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Home / Business / Neumann's $ 700 million payout from WeWork is made possible by the new risk market

Neumann's $ 700 million payout from WeWork is made possible by the new risk market



Earlier founders of startups generally did not attempt to personally deposit their shares in their companies until they at least went public or were acquired.

As WeWork CEO Adam Neumann has shown, following a $ 700 million Thursday Wall Street Journal report, this standard is changing. And you can attribute this shift to massive capital inflows into venture markets, and especially to companies like WeWork.

"Traditionally this would be unusual," said Charlie Plauche, a partner of S3 Ventures of Austin, Texas. "But traditionally, companies have not made billions of dollars of funding before going public."

The taboo of the founders, who raised money before going public on their companies, was based on a desire to ensure that the founders were fully invested in the long-term success of their startups, not just trying to make a quick buck. However, the general prohibition on such moves has gradually been lifted, and the practice of founders selling portions of their shares for their own benefit while their companies are still private has increased, especially since the last financial crisis.

More founders make a profit, but Neumann stands out.

Zynga founder Marc Pincus sold $ 1

09 million of his company's stock in 2011 as part of a pre-IPO transaction. Evan Spiegel and his co-founders of Snap each paid $ 10 million in 2013, four years before the company went public. And Uber's Travis Kalanick sold 29% of its shares in the App-based hailstorm company in 2018 after being dismissed as CEO but before the company went public.

Neumann's transactions, however, are characterized by their collective size, especially by a founder who remains the CEO of his startup. As the Journal reported, Neumann personally earned around $ 700 million from WeWork through a combination of selling his shares and taking out loans backed by some of his remaining shares.

Read This : WeWork co-founder and CEO Adam Neumann allegedly sold shares in the company and raised $ 700 million in loans.

"The magnitude of Neumann's sales is an extreme outlier." said Jay Ritter, a finance professor at the University of Florida, who closely follows the IPO market.

It is impossible to determine, without further details of the transactions, how much of his share Neumann sold during the moves. This is because, according to the report, they have been in the last five years and WeWork's valuation has risen sharply during this period – from $ 5 billion at the end of 2014 to $ 47 billion at the beginning of this year.

Neumann declined to comment on the report or transactions to Business Insider through a WeWork representative.

The inflow of risk money fuels the trend

Unlike founders in earlier eras, but like a growing number today, Neumann holds a controlling stake in this company, despite having no majority of its shares. He can do that because the stock he owns receives 10 votes each, while other stocks get only one vote, the Journal reports. This control generally means that he can run the business the way he sees fit, and not have to worry as much as another founder, if his investors approve of his stock sales. Pincus, Spiegel and Kalanick were in similar positions.

However, the size of Neumann's sales also depends on the value of his company. And that, in turn, is related to a large inflow of capital in the late stages. Companies like Softbank have bought stakes in older, more mature startups. This money – alone, the Softbank has invested from its gigantic $ 100 billion Vision Fund – has enabled these companies to stay longer privately.

However, this trend has also helped change attitudes that founders are redeeming some of their shares at an early stage, venture investors said.

In earlier times, before the inflow of late capital, WeWork companies of the age and maturity would have been public. Founders often sell portions of their shares in an IPO. It was the first time that many of them experienced the success of their company as a stroke of luck. Investors have come to see moves like Neumann's in a similar light, Plauche said. If WeWork had been public since then – as it would have been traditional – he could still have made money.

"In later companies where the founder has postponed liquidity events for years and the valuation has risen, the payoffs are much more meaningful," said Plauche.

Investors actually encourage, in some cases

Another related factor to the increase in such disbursements is that they are often the only way for late-stage investors to obtain their desired shareholding in a particular company. Investors said. In some of the more mature startups, the company itself does not necessarily need more cash, or the existing investors do not want to further dilute their shares by issuing new shares. Thus, the new investors themselves can encourage founders and early employees to sell their shares in the secondary markets.

"There are more and more late investors who want to bring money to work," Pauche said, "and eventually the only way to do this is to provide liquidity to current owners rather than put money on the balance sheet."

Kristian Andersen, a partner of High Alpha, an Indianapolis-based venture firm, said the trend, however, is beyond more mature start-ups. Investors have come to believe that given the growing number of payouts on more mature start-ups, there is not as much risk as they have ever imagined in such moves, he said. And in fact, the startups could benefit from founders getting off the table, he said.

Start-ups in later stages tend to have a huge amount of assets in their shares. Concerned that they could lose everything if they mess things up, they might become cautious, Andersen said. Enabling them to redeem some of their stakes before exiting can help them to be more relaxed and focused on the future of the company beyond an IPO, he said. He sees the founders at a very early stage, where companies are trying to make money, still scowling. But for those who are ahead – for those in the Series B funding rounds and beyond – he thinks that's perfectly fine.

"Increasingly, you see early-stage investors not only comfortable with it, but in many cases, encouraging it," said Andersen. He continued, "We have encouraged many of our CEOs to take some chips off the table as they begin their careers."

However, there are legitimate reasons to worry about whether and how the trend will become stronger. In some cases, selling out a founder prematurely may be a sign of lack of confidence in the company or even worse. For example, in 2000, Nina Brink sold most of her stake in Startup World Online a few months before going public at a fraction of the IPO price. The company's share price fell shortly after the IPO and the company was sold months later.

Do you have a tip for a startup or for the risk industry? Contact this reporter by e-mail at twolverton@businessinsider.com, send him a message on Twitter @troywolv or send him a secure message via signal at 415,515.5594. You can also contact Business Insider securely via SecureDrop.


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