across the US to get licensed when business is closed or about to be closed in the different state. - If you want a comparable, lawyers obviously have to pass the bar to practice. But they can actually practice legal advice before ever passing the bar as long as they are working under a licensed attorney. This is how many pro-bono cases are worked by students in law school etc.
stygiansonic 11y ago
From the article: "Growth broke stuff. To increase revenue, the company moved beyond small businesses to customers with hundreds of employees — and the software struggled to keep up. Instead of pausing to fix bugs, Zenefits simply hired more employees to fill in where the software failed, including repurposing product managers for manual data entry." From a different article about the downfall of Target Canada[1], which also suffered from trying to ramp up too fast: "Getting the details from suppliers largely fell on the young merchandising assistants... “There was never any talk about accuracy,” says a former employee. “You had these people we hired, straight out of school, pressured to do this insane amount of data entry, and nobody told them it had to be right.”" Don't underestimate the proliferation of data entry jobs, especially when there is chaotic growth/lack of a proper plan. 1. http://www.marketingmag.ca/?p=166300&preview=true http://www.marketingmag.ca/?p=166300&preview=true
- Lawtonfogle 11y ago
  >“You had these people we hired, straight out of school, pressured to do this insane amount of data entry, and nobody told them it had to be right.”" My first guess is that it was worse than this. The people doing data entry who took the time to do it right were likely showing up as doing worse on what ever metrics were being ran and were replaced by people who were fast but error prone. Bad metrics leading to bad optimizations.
snappy173 11y ago
it's a matter of risk. when you're trying to be a billion dollar company, you have to take big risks. in that context, the risk of getting caught for breaking the law becomes palatable. when you're trying to create a stable, profitable, but more modest sized company, that risk becomes a threat to your business. it's a big problem when these types of risks start to make sense from a business perspective, because it's the public, not the people that create this environment, that end up suffering.
pbreit 11y ago
This article is terrible. The takeaway is the hypergrowth ultimately overcomes. Cleaning up the mess will be comparatively easy. Zenefits flouting regulations was silly and didn't appear to be necessary. With Sacks at the helm, a huge and growing business and $500m in the bank, Zenefits is very well-positioned.
- tyre 11y ago
  You may be right, but it isn't that one-sided. 1) Sacks was COO when all of this happened. These were specifically lapses in policy and operations. Are you sure he is immune to the repercussions? 2) "[H]uge and growing" as of last year. Every one of these articles discourages new companies from signing up and talented people from joining the company. Trust is a tremendous factor in health insurance, especially when there are many other options on the market. If I have other options, why go to a company under investigation with a horrendous culture? 3) Based on the state of their operations (poor), company culture (dismal), and customer feedback (even worse), I would push back on them being "well-positioned." $500 million can buy you a lot, but if culture, brand, and operations were that easy, Comcast could turn itself into a modern company in a few months.
  - pbreit 11y ago
    1. Sacks has a sterling reputation (and a JD from U of Chicago). He's immune. 2. Zenefits now has a PayPal CEO, exec staffer and board member plus the backing of A16Z. It is an attractive to place to work and obtain services from. 3. I think those things will come around (if they are even as bad as you opine). Comcast is a 50 year-old, former monopoly, $140b company. SO not only a bad comparison but a terrific outcome.
- mcguire 11y ago
  So you're saying Enron is a buy?
  - pbreit 11y ago
    Failing to see the connection.
kneel 11y ago
At the center of this 'scandal' is a program that prevents auto log-out during license training. Being licensed: Sitting at a computer for 52 hours and clicking on it before passing an exam. What a waste of time. Pretty much an entire week and a half of full time staring at a screen to get a license to sell insurance. They were just skating bureaucracy, plenty of companies do this.
- run4yourlives2 11y ago
  At the centre of this scandal is a company selling insurance with unlicensed brokers. That means people advising others on what insurance to buy where their health is concerned who didn't know what the hell they were doing. The software made to skirt the licencing requirements is only a subset of the overall issue. Frankly, I'm getting a little tired with the group of commentators on here that think its a-ok for a company like zenefits to tell people "Sure, you're covered for that in this policy" when they frankly have no idea if that is the case. Selling insurance advice without a license is exactly like selling financial services advice without a license. And both actions are illegal for very good reasons.
  - mattmanser 11y ago
    I worked with mortgage brokers for a while. They had a big exam, all complicated and they were supposed to be able to advise. What they actually did was put 5 figures into a computer and pick the mortgage nearish the top with the biggest commission. I have no idea how complicated health insurance is in the US as I'm from the UK but I'm willing to bet £100 that's what 90% of health insurer brokers do too.
    - run4yourlives2 11y ago
      >I have no idea how complicated health insurance is in the US Exactly.
      - mattmanser 11y ago
        Your comment just drips with enlightening anecdotes and interesting exposition explaining how picking health insurance is so much more complicated than all the other financial advice that today is basically little more than: Put client's answers in brokerage program Choose highest commission in top 10 Recommend product
pascalxus 11y ago
I don't understand what all the outrage is about. The online training keeps you logged in for a period of inactivity that COUNTS towards your 52 hours, which is perfectly legitimate. All they did was create and use a tool which extends this period of inactivity. How in the world is it that this is outragous in any way? This is a very minor fault, certainly not worthy of all the sensationalism that NY times has created, once again.
pascalxus 11y ago
I don't understand what all the outrage is about. The online training keeps you logged in for a period of inactivity that COUNTS towards your 52 hours, which is perfectly legitimate. All they did was create and use a tool which extends this period of inactivity. How in the world is it that this is outragous in any way? And how is it different from merely using your mouse to keep the program active, every 10 minutes? It's the same thing. This is a very minor fault, certainly not worthy of all the sensationalism that NY times has created, once again.
jonesb6 11y ago
"Zenefits scandal highlights the perils of breaking the law at startups"

