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WeWork’s CEO Makes Millions as Landlord to WeWork

624 points by dcgudeman 8y ago

mathattack 8y ago
This type of self dealing rarely ends well for the company in question. How can the CEO be trusted to do right by the company?
whatok 8y ago
I can understand (but definitely wouldn't approve) if this happened early in the company's life but given when it happened and what the company has been valued at in the past few years, I really do not understand what this guy is doing.
- yani 8y ago
  He owns a building that is suitable for what WeWord does. What if he has a plane and his company needs a plane. Why is it bad to use it? Companies always try to hire people from our network first - relatives, friends and friends of friends. Suddently it is bad.
  - barabba 8y ago
    conflict of interest?
  - ascagnel_ 8y ago
    As long as WeWork isn't paying more than market rates on its rent, then it's fine. But if they're paying more, then the CEO is corrupt -- he's using his control of his company to enrich himself personally rather than steering the company towards success.
    - notahacker 8y ago
      It's not just about rent being in line with market norms. In order for it not to be personal enrichment at WeWork's expense, it's also got to be assumed that these particular leases on this particular properties were sincerely believed to be the best possible use of the $110m of WeWork shareholders' funds committed to properties its execs had an ownership interest in: i.e. that there were no competing locations (or capital investments) that might have been expected to yield higher customer revenues and nothing comparable on offer at below market rates. Additionally, we've got to assume WeWork execs were not in competition with WeWork to acquire actual [part]-ownership of the buildings (the article provides an example of Neumann trying to personally buy a stake in a building knowing that WeWork wanted to occupy it but WeWork blocking it because they were happy to stump up for title deeds as well as the lease. It certainly doesn't rule out the possibility he used his knowledge of WeWork's requirements to acquire other freehold titles which WeWork might have preferred to buy rather than just lease though).
  - krembo 8y ago
    Or a better option - he leased/bought the building with interest X and sub-leased it to WeWork for X+50%. From Adam N (We CEO) history, he is not common from such a rich family to afford buying building worldwide.
verganileonardo 8y ago
That is quite common in retail. Usually the family owns all the stores and just rent them to the retailer. (At least in Brazil) Although it sounds bad, not sure how it is perceived in real estate
- andrejuseu 8y ago
  Same in Lithuania, not a problem, if price for renting is like market price, else, it would be interesting to local authorities.
  - mosselman 8y ago
    How is this not a problem? There is a huge conflict of interest in decisions about location, rent negotiations, etc.
    - yani 8y ago
      Is conflict of interest illegal?
      - deleted 8y ago
        [deleted]
      - mosselman 8y ago
        I said 'problem', not 'illegal'. Other shareholders/boards/investors/employees should care.
    - verganileonardo 8y ago
      Rent should be similar to market price for the region. Regarding location, the family wants the store to the be sucessfull for 2 reasons: (1) the rent period is going to be longer and (2) they own the retailer and want to invest in viable stores!
      - conanbatt 8y ago
smithmayowa 8y ago
This sort of self benefiting deals should not be acceptable in any organization from their executives, just as they are not acceptable from democratic government officials.
- wmeredith 8y ago
  Oh boy, have you been following the current US President? How Donald Trump is monetising his presidency: https://www.economist.com/business/2017/07/20/how-donald-trump-is-monetising-his-presidency https://www.economist.com/business/2017/07/20/how-donald-tru...
hendzen 8y ago
As part of an investment round for WeWork in 2014, he was granted Class B shares that gave him 10 votes per share, and now he has more than 65% of the overall share vote, according to WeWork corporate filings. These multi-class ownership structures need to be reformed. The SEC is already thinking about it [0]. [0]- https://www.sec.gov/news/speech/perpetual-dual-class-stock-case-against-corporate-royalty https://www.sec.gov/news/speech/perpetual-dual-class-stock-c...
- yani 8y ago
  Yes, this will be really good to do.
  - lotsofpulp 8y ago
    Unnecessary, no one is being duped into investing in a business in which they have no say. If they deem it's worth the additional agency risk, then they should be able to afford it, if not, they and others will learn going forward.
    - bfdm 8y ago
      But it still perpetuates a class system whereby having money and influence yields (potentially) more money and influence. Main Street investors who will have no say at scale should not be excluded from participating in the wealth creation. Certainly this is not a natural or easy problem, it requires a values analysis of our goals and principles. But if we truly want the market to evaluate a company, we must ultimately allow that market to change the fate of a company. The dual class shares prevent that, which I agree should be listed differently or restricted. For example, if dual class shares were always subject to a confidence vote by the other shares once per 5 years, this is fine. Or you say that after 20 years the dual class must be dissolved. Allow the use for initial listing, but not forever. I think the author of the linked speech painted a very good picture of this.
  - cenal 8y ago
    It’d give even fewer incentives to take a company public.
cluoma 8y ago
The ex-CEO at my wife's previous company did this. Signed a multi-year lease for the company on a building she owned a few months before leaving the company. A real dick move for sure. They were growing at the time and being constrained to such a tiny space for so long was quite rough for them.
- dsr_ 8y ago
  Normally a multi-year commercial lease comes with the right to sublet. Did the company fail to negotiate that?
  - catawbasam 8y ago
    If the ceo was self dealing, she might have 'forgotten'.
    - ceejayoz 8y ago
      Plus, if she gave herself a sweetheart deal on rent, there might not be any sublessor interested in making the inflated payments.
      - Firadeoclus 8y ago
        If the company can't get out of the deal then that rent is a sunk cost. It might still be better for them to sublet at market rent and find a larger property for themselves.
- technofiend 8y ago
  My wife's church sold a multi-million dollar parcel to the museum across the street because one of the church members is a real estate agent and made a commission. This not only denied the church any revenue from making the parking lot a parking garage as the museum did but prevented them from doing anything else with the land in case of expansion or simply a future sale if they move. Talk about stepping over dollars to pick up pennies.
code4tee 8y ago
This is basically the textbook definition of conflict of interests. Given that WeWork is also a very unprofitable business it raises serious fiduciary duty questions regarding his role at WeWork (it would be a big issue even if they were profitable but seems crazy bad when they are not).
Traster 8y ago
There seems to be an archetype in silicon valley today of people viewing companies basically just as convenient extensions of themselves rather than distinct legal entities with separate interests. Why would a WeWork object to paying Neumann's rent? WeWork is bascially Neumann anyway! Why would Tesla object to buying Musk's other companies? Tesla is basically Musk anyway! Why wouldn't levandowski just employ his own company to supply components he was procuring for Google? Why wouldn't Shkreli pay his hedge fund investors back with cash from one of his other companies? It's amazing how often 'innovation' and business success turns into corrupt self-enrichment. Unfortunately justice tends to only come once someone suitably senior gets screwed. With Levandowski that was Google, with Shkreli that was the government. I suspect with WeWork the law suits will come the second the investment value drops - investors won't do a thing until they start losing money, rather than just making less money than they otherwise would have.
- huffmsa 8y ago
  We're seeing it with Sears too. Chairman of the board (the former CEO) just approved a $5.2 billion deal of some sort from EHL, the fund he is the owner and manager of.
  - drieddust 8y ago
    Shouldn't that be a case of corruption straight up? Seems like entire system is in cahoot.
    - huffmsa 8y ago
      There's no clear motive. I guess he's keeping the company alive long enough to sell off more of it's assets, but it seems like a relatively low yield operation to me. Perhaps he's operating on a level we can't comprehend
      - howard941 8y ago
        Strip the assets beyond the bankruptcy code's 2 year fraudulent conveyance lookback period. Fix the problem by extending it to 10 years for corporate fiduciaries or something.
antr 8y ago
Just look at WeWork's WEWORK COMP. 18/25 REGS bond. Total junk. Can't wait for an economic slowdown in 2019/20, and see WeWork default on its debt holders.
bluedino 8y ago
I thought this was common? Many owners of companies also own a real estate holding company and lease a building to their main company.
- moccachino 8y ago
  There is a difference if it is the sole/main owner of the company that also owns the real estate holding company, or if it is the CEO who's doing it to funnel some cash to himself. I think the legit thing to do would be to have three companies. SuperCo Holdings, SuperCo RealEstate and SuperCo Operations. SuperCo Holdings owns both the others 100% and investors buy the Holdings company.
  - jaxn 8y ago
    You are assuming he bought the building with company resources. If he spent his own money/took on the liability personally, that is his business. Yeah, you gotta be extra careful that it's not divergent from company interests (right place, right price). But this isn't shady unless there is some reason it harms the company.
    - usrusr 8y ago
      > You are assuming he bought the building with company resources. If he spent his own money/took on the liability personally, that is his business. It would be his business if he rented out his property to an organization that he can't sign contracts for. But as it stands, he is transferring money from an account he only partially owns (but fully controls, with legal obligations to his co-owners which he seems to be breaking) to an account that he owns fully. It's a sneaky way to give himself a raise that is easier to get past the board. The article even cites WeWork with "approved by the board or an independent committee", which implies that not all of those arrangements happened worth explicit board approval. How he got into the possession of the means by which the transfer from controlled-but-only-partially-owned to owned was facilitated is an unrelated topic.