211 points by tpatke 11y ago

deleted 11y ago

[deleted]

It's so convenient for everyone if this is all on Conrad. Mr Sacks did an excellent job of throwing Conrad under the bus, but as COO for 16 months, a board member and with a desk adjacent to Conrad and a seasoned guy, it strains credulity that he didn't know. There's some schaudenfreude here (and an anonymous account) because these guys all acted like they were smarter than everybody else. I hope regulators do a real investigation and I suspect Mr Sacks will come out more culpable than he would have you believe.

manigandham 11y ago
This isn't about whether Sacks knows or had involvement - it's about how to repair the situation. Conrad had to be the fall guy and Sacks is the best replacement available: already hired, has leadership experience, knows the business, and has plausible deniability via Conrad.
mathattack 11y ago
My guess on this situation... You have a group of people sitting around the table saying, "If we do nothing, the value of the company goes to zero. We have to do something visible and credible." Conrad had to agree to jumping on his sword - as the largest shareholder, he has the most to lose if the company goes under. So he jumps on the sword, and lets everyone kick him while he's down, because it increases the likelihood that the company survives. I have no real information though, so for all I know he could have been stabbed in the back instead.
bsder 11y ago
Yeah, I suspect Conrad is falling on the sword to save the company. I suspect if it goes to a real investigation, lots of people at Zenefits are in deep trouble.

coldcode 11y ago

Being good at starting a company and raising funds is no guarantee of being any good at running a company. Add to that growth from 15 to 1600 in two years is also likely to be a massive failure. Add to that insane pressure from investors to do the impossible (that you promised). I've seen a lot of people crumble at a much smaller size.

deleted 11y ago
[deleted]

gkoberger 11y ago

It's interesting how Uber, Airbnb and Draftkings blatantly broke laws and won. They set the precedent that if you're growing fast enough, the laws will change to fit you. Didn't work out that way for Zenefits. They seemingly lost.

paulsutter 11y ago
Not to defend breaking the law/rules in any case, but there's a big distinction here. Uber broke rules in individual cities, facing the choice of (a) not entering a city, or (b) entering the city by breaking rules. Stretching local rules didn't threaten the survival of Uber the company, it just meant they might be shut down in a single city or area. Zenefits apparently broke rules in such a way that it did threaten the existence of the company. If the news coverage is accurate, insurers could decide or be forced to cut them off as a broker, they could lose their licenses, or have a pile of lawsuits.
Pxtl 11y ago
They voluntarily admitted to it. Considering the macro just prevented auto-logout, would that even have ruined them? Im betting they could have quietly stopped using the macro once it was identified as a problem and gotten away with it. I wonder if this is really just the result of infighting more than regulation.
- jessaustin 11y ago
  Yeah the hack was just a pretext. The explanation for why everybody hates the former CEO isn't difficult to find in TFA: People were given low salaries with the promise of increases when funding came through, but Zenefits didn’t make good on those promises when it raised new investments.
___ab___ 11y ago
I think the reason that {Uber, AirBNB, DraftKings} succeeded in flouting the law is that they operated in industries that are consumer-facing, and where the cost of regulation is obvious to consumers. Many people understand that taxi regulations (for the most part) negatively affect them, and in many cases are extremely frustrated with them: see Washington, DC. Most people aren't familiar with and don't care about the company that manages their health insurance, and as a result there's little public support.

Pxtl 11y ago

Wait, all it did was prevent auto-logout? That's it? Seriously?

ritchiea 11y ago
It does seem to be low scale cheating but a culture of writing and distributing internal software to cheat on tests required for certification sounds toxic.
- jmckib 11y ago
  Someone correct me if I'm wrong, but I believe they were cheating on the broker license course, not the exam. It would be similar to skipping a class with an attendance policy because you already know the material.
  - st3v3r 11y ago
    It still shows an incredible amount of unethical behavior, and more of this pattern of "I'm a startup! I'm special! The law shouldn't apply to me!" Special snowflake syndrome, just exhibited by a company.
  - rfrank 11y ago
    And unlike skipping a class, the people negatively impacted by the cheating aren't the student. That in itself is a vary significant difference, without considering the fact that they sell health insurance.
- Pxtl 11y ago
  We don't know how formally it was distributed. "Oh crap this is frustrating, I keep trying to do the course while I work and it keeps logging me out. Maybe I can whip up a macro..." "Hey Bob, you getting logged out all the time? No, I made a macro" "So here's the training course newbie, and if you start getting logged out all the time there's a macro on the file share you can use to block that." Obviously they could be evil scofflaws, but this kind of violation can easily happen gradually in a frog-boiling way.

yummyfajitas 11y ago

I wonder why "The Macro" doesn't also highlight the perils of clueless regulators imposing moronic laws on HR departments. The specific law that Zenefits violated was a law insisting that before selling insurance, your employees need to sit at a computer and click "next" for 52 hours. Once they've clicked "next" sufficiently many times, only then are they permitted to take the exam to determine whether they have enough knowledge to sell insurance. Shouldn't this scandal also highlight the perils of a regulatory state?

maxerickson 11y ago
Modest amounts of wasted time? Oh no. I suppose one way to estimate how onerous this requirement is (I agree that to the extent it is arbitrary that it is dumb) would be to compare how much compensation the insurance license makes available to how much compensation spending the equivalent time learning a skill like welding makes available. (I think most people wouldn't be very good at welding after 50 hours of training and practice)
- jessaustin 11y ago
  Welding isn't some mystical craft. Most people would be competent for many welding tasks after that much actual time spent welding. If the "training" consisted mostly of clicking "Next", however...
  - EliRivers 11y ago
    As an aside on the subject of welding, with less then ten hours' experience I could weld together two plates of steel (about 3mm thick) such that they withstood having the crap beaten out of them for a hour with a hammer with no visible issues at the weld. Sure, it's a very simple weld in easy circumstances and matching materials, but as you say, it wasn't anything mystical.
- yummyfajitas 11y ago
  All you propose measuring is the individual benefit to sitting through training. That's a terrible way to measure the social cost of a bad regulation. The social cost is 52 hours of productive output from moderately skilled employees. (Or moderately less - if learning the material takes 20 hours, then the waste is 32 hours assuming people can simultaneously learn the material and click.) The right thing to do is simply make people take the test, and if the test isn't accurately measuring people's insurance selling ability, fix the test.

amsilprotag 11y ago

If we are to use this [0] definition, then "Hypergrowth at" can be omitted. It seems like a better title would include "in highly regulated industries." It's interesting to note that the essay only includes discussion of law as it relates to defending startups from incumbents, not as a caveat to the advice: "The good news is, if you get growth, everything else tends to fall into place." Is it the case that Zenefits merely failed to grow fast enough to present a more credible threat to state prosecutors? [0] http://www.paulgraham.com/growth.html http://www.paulgraham.com/growth.html

auggierose 11y ago

>Mr. Conrad had overseen a company that had become derelict in its culture and ethics Zoolander much?