- jaxn 8y ago
  You are correct. The is very common with small businesses. It separates liability and allows you to shift income to long-term capital gains. I didn't read the full article (paywall), but it sounds like the CEO owns the building with other people. Are those owners also large shareholders of WeWork?
chank 8y ago
Wasn't there also an article recently about WeWork losing funding because it's basically a real estate company with a tech facade?
dpflan 8y ago
"The building’s value, meanwhile, has gone up, and the owners have been able to borrow more money by refinancing the property’s debt. Late last year, Messrs. Neumann and Tahari took out a $77.5 million loan, according to loan adviser Meridian Capital Group, $7.5 million more than the prior loan to buy the building." I'm amazed. When does this information about self-leasing show up in due diligence by investors? The prospect of return to the investors must overshadow such data? Is the real-estate market just so inflated at the moment that if you can play it why not do so? The self-leasing strategy + WeWork makes the property value higher (presumably because the rent-ability of the property is proven when a WeWork tenant moves in). Then the property owners can leverage the property. Others have raised the point of conflict of interest and fiduciary responsibility and the not-so-sound financials of the business (e.g. Softbank backs down from $16B to $2B in new investment (still a big number)). I'm curious what is going on here or is it obvious?
- Traster 8y ago
  Somewhere between "Hey guys I just bought a Wave-pool company because I've gotten really into surfing recently" and "We're going to re-invent EBITDA"
lorenzobr 8y ago
Although it doesn't sound right, on the other hand why would Neumann rent his commercial real estate assets to WeWork competitors? Maybe the question should be, why the hell Neumann bought properties directly instead of using the WeWork vehicle? We all know the answer to that I think.
ryanmercer 8y ago
See... this is apparently quite legal but insider trading gets you prison. This is arguably more of a conflict of interest/questionable act than insider trading. I imagine the company could also find cheaper places/better terms for leasing than the CEO owned properties which, to me, is mismanagement if not low-level fraud.
- jaxn 8y ago
  Why do you assume that? He may be willing to bet on WeWork's viability in ways that other landlords won't. Landlords may have been asking him to personally guarantee leases.
  - ryanmercer 8y ago
    >He may be willing to bet on WeWork's viability in ways that other landlords won't. Perhaps, but as someone else in this thread said >The self-leasing strategy + WeWork makes the property value higher (presumably because the rent-ability of the property is proven when a WeWork tenant moves in). Then the property owners can leverage the property. And never mind the fact that he's basically guaranteeing he has a tenant for each building, that will also likely making physical improvements to lure in customers (which will mostly carry over for a future tenant) and effectively building free equity in the property so even if WeWork suddenly folds he can sell the properties at competitive prices and still walk away with a profit. >Landlords may have been asking him to personally guarantee leases. Perhaps with the first location or two but a quick google search shows they've raised billions in funding which would be more than adequate (unless they are growing too fast, which appears to be the case, see below). Now as far as guaranteeing rent here's something interesting >In March 2018, SEC filings indicated that WeWork had raised over $400 million alongside private equity fund The Rhone Group to start a fund to purchase properties directly.[33] In April, documents filed by the company in association with a plan to raise $500 million through the issue of high-yield bonds showed that the company's revenues rose in 2017, but costs rose faster, and the company owed $18 billion rent https://en.wikipedia.org/wiki/WeWork#History_and_funding https://en.wikipedia.org/wiki/WeWork#History_and_funding I don't know how many of the sites he owns but even if it is only 10% there is 1.8 billion 'free' money servicing loans on commercial properties he owns.
gammateam 8y ago
I am more surprised that Neumann allows his name to be known in these investment groups Just form the Wyoming Series LLC or BVI segregated portfolio company, no beneficial owner information will be in public records, but even the state and registered agent can be kept in the dark if you want. I expect value has been extracted this way for centuries. Oops!
myth_drannon 8y ago
I thought it was a very common practice. I know daycare owners who complained about high lease prices for the house/building. What they usually do is take a mortgage, buy a building and don't pay the lease just the mortgage. It's cheaper this way and you end up owning the building after finishing paying the mortgage.
- koolba 8y ago
  That’s taking advantage of price differences between residential and commercial property. Many locales do not allow leasing out a house as a business location but they do allow running a business out of your home.
rekshaw 8y ago
Reminds me a little of the McDonalds movie!
petervandijck 8y ago
For the people in this thread wondering whether this is ok: double dipping is never ok. Once you get to a level where you have financial decision making power, don't pick a provider (even a great one, even at a competitive price) if you have a meaningful financial interest in them. The incentives are all wrong and it leads to badly run companies. In this particular case, it's so far over the line, it's pretty bad. The board might not be able or want to force him out right now, but long term the tone has been set.
- corebit 8y ago
  I think you honed in on a key issue: "pick a provider". There's nothing wrong with the current "arrangement", but there might be a lot wrong with the way the arrangement came to be. Or said another way, there aren't any ethical issues with WeWork renting a building from one of the owners in an above-board lease arrangement. The way WeWork chose that building and reevaluates its lease may have some issues.
- bilbo0s 8y ago
  >double dipping is never ok... ...for companies that are structured as public companies. If your companies are all private, with no investors, go ahead and do whatever you like. It's all just your money, (or your family's money), anyway. But to do that with money from public investors is, and this is only my opinion, but I think it's extremely unethical. Obviously the issue is that there is nothing explicitly illegal about what people like the WeWork CEO are doing. I'm not sure why?
  - stilley2 8y ago
    I'm not a lawyer, but I suspect this may cause you to lose the liability protection of the corporation. From [1]: "The veil of liability protection provided by an entity may be pierced based on the following theories: Alter Ego Theory. If you run your company as little more than your “alter ego,” as a mere extension of yourself (this will generally be the case where there is a lack of separateness between you individually and the company itself, due to commingling of funds, lack of proper governance, and other factors)." 1 https://businessattorneyinaustin.com/llc-corporation-liability-protection/ https://businessattorneyinaustin.com/llc-corporation-liabili...
withhighprod 8y ago
The rich, the richer
whatok 8y ago
Bloomberg is saying that this was disclosed in last year's bond prospectus. To me that's the minimum required but it's probably just better to avoid the appearance of any sort of conflict of interest.
mcv 8y ago
This reminds me of the boardgame 1830 Railways & Robber Barons. You're an investor buying shares in railroad companies, and personally running any railroad of which you are the largest shareholder. A popular opening strategy is to first buy an expensive private company, then start a public company and have the public company buy your private company at inflated price. It's a great way to shunt some money from the company treasury to your private wallet, which is otherwise impossible to do (except for dividend payments, but those are limited and go to all shareholders and not just to you). It's absolutely a robber baron move.
- rags2riches 8y ago
  In one of the Railroad Tycoon games, I forget which, some scenarios come with a goal for your personal wealth. The narrow path there be via investing your salary in your own company and then raising dividends. But that would of course benefit all the shareholders. Instead you would get there by first crushing a competing business, as you would in most scenarios anyway. Then you would buy all the worthless stock you could with your meager salary. Finally you could make an outrageously overpriced buyout offer for the worthless business.
- DanTheManPR 8y ago
  This series of board games taught me a lot about vulture capitalism, and in particular the fine difference in incentives between a mere shareholder and someone with control over an entity. Depending on how the markets and ownership rules are set up, the most effective way to build wealth may be to just play clever games with share flipping and asset transfers between companies that you have controlling stakes in. Building value is for chumps.
- braythwayt 8y ago
  1830 is such an amazing game. Also, a personal shout-out for 1856, its sibling game set in Upper Canada. That game is all about making money before everything gets bought up.
  - mcv 8y ago
    There are actually dozens of games in that genre. 1835 in Germany is very constructive and buildery, and aggressive 1830-style play is not going to do you any good. 1841 in Italy is epic in its complexity; borders popup and disappear, forcing splits and mergers. Companies can buy each other and start new subsidiary companies. There are several games in England, France, Europe as a whole, India, China, Russia, the Isle of Wight, several games for individual states in the US, and most recently, Lilliput. Many of them self-published. Worth checking out if this is your thing. 18EU is probably my favourite. Feels epic, but plays remarkably quickly.
convivialdingo 8y ago
My wife’s family did this also. They owned the buildings and leased them back to the company. It saved their butts when a partner they took on tried to take over their very valuable company. I don’t see the problem unless there’s obvious overpricing, corruption, or failures to disclose. At some point it makes better sense to put property under a holding company or similar.