financedfuture 11y ago

Regarding unicorns (> U$1 billion valuation), the U.S should implement certain regulations. These startups have market caps that are larger than thousands of public companies that go through several laws and openly disclosure their financial information. Not only does this lack information hurt shareholders that are not "part of the club", but also stakeholders that rely on the company in other matters. http://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2674420 http://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2674420 "Regulation of unicorns should recognize that outsized power."

deleted 11y ago
[deleted]
alexc05 11y ago
I'm not actually sure I agree with this. Consider that the people & companies investing in pre-IPO U$1B companies are extreme expert investors. They take the risk on. Now if we're talking about post IPO, then actual financial regulations kick in and market-traders are afforded the protections that they have now (which is still sometimes significant) Imposing additional regs on a 'privately held' company simply because they accepted enough money to give them a U$1B valuation punishes them for growth. Additionally, valuations are sometimes voodoo calculations for example (and someone else can check my math) but is someone gave me $1 for 1/10,000,000 of my company, wouldn't that be a billion dollar valuation? Obviously not a credible one - but - where's the line? $1M for 1/1000? It's still not a billion real dollars. If you look at linkedin's valuation it's based on current potential for future revenue. But revenue that is like 10 or 20 years in the future. (reference: my foggy recollection of Peter Thiel's lecture in Sam Altman's startup school) Maybe I'm confused as to how valuations actually work.
- maxerickson 11y ago
  It wouldn't be to protect just the sophisticated investors but also stakeholders that rely on the company in other matters. How to set the bar would be an issue.
- financedfuture 11y ago

jmckib 11y ago

Alternative title: "Zenefits Scandal Highlights Perils of Excessive Occupational Licensure". What exactly is the purpose of requiring a license for selling insurance? If consumers desire some assurance of quality in their insurance brokers, then certification, not licensure, would be sufficient. The only justification for licensure over certification is a paternalistic one: consumers are simply too ignorant to choose their own insurance brokers, even if some are certified and some are not. As Milton Friedman said in Chap 9 of Capitalism and Freedom, this argument "amounts to saying that we in our capacity as voters must protect ourselves in our capacity as consumers against our own ignorance." This isn't to say that Zenefits hasn't made a huge misstep for seemingly little benefit (bypassing a 56 hour course?), but I wish there was some discussion of the absurdity of the law that was broken alongside the bashing of Zenefits for breaking it.

CPLX 11y ago
Insurance is important. Unlike many other consumer products you really don't have any idea what you're buying until after you've bought it. Making an incorrect or misled choice in health insurance is sufficient -- literally -- to completely ruin your life financially in a matter of hours, or cause unnecessary death via untreated illness. If you want to claim that you can read a health insurance policy binder and understand it be my guest. I am a frequent writer and editor of technical literature and capable of writing code and I have a pilots license and I find health insurance policies almost incomprehensible. We make sure that you don't get a bad haircut by requiring licenses for barbers. You can't fix my sink or chimney without licensing. We require licensing and testing to act on someone's behalf in the legal system, and in nearly all sales of securities, and of financial products, of which insurance is one mind you. If Zenefits wanted to make an in-public argument that these rules are not necessary they were free to do so. I would have disagreed, and I'm sure others would have shared my opinion. Maybe they could have won the argument. They didn't do that. They aren't righteous crusaders passionate about consumer choices and regulatory issues, they're opportunistic business people who broke the law and committed fraud instead of following the rules or working to change them.
- yummyfajitas 11y ago

dpweb 11y ago

Had some personal experience in bending the rules (a very ugly experience) - and its better to follow the laws, even if the laws don't make sense. In a B2B business especially, follow very closely and to the letter.

chillingeffect 11y ago

Come on now, NYT, there is virtually no evidence of corruption at startups being any worse than any other business or human endeavor. NYT, you're just spreading FUD because people look to you for guidance and you need to respond to their fear. Yes, these guys (Zenefits) were, in one area, dishonest and cheated. But it's not like Cigna, PacTel, BoA, Citizens and zillion other companies are paragons of virtue. Nevermind Volkswagen. [1] https://en.wikipedia.org/wiki/Accounting_scandals https://en.wikipedia.org/wiki/Accounting_scandals [2] https://en.wikipedia.org/wiki/List_of_corporate_collapses_and_scandals https://en.wikipedia.org/wiki/List_of_corporate_collapses_an...

Fede_V 11y ago

What I found particularly illuminating was this: 'Some investors said Mr. Dalgaard was as instrumental as Mr. Conrad in pushing for steep revenue targets, and that both men’s ambition pointed in the same direction — toward hypergrowth.' (in fairness, later on, the article says this: Another person familiar with the board disputed this, saying Mr. Dalgaard, who formerly ran the cloud software company SuccessFactors, was among those asking Mr. Conrad to restrain Zenefits’ growth plans and fix the culture. ) This is the same person that had a glowing profile written about them in the NYT: http://www.nytimes.com/2015/10/18/business/lars-dalgaard-build-trust-by-daring-to-show-that-youre-human.html http://www.nytimes.com/2015/10/18/business/lars-dalgaard-bui... With this beautiful paragraph: 'I learned so many things from my dad, but in particular he taught me about ethics and that there is no easy way to get to your goal. You’ve got to be like Lambeau Field in Green Bay and build for bad weather. That’s basically the only way to achieve any type of success. But you often see with some companies, particularly start-ups, that they’re telling themselves and others a bit of a story, and not being honest about what the real issues are. Instead of taking all that energy and focusing on the core outcomes, they’re just glazing over it and hoping it will be O.K. There is no such thing as a quick fix.' There's no way to know what the real truth actually is - but, wow, that's quite a contrast between the two articles.

poof131 11y ago
The most telling quote for me was “The two men also differed over whether to address employee morale by re-pricing stock options to the new lower valuation, according to people familiar with the matter. Mr. Conrad favored the move, but Mr. Dalgaard believed it would train employees to expect a re-pricing any time the company’s fortunes changed.” So the “we support founders” mantra may also mean we support founders and ourselves at the expense of employees. Despite all Conrad’s miss-steps, such as the ill-mannered Quora response, I now have a new respect for him. At least he was trying to fight for the employees. Sad to see a16z in this light. With fantasy valuations crashing to reality, repricing options should become the standard. Or you can follow the current SV playbook and hope employees don’t really understand what’s going on with equity.
- JoeAltmaier 11y ago

wslh 11y ago

It is very interesting to read about other approaches for growth. For example, Google waited patiently several years until a business model worked. Imagine Google starting today with a protoversion of PageRank.

deleted 11y ago

[deleted]

manishsharan 11y ago

So what will Zenefits eventual business model look like if they survive this ? I don't think they can be an insurance broker; customers would have to be incredibly stupid to buy insurance from them. If they are going to be an HR software company, then do they even deserve that kind of valuation, as their current valuation seems to be base on an expectation of hypergrowth. HR s/w companies rarely have hypergrowth , what with SAP and Oracle owning large chunks of the enterprise market.

rifung 11y ago

It seems like a recurring theme in these "scandals" is that if you put too much pressure on your executives, they end up either quitting or doing something they shouldn't be doing in order to keep up with your demands. Another example is with VW and their diesel emissions. I feel like people just have a difficult time saying they were wrong or pushing back and saying they can't do something. I am guilty of this myself.

jaxomlotus 11y ago
It's because VCs would rather their investments would take risks then not. With risks, at least there is a chance you will accomplish great things (and there is only a chance you will get caught if your risk wasn't fully above the board). But if you don't take risks, there is no chance of accomplishing great things. I think boards should be held responsible for encouraging these kinds of risks, but let's be honest - by focusing VC returns on maximizing investment outcomes, the system is set up this way.
mcguire 11y ago
"You" who? The system can be as rotten as you like, but in any particular case, at some point, someone said, "Let's start cutting corners."
- bsder 11y ago
  > The system can be as rotten as you like, but in any particular case, at some point, someone said, "Let's start cutting corners." Yes, but... Normally things like this build up gradually from "just one step" on something that is patently stupid. And, let's face it, if you can get a certification from an online course, it's stupid, prima facie. So, you need to get one more person online to file benefits. Get them certified. Okay, these certifications are stupid and any idiot can sit through these. Okay, let's get the same idiot to sit through each one. Okay, we're still not getting certified fast enough. Okay, hire more idiots to sit through this. Okay, but they'll have to learn this. Okay, let's put some programmers on this so we only need one idiot to do things on multiple sessions. Okay, now that we have the macro, we don't need the idiot anymore. etc. If the feds weren't clamping down on this, everybody would be singing their praises like Uber and AirBnB. It's all about the bandwagon, baby.