numair 8y ago
Beyond the entire conversation about whether this is legal or illegal, and whether this is typical or atypical, there is a much more significant issue. The entire image and “vibe” of this guy / his team is supposed to be an egalitarian re-invention of the status quo. The kibbutz story. The “community adjusted EBITDA.” The rebranding to “We.” But this sort of real estate self-dealing isn’t a We move, it’s a Me move. And thus, we find ourselves facing a bigger issue that is far more troubling if you’re a shareholder or employee (and somewhat enjoyable if you’re a competitor): the emperor has no clothes and the CEO is full of shit. He is self-serving and isn’t optimizing for the benefit of those around him. As others in the tech industry are only beginning to figure out, once your curated narrative dies and the reality of who you really are comes to the surface, an unstoppable cycle of “bad press” and “negative sentiment” emerges. That’s a hard cycle to work out of, especially if the value of your company is predicated on your image / the image of the company. Hiring Obama’s speech writer and lobbying Congress doesn’t fix the underlying issue, and eventually you’re living in a Reverse Metcalf’s Law situation that’s scaling in the wrong direction. As WeWork is built on an image of selling “a new, better way of working” to companies of all sizes, it becomes extremely problematic if people start to associate the brand with “the rich keep getting richer, and they’re screwing us over and working us to the bone along the way.” An image of a “collaborative enterprise” becomes a laughable fantasy novel next to the reality of, “we are funded by third world despots and our CEO is lining his pockets with as much of our money as possible, while scheming up ways to do petty things such as avoid paying the cleaning staff any sort of decent wages or benefits.” This isn’t the We Company. It’s the Me Company. That’s not very innovative. That doesn’t foster greater productivity. And eventually, a lot of tenants aren’t going to pay for it, because it seems a lot of them really think they’re paying to be part of a progressive, futuristic environment. If their smartest and most progressive employees start telling them they don’t want to visit the office, they’re going to get rid of that office. Companies’ desire to please their knowledge workers — what originally drove WeWork’s success — thus ends up killing it.
- AJ007 8y ago
  I never got that image from WeWork. Anyone around during late 2008-2009 knows what happened to leases and rents. It seemed apparent from the beginning that WeWork was just exchanging future risk for current cash, and thus everything else was marketing farcical bullshit. The fact that no one can actually do real work at a WeWork was just icing on the shit pie.
Dowwie 8y ago
This is like paying for your startup with a credit card and being called out on it by reporters when the bill gets paid by the company rather than the individual, but on a much larger scale. There are perfectly valid, ethical reasons why you're using alternative sources of credit to fund a startup! Here's why this article is an opinion piece searching for scandal that fails to reveal one: Consider the legal definition of "self-dealing": "One important duty of a fiduciary is to act in the best interests of the benefited party. When a fiduciary engages in self-dealing, she breaches this duty by acting in her own interests instead of the interests of the represented party. For example, self-dealing occurs when a trustee uses money from the trust account to make a loan to a business in which he has a substantial personal interest. A fiduciary may make such a transaction with the prior permission of the trust beneficiary, but if the trustee does not obtain permission, the beneficiary can void the transaction and sue the fiduciary for any monetary losses that result."[1] Every decision WeWork made to lease new commercial space was made with board support. The CEO and family members conducted deals with WeWork that he or family personally benefited by, but it was done in a transparent manner and with board support. WeWork is navigating uncharted territory. This makes those working in finance apprehensive. Underwriters have certain requirements that a borrower must meet before a loan is approved. A rapidly expanding, growth-oriented business like WeWork may not qualify to lease new space as quickly as it requires. However, perhaps individuals who pledge their own collateral might. Commercial space was leased by individuals (or other entities) and then re-leased to WeWork. I could be wrong about this case, but if I am then this will likely grow into a scandal and self-dealing will be revealed. [1] https://legal-dictionary.thefreedictionary.com/Self-Dealing https://legal-dictionary.thefreedictionary.com/Self-Dealing
- logifail 8y ago
  >> Every decision WeWork made [..] was made with board support History reveals that the list of bad and/or outright illegal corporate decisions made with board support is long.
- hn_throwaway_99 8y ago
  > This is like paying for your startup with a credit card and being called out on it by reporters when the bill gets paid by the company rather than the individual, but on a much larger scale. I've seen this happen in multiple cases, and I find it highly unethical. At the very least it means the CEO is raking in thousands of dollars a month in credit card points for purchases across the entire company.
PurpleRamen 8y ago
Ah yeah, the old McDonalds farming-scheme. Buy some land, raise some cattle under your flag and milk them till they are dry. They have all the work and risk and you get all the fat money. At least a good farmer knows how to maintain them well for longterm-milking.
ineedasername 8y ago
This unfortunately is not uncommon outside of silicon valley either. The recent Sears debacle was helped along quite a bit by a CEO that was self-dealing to his own personal financial interests. And in a case very similar to the CEO of WeWork I recall the CEO of a restaurant holding corporation personally purchased the land where he knew he'd direct his company to build restaurants and lease it back to the company at exorbitant rents. (Though he was also jailed for criminal conduct as well, basically soliciting outright bribes from vendors.)
uberdru 8y ago
This needs to called what it is, corruption. "Self-dealing is the conduct of a trustee, attorney, corporate officer, or other fiduciary that consists of taking advantage of his position in a transaction and acting in his own interests rather than in the interests of the beneficiaries of the trust, corporate shareholders, or his clients." This is supposedly why boards exist in the first place. https://en.wikipedia.org/wiki/Self-dealing https://en.wikipedia.org/wiki/Self-dealing
Proven 8y ago
What’s wrong with that? Somebody has to be the landlord. Maybe he could make more by renting properties to other tenants?
linkmotif 8y ago
How is this wrong? Is WeWork publicly funded? Either way, is he withholding his status as landlord from investors? How is this even a conflict of interest? This sounds like a normal real estate deal: sale-leaseback to a management company.
- detaro 8y ago
  Conflict of interest: The CEO, who is supposed to have the companies best interest in mind, would benefit if the company made bad financial decisions like renting too much property from him.
thrillgore 8y ago
This sounds awfully similar to what the current CEO of Sears is trying to do.
mightymuse 8y ago
This is just the start/continuation of the WeWork world unraveling. I am familiar with the internals and there is a lot more being hidden that has yet to come out. When the 2010's documentary gets made and they get to the section about the start-up world unraveling and being exposed, it's gonna be Theranos, Fyre and WeWork highlighted throughout. 2019 is perfect timing.
deforciant 8y ago
I remember in my first job our CEO was quite proud that he bought the whole office building himself and then rented out to his company. He said whole mortgage will be repaid in 8 years... :) I guess the only difference was that it is a small company and not a 'unicorn'.
exabrial 8y ago
I don't see a problem with this if it's properly disclosed to investors, workers, and users of the service. If you don't like it, literally nobody is making you give your wealth to him, and there are plenty of alternatives that would benefit the local economy wherever you are.
majia 8y ago
We should add two mandatory clauses to cooperate law: 1. Major shareholders must disclose any business relationships between the company and shareholders' other business interests. 2. Shareholders can demand a vote on whether an above-mentioned business relationship causes a conflict of interest. If so, the relationship must be terminated.
NorthOf33rd 8y ago
Oh, self dealing. Shocking. For what happens when this gets rampant enough, please see DOMO. Wouldn't be surprised if Neumann owned a coffeeshop or fast casual restaurant ala Cubby's and mandated that said eatery cater all locations.
clamprecht 8y ago
Who said it - "No conflict, no interest"? Edit: Fred Wilson attributes it to John Doerr - https://avc.com/2010/04/no-conflict-no-interest/ https://avc.com/2010/04/no-conflict-no-interest/
kolbe 8y ago
Reminder: the Saudi Sovereign Wealth Fund is the majorly of money in SoftBank’s Vision Fund. And SoftBank is by far the largest investor in WeWork. I have to admire Neumann’s balls in trying to play Mohammed bin Salman for a chump. But I don’t think this will end well for him.
CodeSheikh 8y ago
"Adam Neumann, WeWork’s chief executive, who leased the property to WeWork after buying it.." Is this even legal? I smell conflict of interest.
dunpeal 8y ago
Just something to remember the next time a startup CEO tells you that "we" have to "work hard and give up some of our compensation" to "make a positive change in the world".
habitue 8y ago
Thinking out loud here, it seems like this behaves very similarly to leverage in that it kind of magnifies his gains or losses from wework. If Wework succeeds he can squeeze the company for more rent. If Wework fails, suddenly he also has a bunch of broken leases. (Although he has a floor to his losses from the real estate since he can eventually rerent it, maybe at a lower price) Another interesting aspect of this is that he can basically insider trade with impunity since real estate isn't a security. Who knows when/where WeWork will open an office next? Well, he does, and can buy a place cheaply (I don't imagine WeWork presence affects the real estate price much, but in principle it could).