deleted 11y ago

[deleted]

GCA10 11y ago

Rhetoric aside, isn't this really just another example of "... Highlights Perils of Hard-Charging CEOs"? It's that simple. We can wander far from fast-growing startups and find the same kind of conduct anywhere in business. The guy running my corner grocery store decided to set up a sit-down cafe without getting a city license. The folks running a nearby office suite are in no hurry to put in city-mandated sprinklers. Business founders/owners like to get things done without asking permission. That's how they roll. Trying to invoke unicorn valuations, VCs, etc. is silly. It's a classic case of finding an exciting anecdote and trying to attach causality theories after the fact.

unoti 11y ago
> The guy running my corner grocery store decided to set up a sit-down cafe without getting a city license. The guy at the corner grocery store isn't discussing my employee's private medical records with me in between slamming down hits on the beer bong.
- mdonahoe 11y ago
  Are you referencing something in particular with this beer bong comment, or just being hyberbolic?
  - untog 11y ago
    Reasonably sure it is exaggeration for comic effect. We are not in a court room.
    - mcguire 11y ago
      Bam! mdonahoe is overruled!
  - bronson 11y ago
    It's FTFA: "There was a laxity about rules and decorum. Zenefits offered beer kegs in its offices, and in the Scottsdale, Ariz., office, people freely imbibed during the workday."

whoknowsnotme 11y ago

It is unfortunate that the public doesn't know much about insurance or how it's regulated. While what Zenefits did was wrong in several cases, there are some important things to understand: - This macro program didn't have anything to do with whether an agent would/could pass an insurance exam. That's separate and in order for someone to practice, they need to pass the test. - If this training program were so critical to understanding and effectively selling insurance, why wouldn't all state adopt it? - The unfortunate fact is that the details you must study and know to pass the test have very little do with how you will sell insurance. The study packets, courses etc. do not prepare you in any way to sell these products better. Actually a lot of the test talks about annuities and things completely unrelated to medical insurance. - The licensing issues largely relate to non-resident licenses, not the actual resident license where the test is required to pass. It's a common practice in brokerages across the US to get licensed when business is closed or about to be closed in the different state. - If you want a comparable, lawyers obviously have to pass the bar to practice. But they can actually practice legal advice before ever passing the bar as long as they are working under a licensed attorney. This is how many pro-bono cases are worked by students in law school etc.

stygiansonic 11y ago

From the article: "Growth broke stuff. To increase revenue, the company moved beyond small businesses to customers with hundreds of employees — and the software struggled to keep up. Instead of pausing to fix bugs, Zenefits simply hired more employees to fill in where the software failed, including repurposing product managers for manual data entry." From a different article about the downfall of Target Canada[1], which also suffered from trying to ramp up too fast: "Getting the details from suppliers largely fell on the young merchandising assistants... “There was never any talk about accuracy,” says a former employee. “You had these people we hired, straight out of school, pressured to do this insane amount of data entry, and nobody told them it had to be right.”" Don't underestimate the proliferation of data entry jobs, especially when there is chaotic growth/lack of a proper plan. 1. http://www.marketingmag.ca/?p=166300&preview=true http://www.marketingmag.ca/?p=166300&preview=true

Lawtonfogle 11y ago
>“You had these people we hired, straight out of school, pressured to do this insane amount of data entry, and nobody told them it had to be right.”" My first guess is that it was worse than this. The people doing data entry who took the time to do it right were likely showing up as doing worse on what ever metrics were being ran and were replaced by people who were fast but error prone. Bad metrics leading to bad optimizations.