- thesausageking 8y ago
  He wins either way. He sold some of his WeWork stock, bought buildings with the proceeds, and then had WeWork sign leases with them. If WeWork folds, he still owns the buildings and can sign new tenants. Before it does, the faster it expands, the more often he can do this, and the more money he can make. That's the conflict of interest. WeWork shareholders want WeWork to build a great business and eventually IPO, but it maybe better for him personally if WeWork simply grows as fast as possible at any cost by doing things like signing expensive leases it can't make the unit economics work for.
  - achillesheels 8y ago
    Very elegantly worded, thank you.
kpwagner 8y ago
I'm not a subscriber of WSJ, so I can only read the first paragraph. Based on the headline and the first paragraph, I don't see the problem. Wouldn't WeWork have to lease the space from someone? Why is it a problem if that someone is the CEO of WeWork? If WeWork is paying above market rent, then sure, that is corrupt. A lot of people hop on the band-wagon of bashing "rent-seeking", mostly misusing the term in the process, confusing rent-seeking with leasing/renting land or capital. WeWork's whole business is built on renting as far as I can tell.
- biztos 8y ago
  Others have mentioned this but to reiterate: imagine a WeWork location should move to a larger space, but the CEO doesn't own a sufficiently large space. At this point the CEO has a conflict of interest: on the one hand, he should move the location, because that's best for WeWork; on the other hand, he should keep it where it is because that's best for his real-estate company. There are many potential conflicts but that's probably the easiest to use as an illustration.
epa 8y ago
Why does it matter? If the board of directors are aware and approved it there is no issue here.
linguistbreaker 8y ago
This is how an oligarchy works
evanweaver 8y ago
This kind of conflict indeed looks sketchy, and I don't think Neumann should do it, but the risk and opportunity still run both ways. Neumann is assuming the capital risk. Does WeWork and its investors (including Neumann!) want these assets and associated liabilities on its books? Probably not. Is Neumann making money from this transaction long term? No way to tell; he himself probably doesn't even know if these deals are profitable for him now. What he is definitely doing is increasing his levered bet on WeWork, which could be good or bad for WeWork, and good or bad for him, depending on how everything turns out.
- mabbo 8y ago
  Neumann is the one making the deals for rentals- including the price. As the representative of the company he is incentivized to reduce the rental price as much as possible. But as the owner on the other side of the same deal, he's incentivized to increase the price as much as possible. The problem with this is that as CEO, he's talking about someone else's money (investors) while the other side he's talking about money in his pocket. How can there not be a conflict of interest?
  - evanweaver 8y ago
    I didn't deny there was a conflict. I'm just saying it's not a conflict that automatically benefits him at the expense of the company.
  - uberdru 8y ago
    How can you be sure he's assuming any capital risk? It's far more likely that any downside would be passed on to shareholders.
yeukhon 8y ago
But WeWork owes billions of rents...
oregontechninja 8y ago
This is just like McDonald's, the real money is made owning the land they sit on.
defterGoose 8y ago
Oh hey, look, another person living rich on schemes to simply move money around instead of doing something societally productive. Neat.
chatmasta 8y ago
As landlord, isn't he taking on the risk of WeWork defaulting on rent? Shouldn't he be compensated for that risk?
- hn_throwaway_99 8y ago
  But the whole point is that as CEO he now has a huge conflict of interest. It's not hard to see him prioritizing occupancy at locations he owns over other WeWork properties solely to ensure he gets paid first.
- TomBombadildoze 8y ago
  > WeWork’s CEO Makes Millions as Landlord to WeWork What risk? He's already pocketed the profits. If WeWork defaults, his property management company takes the loss, possibly sells the property, and perhaps files for bankruptcy. It doesn't affect his personal finances. "Risk" has become cognitive poison. There can be, and often is, a huge divide between _financial risk_ and _risk of grave personal consequences_.
sealthedeal 8y ago
love it!
gdsdfe 8y ago
CEOs are just hustlers in fancier clothes
mychael 8y ago
WeWork is another Theranos waiting to happen. - Unicorn status. Check. - Douchey founder(s). Check. - Shady dealings and corruption. Check.
calimac 8y ago
NONE of you people commenting about Capitalistic economic principles and the function of commerce even understand the most elementary of structural function of commerce. I suggest you learn more about the structure of commerce and law before you spew some socialist utopia as if you have ever lived in a successful socialist economy at scale or otherwise.
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hmart 8y ago
From Dan Abramov Twitter timeline: "-watches Mad Men: woah, they were so backwards in 60s -looks at the tech industry: oh no"
whack 8y ago
If I were an investor in WeWork, I would be concerned about this as well. Except that I'm not an investor, and I'm assuming 99% of angry commenters aren't either. Devil's advocate: Conflicts of interest are absolutely everywhere and can never be avoided completely. For example, here's a conflict of interest in my own job: I want my employer to pay me as much money as possible, and my employer wants to pay me as little as possible. And if I were a manager/director/executive, I would want to hire as many people as possible to boost my stature. And the company would want to hire as few people as possible to keep their expenses low. The fact that a conflict of interest exists, isn't in itself a irreconcilable problem. It only becomes one if one party tries to hide it from the other, and deceives them to get what they want. Presumably that isn't happening at WeWork. If you're an investor in WeWork, I can understand your concern, and your wanting your board representatives to take a close look at these agreements. From what I hear though, the investors and board of directors are all perfectly happy with the arrangements that have been made. Perhaps a little less soapboxing from the peanut gallery is in order.
bogomipz 8y ago
The article states: >"Mr. Neumann owes his personal wealth largely to sales of WeWork stock. It is unclear how much WeWork stock he has sold, but he has told some friends it is in the hundreds of millions of dollars." Honest question - are investors OK with this? Isn't he essentially enriching himself with VC money that has yet to see a return realized? Couldn't this be seen as a hedge that even if investor loose their shirts he himself has managed to enrich himself with a real-estate portfolio?
mbostleman 8y ago
Sounds like Ray Kroc's model.
Animats 8y ago
That's not uncommon. It's how Roy Kroc got rich with McDonalds. His real business was leasing land to franchisees.
daveheq 8y ago
Article requires subscription to WSJ to read... this really shouldn't be bumped to the top and show up in my notifications.
- hrrsn 8y ago
  https://outline.com/WMUaqc https://outline.com/WMUaqc
crsv 8y ago
Uh oh. WSJ's picked a new target, it's going to be Theranos all over again.
- p1necone 8y ago
  Not sure what you're getting at here, Theranos was "targeted" because they were completely fraudulent.
- deleted 8y ago
  [deleted]
kgwgk 8y ago
Matt Levine today: https://www.bloomberg.com/opinion/articles/2019-01-16/wework-ceo-adam-neumann-is-also-a-landlord https://www.bloomberg.com/opinion/articles/2019-01-16/wework... "Yes it really does seem like a conflict of interest! “A WeWork spokesman said all related-party deals are reviewed and approved by the board or an independent committee and disclosed to investors,” so that is good, but on the other hand, “Mr. Neumann, the 39-year-old executive who founded WeWork in 2010, is WeWork’s largest individual shareholder and has voting control over the company,” so it is not clear that the board can say no. (He got that control in 2014 with some super-voting stock; before that, he once tried to do a related-party deal and got turned down by the board.) "One thing I will say, though, is that if you told me that a privately owned real estate company was engaging in transactions with its controlling shareholder and CEO that raised possible conflicts of interest, I would be like “ha, yeah, that’s the real estate industry for you.” Conflicts of interest are more common there, as everyone knows these days after years of stories about Donald Trump’s business dealings, and it is not surprising for a founder/controller/CEO to be involved in a deal with his company on multiple sides and in multiple ways. Private tech startups, on the other hand, tend to be a bit more pristine. They are not complex moneymaking structures for their founders but mission-driven enterprises where everyone’s incentives are ostentatiously and lavishly aligned: If the company gets big, the founder becomes a zillionaire; if not, he walks away with only his modest salary and a track record for failing ambitiously. WeWork is a weird company because it is a real estate company that thinks it’s a tech startup; it seems to have the culture and New-Age-y patter and grandiose ambition and valuation of a tech company. But what if, deep down in its heart, it really is a real estate company?"
hkmurakami 8y ago
It was amusing to me that this sorry of thing is seen as potentially quite a big issue in tech yet is totally common in the real estate industry. I was made aware of this by today's Matt Levine piece https://www.bloomberg.com/opinion/articles/2019-01-16/even-cheaters-don-t-always-win https://www.bloomberg.com/opinion/articles/2019-01-16/even-c...
rwmj 8y ago
Why is WeWork any different from a company like Regis, or any number of managed offices in the 80s, which have been doing the same thing for years?
pl0x 8y ago
WeWork is a giant ponzi scheme on the brink of financial collapse. 2008 is happening all over again.
jamez1 8y ago
Often the operating business is floated and the vendors keep the buildings, this is nothing new and much more endemic than appears. You're only just seeing an article on this behavior because a high profile tech company is doing it rather than a factory or a shop.
mk926 8y ago
how can I read the article?
janismajoris 8y ago
Regus have been doing this ages.
michalu 8y ago
Classic Ponzi Scheme. People have been wondering how WeEork has't gone bankrupt yet. Well you don't go bankrupt if you can keep raising/lending more to pay up your losses. Until the day you can't anymore.

624 points by dcgudeman 8y ago

This type of self dealing rarely ends well for the company in question. How can the CEO be trusted to do right by the company?

whatok 8y ago

I can understand (but definitely wouldn't approve) if this happened early in the company's life but given when it happened and what the company has been valued at in the past few years, I really do not understand what this guy is doing.

yani 8y ago
He owns a building that is suitable for what WeWord does. What if he has a plane and his company needs a plane. Why is it bad to use it? Companies always try to hire people from our network first - relatives, friends and friends of friends. Suddently it is bad.
- barabba 8y ago
  conflict of interest?
- ascagnel_ 8y ago
  As long as WeWork isn't paying more than market rates on its rent, then it's fine. But if they're paying more, then the CEO is corrupt -- he's using his control of his company to enrich himself personally rather than steering the company towards success.
  - notahacker 8y ago
    It's not just about rent being in line with market norms. In order for it not to be personal enrichment at WeWork's expense, it's also got to be assumed that these particular leases on this particular properties were sincerely believed to be the best possible use of the $110m of WeWork shareholders' funds committed to properties its execs had an ownership interest in: i.e. that there were no competing locations (or capital investments) that might have been expected to yield higher customer revenues and nothing comparable on offer at below market rates. Additionally, we've got to assume WeWork execs were not in competition with WeWork to acquire actual [part]-ownership of the buildings (the article provides an example of Neumann trying to personally buy a stake in a building knowing that WeWork wanted to occupy it but WeWork blocking it because they were happy to stump up for title deeds as well as the lease. It certainly doesn't rule out the possibility he used his knowledge of WeWork's requirements to acquire other freehold titles which WeWork might have preferred to buy rather than just lease though).
- krembo 8y ago
  Or a better option - he leased/bought the building with interest X and sub-leased it to WeWork for X+50%. From Adam N (We CEO) history, he is not common from such a rich family to afford buying building worldwide.

verganileonardo 8y ago

That is quite common in retail. Usually the family owns all the stores and just rent them to the retailer. (At least in Brazil) Although it sounds bad, not sure how it is perceived in real estate

andrejuseu 8y ago
Same in Lithuania, not a problem, if price for renting is like market price, else, it would be interesting to local authorities.
- mosselman 8y ago
  How is this not a problem? There is a huge conflict of interest in decisions about location, rent negotiations, etc.
  - yani 8y ago
    Is conflict of interest illegal?
    - deleted 8y ago
      [deleted]
    - mosselman 8y ago
      I said 'problem', not 'illegal'. Other shareholders/boards/investors/employees should care.
  - verganileonardo 8y ago
    Rent should be similar to market price for the region. Regarding location, the family wants the store to the be sucessfull for 2 reasons: (1) the rent period is going to be longer and (2) they own the retailer and want to invest in viable stores!
    - conanbatt 8y ago

smithmayowa 8y ago

This sort of self benefiting deals should not be acceptable in any organization from their executives, just as they are not acceptable from democratic government officials.

wmeredith 8y ago
Oh boy, have you been following the current US President? How Donald Trump is monetising his presidency: https://www.economist.com/business/2017/07/20/how-donald-trump-is-monetising-his-presidency https://www.economist.com/business/2017/07/20/how-donald-tru...

hendzen 8y ago

As part of an investment round for WeWork in 2014, he was granted Class B shares that gave him 10 votes per share, and now he has more than 65% of the overall share vote, according to WeWork corporate filings. These multi-class ownership structures need to be reformed. The SEC is already thinking about it [0]. [0]- https://www.sec.gov/news/speech/perpetual-dual-class-stock-case-against-corporate-royalty https://www.sec.gov/news/speech/perpetual-dual-class-stock-c...

yani 8y ago
Yes, this will be really good to do.
- lotsofpulp 8y ago
  Unnecessary, no one is being duped into investing in a business in which they have no say. If they deem it's worth the additional agency risk, then they should be able to afford it, if not, they and others will learn going forward.
  - bfdm 8y ago
    But it still perpetuates a class system whereby having money and influence yields (potentially) more money and influence. Main Street investors who will have no say at scale should not be excluded from participating in the wealth creation. Certainly this is not a natural or easy problem, it requires a values analysis of our goals and principles. But if we truly want the market to evaluate a company, we must ultimately allow that market to change the fate of a company. The dual class shares prevent that, which I agree should be listed differently or restricted. For example, if dual class shares were always subject to a confidence vote by the other shares once per 5 years, this is fine. Or you say that after 20 years the dual class must be dissolved. Allow the use for initial listing, but not forever. I think the author of the linked speech painted a very good picture of this.
- cenal 8y ago
  It’d give even fewer incentives to take a company public.

cluoma 8y ago

The ex-CEO at my wife's previous company did this. Signed a multi-year lease for the company on a building she owned a few months before leaving the company. A real dick move for sure. They were growing at the time and being constrained to such a tiny space for so long was quite rough for them.

dsr_ 8y ago
Normally a multi-year commercial lease comes with the right to sublet. Did the company fail to negotiate that?
- catawbasam 8y ago
  If the ceo was self dealing, she might have 'forgotten'.
  - ceejayoz 8y ago
    Plus, if she gave herself a sweetheart deal on rent, there might not be any sublessor interested in making the inflated payments.
    - Firadeoclus 8y ago
      If the company can't get out of the deal then that rent is a sunk cost. It might still be better for them to sublet at market rent and find a larger property for themselves.
technofiend 8y ago
My wife's church sold a multi-million dollar parcel to the museum across the street because one of the church members is a real estate agent and made a commission. This not only denied the church any revenue from making the parking lot a parking garage as the museum did but prevented them from doing anything else with the land in case of expansion or simply a future sale if they move. Talk about stepping over dollars to pick up pennies.

code4tee 8y ago

This is basically the textbook definition of conflict of interests. Given that WeWork is also a very unprofitable business it raises serious fiduciary duty questions regarding his role at WeWork (it would be a big issue even if they were profitable but seems crazy bad when they are not).

Traster 8y ago

There seems to be an archetype in silicon valley today of people viewing companies basically just as convenient extensions of themselves rather than distinct legal entities with separate interests. Why would a WeWork object to paying Neumann's rent? WeWork is bascially Neumann anyway! Why would Tesla object to buying Musk's other companies? Tesla is basically Musk anyway! Why wouldn't levandowski just employ his own company to supply components he was procuring for Google? Why wouldn't Shkreli pay his hedge fund investors back with cash from one of his other companies? It's amazing how often 'innovation' and business success turns into corrupt self-enrichment. Unfortunately justice tends to only come once someone suitably senior gets screwed. With Levandowski that was Google, with Shkreli that was the government. I suspect with WeWork the law suits will come the second the investment value drops - investors won't do a thing until they start losing money, rather than just making less money than they otherwise would have.

huffmsa 8y ago
We're seeing it with Sears too. Chairman of the board (the former CEO) just approved a $5.2 billion deal of some sort from EHL, the fund he is the owner and manager of.
- drieddust 8y ago
  Shouldn't that be a case of corruption straight up? Seems like entire system is in cahoot.
  - huffmsa 8y ago
    There's no clear motive. I guess he's keeping the company alive long enough to sell off more of it's assets, but it seems like a relatively low yield operation to me. Perhaps he's operating on a level we can't comprehend
    - howard941 8y ago
      Strip the assets beyond the bankruptcy code's 2 year fraudulent conveyance lookback period. Fix the problem by extending it to 10 years for corporate fiduciaries or something.

antr 8y ago

Just look at WeWork's WEWORK COMP. 18/25 REGS bond. Total junk. Can't wait for an economic slowdown in 2019/20, and see WeWork default on its debt holders.

bluedino 8y ago

I thought this was common? Many owners of companies also own a real estate holding company and lease a building to their main company.

moccachino 8y ago
There is a difference if it is the sole/main owner of the company that also owns the real estate holding company, or if it is the CEO who's doing it to funnel some cash to himself. I think the legit thing to do would be to have three companies. SuperCo Holdings, SuperCo RealEstate and SuperCo Operations. SuperCo Holdings owns both the others 100% and investors buy the Holdings company.
- jaxn 8y ago
  You are assuming he bought the building with company resources. If he spent his own money/took on the liability personally, that is his business. Yeah, you gotta be extra careful that it's not divergent from company interests (right place, right price). But this isn't shady unless there is some reason it harms the company.
  - usrusr 8y ago
    > You are assuming he bought the building with company resources. If he spent his own money/took on the liability personally, that is his business. It would be his business if he rented out his property to an organization that he can't sign contracts for. But as it stands, he is transferring money from an account he only partially owns (but fully controls, with legal obligations to his co-owners which he seems to be breaking) to an account that he owns fully. It's a sneaky way to give himself a raise that is easier to get past the board. The article even cites WeWork with "approved by the board or an independent committee", which implies that not all of those arrangements happened worth explicit board approval. How he got into the possession of the means by which the transfer from controlled-but-only-partially-owned to owned was facilitated is an unrelated topic.
jaxn 8y ago
You are correct. The is very common with small businesses. It separates liability and allows you to shift income to long-term capital gains. I didn't read the full article (paywall), but it sounds like the CEO owns the building with other people. Are those owners also large shareholders of WeWork?