snappy173 11y ago

it's a matter of risk. when you're trying to be a billion dollar company, you have to take big risks. in that context, the risk of getting caught for breaking the law becomes palatable. when you're trying to create a stable, profitable, but more modest sized company, that risk becomes a threat to your business. it's a big problem when these types of risks start to make sense from a business perspective, because it's the public, not the people that create this environment, that end up suffering.

pbreit 11y ago

This article is terrible. The takeaway is the hypergrowth ultimately overcomes. Cleaning up the mess will be comparatively easy. Zenefits flouting regulations was silly and didn't appear to be necessary. With Sacks at the helm, a huge and growing business and $500m in the bank, Zenefits is very well-positioned.

tyre 11y ago
You may be right, but it isn't that one-sided. 1) Sacks was COO when all of this happened. These were specifically lapses in policy and operations. Are you sure he is immune to the repercussions? 2) "[H]uge and growing" as of last year. Every one of these articles discourages new companies from signing up and talented people from joining the company. Trust is a tremendous factor in health insurance, especially when there are many other options on the market. If I have other options, why go to a company under investigation with a horrendous culture? 3) Based on the state of their operations (poor), company culture (dismal), and customer feedback (even worse), I would push back on them being "well-positioned." $500 million can buy you a lot, but if culture, brand, and operations were that easy, Comcast could turn itself into a modern company in a few months.
- pbreit 11y ago
  1. Sacks has a sterling reputation (and a JD from U of Chicago). He's immune. 2. Zenefits now has a PayPal CEO, exec staffer and board member plus the backing of A16Z. It is an attractive to place to work and obtain services from. 3. I think those things will come around (if they are even as bad as you opine). Comcast is a 50 year-old, former monopoly, $140b company. SO not only a bad comparison but a terrific outcome.
mcguire 11y ago
So you're saying Enron is a buy?
- pbreit 11y ago
  Failing to see the connection.

kneel 11y ago

At the center of this 'scandal' is a program that prevents auto log-out during license training. Being licensed: Sitting at a computer for 52 hours and clicking on it before passing an exam. What a waste of time. Pretty much an entire week and a half of full time staring at a screen to get a license to sell insurance. They were just skating bureaucracy, plenty of companies do this.

run4yourlives2 11y ago
At the centre of this scandal is a company selling insurance with unlicensed brokers. That means people advising others on what insurance to buy where their health is concerned who didn't know what the hell they were doing. The software made to skirt the licencing requirements is only a subset of the overall issue. Frankly, I'm getting a little tired with the group of commentators on here that think its a-ok for a company like zenefits to tell people "Sure, you're covered for that in this policy" when they frankly have no idea if that is the case. Selling insurance advice without a license is exactly like selling financial services advice without a license. And both actions are illegal for very good reasons.
- mattmanser 11y ago
  I worked with mortgage brokers for a while. They had a big exam, all complicated and they were supposed to be able to advise. What they actually did was put 5 figures into a computer and pick the mortgage nearish the top with the biggest commission. I have no idea how complicated health insurance is in the US as I'm from the UK but I'm willing to bet £100 that's what 90% of health insurer brokers do too.
  - run4yourlives2 11y ago
    >I have no idea how complicated health insurance is in the US Exactly.
    - mattmanser 11y ago
      Your comment just drips with enlightening anecdotes and interesting exposition explaining how picking health insurance is so much more complicated than all the other financial advice that today is basically little more than: Put client's answers in brokerage program Choose highest commission in top 10 Recommend product

pascalxus 11y ago

I don't understand what all the outrage is about. The online training keeps you logged in for a period of inactivity that COUNTS towards your 52 hours, which is perfectly legitimate. All they did was create and use a tool which extends this period of inactivity. How in the world is it that this is outragous in any way? This is a very minor fault, certainly not worthy of all the sensationalism that NY times has created, once again.

pascalxus 11y ago

I don't understand what all the outrage is about. The online training keeps you logged in for a period of inactivity that COUNTS towards your 52 hours, which is perfectly legitimate. All they did was create and use a tool which extends this period of inactivity. How in the world is it that this is outragous in any way? And how is it different from merely using your mouse to keep the program active, every 10 minutes? It's the same thing. This is a very minor fault, certainly not worthy of all the sensationalism that NY times has created, once again.

jonesb6 11y ago

"Zenefits scandal highlights the perils of breaking the law at startups"