chank 8y ago

Wasn't there also an article recently about WeWork losing funding because it's basically a real estate company with a tech facade?

dpflan 8y ago

"The building’s value, meanwhile, has gone up, and the owners have been able to borrow more money by refinancing the property’s debt. Late last year, Messrs. Neumann and Tahari took out a $77.5 million loan, according to loan adviser Meridian Capital Group, $7.5 million more than the prior loan to buy the building." I'm amazed. When does this information about self-leasing show up in due diligence by investors? The prospect of return to the investors must overshadow such data? Is the real-estate market just so inflated at the moment that if you can play it why not do so? The self-leasing strategy + WeWork makes the property value higher (presumably because the rent-ability of the property is proven when a WeWork tenant moves in). Then the property owners can leverage the property. Others have raised the point of conflict of interest and fiduciary responsibility and the not-so-sound financials of the business (e.g. Softbank backs down from $16B to $2B in new investment (still a big number)). I'm curious what is going on here or is it obvious?

Traster 8y ago
Somewhere between "Hey guys I just bought a Wave-pool company because I've gotten really into surfing recently" and "We're going to re-invent EBITDA"

lorenzobr 8y ago

Although it doesn't sound right, on the other hand why would Neumann rent his commercial real estate assets to WeWork competitors? Maybe the question should be, why the hell Neumann bought properties directly instead of using the WeWork vehicle? We all know the answer to that I think.

ryanmercer 8y ago

See... this is apparently quite legal but insider trading gets you prison. This is arguably more of a conflict of interest/questionable act than insider trading. I imagine the company could also find cheaper places/better terms for leasing than the CEO owned properties which, to me, is mismanagement if not low-level fraud.

jaxn 8y ago
Why do you assume that? He may be willing to bet on WeWork's viability in ways that other landlords won't. Landlords may have been asking him to personally guarantee leases.
- ryanmercer 8y ago
  >He may be willing to bet on WeWork's viability in ways that other landlords won't. Perhaps, but as someone else in this thread said >The self-leasing strategy + WeWork makes the property value higher (presumably because the rent-ability of the property is proven when a WeWork tenant moves in). Then the property owners can leverage the property. And never mind the fact that he's basically guaranteeing he has a tenant for each building, that will also likely making physical improvements to lure in customers (which will mostly carry over for a future tenant) and effectively building free equity in the property so even if WeWork suddenly folds he can sell the properties at competitive prices and still walk away with a profit. >Landlords may have been asking him to personally guarantee leases. Perhaps with the first location or two but a quick google search shows they've raised billions in funding which would be more than adequate (unless they are growing too fast, which appears to be the case, see below). Now as far as guaranteeing rent here's something interesting >In March 2018, SEC filings indicated that WeWork had raised over $400 million alongside private equity fund The Rhone Group to start a fund to purchase properties directly.[33] In April, documents filed by the company in association with a plan to raise $500 million through the issue of high-yield bonds showed that the company's revenues rose in 2017, but costs rose faster, and the company owed $18 billion rent https://en.wikipedia.org/wiki/WeWork#History_and_funding https://en.wikipedia.org/wiki/WeWork#History_and_funding I don't know how many of the sites he owns but even if it is only 10% there is 1.8 billion 'free' money servicing loans on commercial properties he owns.

gammateam 8y ago

I am more surprised that Neumann allows his name to be known in these investment groups Just form the Wyoming Series LLC or BVI segregated portfolio company, no beneficial owner information will be in public records, but even the state and registered agent can be kept in the dark if you want. I expect value has been extracted this way for centuries. Oops!

myth_drannon 8y ago

I thought it was a very common practice. I know daycare owners who complained about high lease prices for the house/building. What they usually do is take a mortgage, buy a building and don't pay the lease just the mortgage. It's cheaper this way and you end up owning the building after finishing paying the mortgage.

koolba 8y ago
That’s taking advantage of price differences between residential and commercial property. Many locales do not allow leasing out a house as a business location but they do allow running a business out of your home.

rekshaw 8y ago

Reminds me a little of the McDonalds movie!

petervandijck 8y ago

For the people in this thread wondering whether this is ok: double dipping is never ok. Once you get to a level where you have financial decision making power, don't pick a provider (even a great one, even at a competitive price) if you have a meaningful financial interest in them. The incentives are all wrong and it leads to badly run companies. In this particular case, it's so far over the line, it's pretty bad. The board might not be able or want to force him out right now, but long term the tone has been set.

corebit 8y ago
I think you honed in on a key issue: "pick a provider". There's nothing wrong with the current "arrangement", but there might be a lot wrong with the way the arrangement came to be. Or said another way, there aren't any ethical issues with WeWork renting a building from one of the owners in an above-board lease arrangement. The way WeWork chose that building and reevaluates its lease may have some issues.
bilbo0s 8y ago
>double dipping is never ok... ...for companies that are structured as public companies. If your companies are all private, with no investors, go ahead and do whatever you like. It's all just your money, (or your family's money), anyway. But to do that with money from public investors is, and this is only my opinion, but I think it's extremely unethical. Obviously the issue is that there is nothing explicitly illegal about what people like the WeWork CEO are doing. I'm not sure why?
- stilley2 8y ago
  I'm not a lawyer, but I suspect this may cause you to lose the liability protection of the corporation. From [1]: "The veil of liability protection provided by an entity may be pierced based on the following theories: Alter Ego Theory. If you run your company as little more than your “alter ego,” as a mere extension of yourself (this will generally be the case where there is a lack of separateness between you individually and the company itself, due to commingling of funds, lack of proper governance, and other factors)." 1 https://businessattorneyinaustin.com/llc-corporation-liability-protection/ https://businessattorneyinaustin.com/llc-corporation-liabili...

withhighprod 8y ago

The rich, the richer

whatok 8y ago

Bloomberg is saying that this was disclosed in last year's bond prospectus. To me that's the minimum required but it's probably just better to avoid the appearance of any sort of conflict of interest.

mcv 8y ago

This reminds me of the boardgame 1830 Railways & Robber Barons. You're an investor buying shares in railroad companies, and personally running any railroad of which you are the largest shareholder. A popular opening strategy is to first buy an expensive private company, then start a public company and have the public company buy your private company at inflated price. It's a great way to shunt some money from the company treasury to your private wallet, which is otherwise impossible to do (except for dividend payments, but those are limited and go to all shareholders and not just to you). It's absolutely a robber baron move.

rags2riches 8y ago
In one of the Railroad Tycoon games, I forget which, some scenarios come with a goal for your personal wealth. The narrow path there be via investing your salary in your own company and then raising dividends. But that would of course benefit all the shareholders. Instead you would get there by first crushing a competing business, as you would in most scenarios anyway. Then you would buy all the worthless stock you could with your meager salary. Finally you could make an outrageously overpriced buyout offer for the worthless business.
DanTheManPR 8y ago
This series of board games taught me a lot about vulture capitalism, and in particular the fine difference in incentives between a mere shareholder and someone with control over an entity. Depending on how the markets and ownership rules are set up, the most effective way to build wealth may be to just play clever games with share flipping and asset transfers between companies that you have controlling stakes in. Building value is for chumps.
braythwayt 8y ago
1830 is such an amazing game. Also, a personal shout-out for 1856, its sibling game set in Upper Canada. That game is all about making money before everything gets bought up.
- mcv 8y ago
  There are actually dozens of games in that genre. 1835 in Germany is very constructive and buildery, and aggressive 1830-style play is not going to do you any good. 1841 in Italy is epic in its complexity; borders popup and disappear, forcing splits and mergers. Companies can buy each other and start new subsidiary companies. There are several games in England, France, Europe as a whole, India, China, Russia, the Isle of Wight, several games for individual states in the US, and most recently, Lilliput. Many of them self-published. Worth checking out if this is your thing. 18EU is probably my favourite. Feels epic, but plays remarkably quickly.

convivialdingo 8y ago

My wife’s family did this also. They owned the buildings and leased them back to the company. It saved their butts when a partner they took on tried to take over their very valuable company. I don’t see the problem unless there’s obvious overpricing, corruption, or failures to disclose. At some point it makes better sense to put property under a holding company or similar.

numair 8y ago

Beyond the entire conversation about whether this is legal or illegal, and whether this is typical or atypical, there is a much more significant issue. The entire image and “vibe” of this guy / his team is supposed to be an egalitarian re-invention of the status quo. The kibbutz story. The “community adjusted EBITDA.” The rebranding to “We.” But this sort of real estate self-dealing isn’t a We move, it’s a Me move. And thus, we find ourselves facing a bigger issue that is far more troubling if you’re a shareholder or employee (and somewhat enjoyable if you’re a competitor): the emperor has no clothes and the CEO is full of shit. He is self-serving and isn’t optimizing for the benefit of those around him. As others in the tech industry are only beginning to figure out, once your curated narrative dies and the reality of who you really are comes to the surface, an unstoppable cycle of “bad press” and “negative sentiment” emerges. That’s a hard cycle to work out of, especially if the value of your company is predicated on your image / the image of the company. Hiring Obama’s speech writer and lobbying Congress doesn’t fix the underlying issue, and eventually you’re living in a Reverse Metcalf’s Law situation that’s scaling in the wrong direction. As WeWork is built on an image of selling “a new, better way of working” to companies of all sizes, it becomes extremely problematic if people start to associate the brand with “the rich keep getting richer, and they’re screwing us over and working us to the bone along the way.” An image of a “collaborative enterprise” becomes a laughable fantasy novel next to the reality of, “we are funded by third world despots and our CEO is lining his pockets with as much of our money as possible, while scheming up ways to do petty things such as avoid paying the cleaning staff any sort of decent wages or benefits.” This isn’t the We Company. It’s the Me Company. That’s not very innovative. That doesn’t foster greater productivity. And eventually, a lot of tenants aren’t going to pay for it, because it seems a lot of them really think they’re paying to be part of a progressive, futuristic environment. If their smartest and most progressive employees start telling them they don’t want to visit the office, they’re going to get rid of that office. Companies’ desire to please their knowledge workers — what originally drove WeWork’s success — thus ends up killing it.

AJ007 8y ago
I never got that image from WeWork. Anyone around during late 2008-2009 knows what happened to leases and rents. It seemed apparent from the beginning that WeWork was just exchanging future risk for current cash, and thus everything else was marketing farcical bullshit. The fact that no one can actually do real work at a WeWork was just icing on the shit pie.

Dowwie 8y ago

This is like paying for your startup with a credit card and being called out on it by reporters when the bill gets paid by the company rather than the individual, but on a much larger scale. There are perfectly valid, ethical reasons why you're using alternative sources of credit to fund a startup! Here's why this article is an opinion piece searching for scandal that fails to reveal one: Consider the legal definition of "self-dealing": "One important duty of a fiduciary is to act in the best interests of the benefited party. When a fiduciary engages in self-dealing, she breaches this duty by acting in her own interests instead of the interests of the represented party. For example, self-dealing occurs when a trustee uses money from the trust account to make a loan to a business in which he has a substantial personal interest. A fiduciary may make such a transaction with the prior permission of the trust beneficiary, but if the trustee does not obtain permission, the beneficiary can void the transaction and sue the fiduciary for any monetary losses that result."[1] Every decision WeWork made to lease new commercial space was made with board support. The CEO and family members conducted deals with WeWork that he or family personally benefited by, but it was done in a transparent manner and with board support. WeWork is navigating uncharted territory. This makes those working in finance apprehensive. Underwriters have certain requirements that a borrower must meet before a loan is approved. A rapidly expanding, growth-oriented business like WeWork may not qualify to lease new space as quickly as it requires. However, perhaps individuals who pledge their own collateral might. Commercial space was leased by individuals (or other entities) and then re-leased to WeWork. I could be wrong about this case, but if I am then this will likely grow into a scandal and self-dealing will be revealed. [1] https://legal-dictionary.thefreedictionary.com/Self-Dealing https://legal-dictionary.thefreedictionary.com/Self-Dealing

logifail 8y ago
>> Every decision WeWork made [..] was made with board support History reveals that the list of bad and/or outright illegal corporate decisions made with board support is long.
hn_throwaway_99 8y ago
> This is like paying for your startup with a credit card and being called out on it by reporters when the bill gets paid by the company rather than the individual, but on a much larger scale. I've seen this happen in multiple cases, and I find it highly unethical. At the very least it means the CEO is raking in thousands of dollars a month in credit card points for purchases across the entire company.

PurpleRamen 8y ago

Ah yeah, the old McDonalds farming-scheme. Buy some land, raise some cattle under your flag and milk them till they are dry. They have all the work and risk and you get all the fat money. At least a good farmer knows how to maintain them well for longterm-milking.

ineedasername 8y ago

This unfortunately is not uncommon outside of silicon valley either. The recent Sears debacle was helped along quite a bit by a CEO that was self-dealing to his own personal financial interests. And in a case very similar to the CEO of WeWork I recall the CEO of a restaurant holding corporation personally purchased the land where he knew he'd direct his company to build restaurants and lease it back to the company at exorbitant rents. (Though he was also jailed for criminal conduct as well, basically soliciting outright bribes from vendors.)

uberdru 8y ago

This needs to called what it is, corruption. "Self-dealing is the conduct of a trustee, attorney, corporate officer, or other fiduciary that consists of taking advantage of his position in a transaction and acting in his own interests rather than in the interests of the beneficiaries of the trust, corporate shareholders, or his clients." This is supposedly why boards exist in the first place. https://en.wikipedia.org/wiki/Self-dealing https://en.wikipedia.org/wiki/Self-dealing

Proven 8y ago

What’s wrong with that? Somebody has to be the landlord. Maybe he could make more by renting properties to other tenants?

linkmotif 8y ago

How is this wrong? Is WeWork publicly funded? Either way, is he withholding his status as landlord from investors? How is this even a conflict of interest? This sounds like a normal real estate deal: sale-leaseback to a management company.

detaro 8y ago
Conflict of interest: The CEO, who is supposed to have the companies best interest in mind, would benefit if the company made bad financial decisions like renting too much property from him.

thrillgore 8y ago

This sounds awfully similar to what the current CEO of Sears is trying to do.

mightymuse 8y ago

This is just the start/continuation of the WeWork world unraveling. I am familiar with the internals and there is a lot more being hidden that has yet to come out. When the 2010's documentary gets made and they get to the section about the start-up world unraveling and being exposed, it's gonna be Theranos, Fyre and WeWork highlighted throughout. 2019 is perfect timing.

deforciant 8y ago

I remember in my first job our CEO was quite proud that he bought the whole office building himself and then rented out to his company. He said whole mortgage will be repaid in 8 years... :) I guess the only difference was that it is a small company and not a 'unicorn'.

exabrial 8y ago

I don't see a problem with this if it's properly disclosed to investors, workers, and users of the service. If you don't like it, literally nobody is making you give your wealth to him, and there are plenty of alternatives that would benefit the local economy wherever you are.

majia 8y ago

We should add two mandatory clauses to cooperate law: 1. Major shareholders must disclose any business relationships between the company and shareholders' other business interests. 2. Shareholders can demand a vote on whether an above-mentioned business relationship causes a conflict of interest. If so, the relationship must be terminated.

NorthOf33rd 8y ago

Oh, self dealing. Shocking. For what happens when this gets rampant enough, please see DOMO. Wouldn't be surprised if Neumann owned a coffeeshop or fast casual restaurant ala Cubby's and mandated that said eatery cater all locations.

clamprecht 8y ago

Who said it - "No conflict, no interest"? Edit: Fred Wilson attributes it to John Doerr - https://avc.com/2010/04/no-conflict-no-interest/ https://avc.com/2010/04/no-conflict-no-interest/

kolbe 8y ago

Reminder: the Saudi Sovereign Wealth Fund is the majorly of money in SoftBank’s Vision Fund. And SoftBank is by far the largest investor in WeWork. I have to admire Neumann’s balls in trying to play Mohammed bin Salman for a chump. But I don’t think this will end well for him.

CodeSheikh 8y ago

"Adam Neumann, WeWork’s chief executive, who leased the property to WeWork after buying it.." Is this even legal? I smell conflict of interest.

dunpeal 8y ago

Just something to remember the next time a startup CEO tells you that "we" have to "work hard and give up some of our compensation" to "make a positive change in the world".

habitue 8y ago

Thinking out loud here, it seems like this behaves very similarly to leverage in that it kind of magnifies his gains or losses from wework. If Wework succeeds he can squeeze the company for more rent. If Wework fails, suddenly he also has a bunch of broken leases. (Although he has a floor to his losses from the real estate since he can eventually rerent it, maybe at a lower price) Another interesting aspect of this is that he can basically insider trade with impunity since real estate isn't a security. Who knows when/where WeWork will open an office next? Well, he does, and can buy a place cheaply (I don't imagine WeWork presence affects the real estate price much, but in principle it could).

thesausageking 8y ago
He wins either way. He sold some of his WeWork stock, bought buildings with the proceeds, and then had WeWork sign leases with them. If WeWork folds, he still owns the buildings and can sign new tenants. Before it does, the faster it expands, the more often he can do this, and the more money he can make. That's the conflict of interest. WeWork shareholders want WeWork to build a great business and eventually IPO, but it maybe better for him personally if WeWork simply grows as fast as possible at any cost by doing things like signing expensive leases it can't make the unit economics work for.
- achillesheels 8y ago
  Very elegantly worded, thank you.

kpwagner 8y ago

I'm not a subscriber of WSJ, so I can only read the first paragraph. Based on the headline and the first paragraph, I don't see the problem. Wouldn't WeWork have to lease the space from someone? Why is it a problem if that someone is the CEO of WeWork? If WeWork is paying above market rent, then sure, that is corrupt. A lot of people hop on the band-wagon of bashing "rent-seeking", mostly misusing the term in the process, confusing rent-seeking with leasing/renting land or capital. WeWork's whole business is built on renting as far as I can tell.

biztos 8y ago
Others have mentioned this but to reiterate: imagine a WeWork location should move to a larger space, but the CEO doesn't own a sufficiently large space. At this point the CEO has a conflict of interest: on the one hand, he should move the location, because that's best for WeWork; on the other hand, he should keep it where it is because that's best for his real-estate company. There are many potential conflicts but that's probably the easiest to use as an illustration.

epa 8y ago

Why does it matter? If the board of directors are aware and approved it there is no issue here.

linguistbreaker 8y ago

This is how an oligarchy works

evanweaver 8y ago

This kind of conflict indeed looks sketchy, and I don't think Neumann should do it, but the risk and opportunity still run both ways. Neumann is assuming the capital risk. Does WeWork and its investors (including Neumann!) want these assets and associated liabilities on its books? Probably not. Is Neumann making money from this transaction long term? No way to tell; he himself probably doesn't even know if these deals are profitable for him now. What he is definitely doing is increasing his levered bet on WeWork, which could be good or bad for WeWork, and good or bad for him, depending on how everything turns out.

mabbo 8y ago
Neumann is the one making the deals for rentals- including the price. As the representative of the company he is incentivized to reduce the rental price as much as possible. But as the owner on the other side of the same deal, he's incentivized to increase the price as much as possible. The problem with this is that as CEO, he's talking about someone else's money (investors) while the other side he's talking about money in his pocket. How can there not be a conflict of interest?
- evanweaver 8y ago
  I didn't deny there was a conflict. I'm just saying it's not a conflict that automatically benefits him at the expense of the company.
- uberdru 8y ago
  How can you be sure he's assuming any capital risk? It's far more likely that any downside would be passed on to shareholders.

yeukhon 8y ago

But WeWork owes billions of rents...

oregontechninja 8y ago

This is just like McDonald's, the real money is made owning the land they sit on.

defterGoose 8y ago

Oh hey, look, another person living rich on schemes to simply move money around instead of doing something societally productive. Neat.

chatmasta 8y ago

As landlord, isn't he taking on the risk of WeWork defaulting on rent? Shouldn't he be compensated for that risk?

hn_throwaway_99 8y ago
But the whole point is that as CEO he now has a huge conflict of interest. It's not hard to see him prioritizing occupancy at locations he owns over other WeWork properties solely to ensure he gets paid first.
TomBombadildoze 8y ago
> WeWork’s CEO Makes Millions as Landlord to WeWork What risk? He's already pocketed the profits. If WeWork defaults, his property management company takes the loss, possibly sells the property, and perhaps files for bankruptcy. It doesn't affect his personal finances. "Risk" has become cognitive poison. There can be, and often is, a huge divide between _financial risk_ and _risk of grave personal consequences_.

sealthedeal 8y ago

love it!

gdsdfe 8y ago

CEOs are just hustlers in fancier clothes

mychael 8y ago

WeWork is another Theranos waiting to happen. - Unicorn status. Check. - Douchey founder(s). Check. - Shady dealings and corruption. Check.

calimac 8y ago

NONE of you people commenting about Capitalistic economic principles and the function of commerce even understand the most elementary of structural function of commerce. I suggest you learn more about the structure of commerce and law before you spew some socialist utopia as if you have ever lived in a successful socialist economy at scale or otherwise.

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hmart 8y ago

From Dan Abramov Twitter timeline: "-watches Mad Men: woah, they were so backwards in 60s -looks at the tech industry: oh no"

whack 8y ago

If I were an investor in WeWork, I would be concerned about this as well. Except that I'm not an investor, and I'm assuming 99% of angry commenters aren't either. Devil's advocate: Conflicts of interest are absolutely everywhere and can never be avoided completely. For example, here's a conflict of interest in my own job: I want my employer to pay me as much money as possible, and my employer wants to pay me as little as possible. And if I were a manager/director/executive, I would want to hire as many people as possible to boost my stature. And the company would want to hire as few people as possible to keep their expenses low. The fact that a conflict of interest exists, isn't in itself a irreconcilable problem. It only becomes one if one party tries to hide it from the other, and deceives them to get what they want. Presumably that isn't happening at WeWork. If you're an investor in WeWork, I can understand your concern, and your wanting your board representatives to take a close look at these agreements. From what I hear though, the investors and board of directors are all perfectly happy with the arrangements that have been made. Perhaps a little less soapboxing from the peanut gallery is in order.

bogomipz 8y ago

The article states: >"Mr. Neumann owes his personal wealth largely to sales of WeWork stock. It is unclear how much WeWork stock he has sold, but he has told some friends it is in the hundreds of millions of dollars." Honest question - are investors OK with this? Isn't he essentially enriching himself with VC money that has yet to see a return realized? Couldn't this be seen as a hedge that even if investor loose their shirts he himself has managed to enrich himself with a real-estate portfolio?

mbostleman 8y ago

Sounds like Ray Kroc's model.

Animats 8y ago

That's not uncommon. It's how Roy Kroc got rich with McDonalds. His real business was leasing land to franchisees.

daveheq 8y ago

Article requires subscription to WSJ to read... this really shouldn't be bumped to the top and show up in my notifications.

hrrsn 8y ago
https://outline.com/WMUaqc https://outline.com/WMUaqc

crsv 8y ago

Uh oh. WSJ's picked a new target, it's going to be Theranos all over again.

p1necone 8y ago
Not sure what you're getting at here, Theranos was "targeted" because they were completely fraudulent.
deleted 8y ago
[deleted]

kgwgk 8y ago

Matt Levine today: https://www.bloomberg.com/opinion/articles/2019-01-16/wework-ceo-adam-neumann-is-also-a-landlord https://www.bloomberg.com/opinion/articles/2019-01-16/wework... "Yes it really does seem like a conflict of interest! “A WeWork spokesman said all related-party deals are reviewed and approved by the board or an independent committee and disclosed to investors,” so that is good, but on the other hand, “Mr. Neumann, the 39-year-old executive who founded WeWork in 2010, is WeWork’s largest individual shareholder and has voting control over the company,” so it is not clear that the board can say no. (He got that control in 2014 with some super-voting stock; before that, he once tried to do a related-party deal and got turned down by the board.) "One thing I will say, though, is that if you told me that a privately owned real estate company was engaging in transactions with its controlling shareholder and CEO that raised possible conflicts of interest, I would be like “ha, yeah, that’s the real estate industry for you.” Conflicts of interest are more common there, as everyone knows these days after years of stories about Donald Trump’s business dealings, and it is not surprising for a founder/controller/CEO to be involved in a deal with his company on multiple sides and in multiple ways. Private tech startups, on the other hand, tend to be a bit more pristine. They are not complex moneymaking structures for their founders but mission-driven enterprises where everyone’s incentives are ostentatiously and lavishly aligned: If the company gets big, the founder becomes a zillionaire; if not, he walks away with only his modest salary and a track record for failing ambitiously. WeWork is a weird company because it is a real estate company that thinks it’s a tech startup; it seems to have the culture and New-Age-y patter and grandiose ambition and valuation of a tech company. But what if, deep down in its heart, it really is a real estate company?"

hkmurakami 8y ago

It was amusing to me that this sorry of thing is seen as potentially quite a big issue in tech yet is totally common in the real estate industry. I was made aware of this by today's Matt Levine piece https://www.bloomberg.com/opinion/articles/2019-01-16/even-cheaters-don-t-always-win https://www.bloomberg.com/opinion/articles/2019-01-16/even-c...

rwmj 8y ago

Why is WeWork any different from a company like Regis, or any number of managed offices in the 80s, which have been doing the same thing for years?

pl0x 8y ago

WeWork is a giant ponzi scheme on the brink of financial collapse. 2008 is happening all over again.

jamez1 8y ago

Often the operating business is floated and the vendors keep the buildings, this is nothing new and much more endemic than appears. You're only just seeing an article on this behavior because a high profile tech company is doing it rather than a factory or a shop.

mk926 8y ago

how can I read the article?

janismajoris 8y ago

Regus have been doing this ages.

michalu 8y ago

Classic Ponzi Scheme. People have been wondering how WeEork has't gone bankrupt yet. Well you don't go bankrupt if you can keep raising/lending more to pay up your losses. Until the day you can't anymore.