This isn’t Facebook: WeWork’s harsh lesson in going public

Over the past month, as Adam Neumann’s grandiose plans for We Co started to fray, bankers began warning that he would have to loosen his iron grip on the company

In this Jan. 16, 2018 file photo, Adam Neumann, center, co-founder and CEO of WeWork, attends the opening bell ceremony at Nasdaq in New York. WeWork's parent company is revealing more of its initial public offering plans, saying it expects to list shares on the Nasdaq. APShow less

The message to Adam Neumann was clear: You’re not Zuckerberg.

Over the past month, as Mr Neumann’s grandiose plans for We Co started to fray, bankers began warning that he would have to loosen his iron grip on the company.

The old era of Mark Zuckerburg was over, WeWork executives would soon learn. Back in 2012, Mr Zuckerberg could take Facebook public and still retain extraordinary voting power. But that was then.

With its estimated valuation crashing, WeWork said it expects to complete its initial public offering by the end of this year, indicating a delay of its much-awaited listing.

It was reported earlier the offering is likely to be postponed until at least October.

“The We Company is looking forward to our upcoming IPO, which we expect to be completed by the end of the year," the company said on Monday in New York. ”We want to thank all of our employees, members and partners for their ongoing commitment.”

SoftBank, the rental office company’s biggest investor, had pressed WeWork to put off the stock offering amid doubts about the business. WeWork had planned to begin making its pitch to investors in a roadshow as soon as this week.

And so it was that Mr Neumann, the polarising co-founder of WeWork, begrudgingly agreed last week to cede some of his powers. The question now: Will that be enough? Already, WeWork’s hoped-for valuation has plunged by more than half, or some $30 billion (Dh110bn).

By Friday morning, Mr Neumann’s company had hastily filed an amended prospectus for an initial public offering - one that will test not only WeWork and its guru-CEO but, in many ways, an entire generation of money-burning, grow-at-all-cost start-ups.

The company appears to be facing pressure "to go public at a time that is inappropriate and with a governance record that is questionable".

In a matter of weeks, WeWork’s IPO has gone from one of the most hotly anticipated deals of the decade to perhaps one of the most dreaded. Despite growing scepticism over WeWork’s business prospects, Mr Neumann has resisted corporate-governance changes that would be considered standard elsewhere.

The chaos was apparent Thursday and Friday, as WeWork picked a stock exchange, emailed bankers and filed its new prospectus - all in about 12 hours.

Defying skeptics - among them, some of its own financial backers - WeWork is plowing ahead with plans to go public on the Nasdaq stock market. Not even Nasdaq officials knew for certain that the company would chose the exchange until the last minute on Thursday, according to people familiar with the matter.

Emails were flying into the night. The new prospectus hit just after 6am on Friday.

WeWork representatives did not respond to a request for comment.

A member of the co-working space sits in a lounge area at the WeWork on 85 Broad Street in Manhattan. Bloomberg

Mr Neumann didn’t get where he is, atop one of the most talked-about start-ups of the decade, by sharing. But in a new prospectus WeWork disclosed that Mr Neumann would wield less power via an unusual class of high-voting stock.

Now, executives must persuade investors that their company - which has raised $12bn since its founding and never turned a nickel of profit - is worth billions on the stock market.

Unclear is just what WeWork might fetch on the open market. Only months ago, some bankers whispered it might be worth as much as $65bn. Now that figure has fallen to as little as $15 billion.

Beyond a page or so of steps WeWork would take to tighten up its corporate governance practices, Friday’s amended prospectus was little changed from the initial one in August.

The dedication, even the second time, is pure Mr Neumann:

TO THE ENERGY OF WE –

GREATER THAN ANY ONE OF US

BUT INSIDE EACH OF US

Among other things, the company will trim the voting advantage that gives Mr Neumann sway over the board, and no member of his family will be allowed to sit on the board. WeWork will also announce a lead independent director by year’s end.

The move leaves in place a rare three-class stock structure and Neumann still maintains a voting majority, so it’s unclear how much the changes will appease both investors and the banks in charge of managing WeWork’s IPO.

Questions remain about how investors will value the fast-growing, money-losing office leasing business that’s backed by SoftBank. Both of the company’s lead financial advisers - JPMorgan Chase and Goldman Sachs - have previously voiced concerns about proceeding with an IPO at a valuation around $15bn, people briefed on the discussions have said.

Looking to save the IPO and limit its downside, SoftBank is in discussions to buy about $750 million worth of additional stock in the offering, the people said.

The board will have the ability to remove the chief executive, and the updated prospectus has taken out a clause that previously said Mr Neumann’s wife Rebekah - who’s listed as a founder and chief brand and impact officer of WeWork - will have a role choosing any new chief. Some criticised the changes as not going far enough.

“This is an example of posturing,” Jeffrey Cunningham, who teaches management at Arizona State University and has served on several corporate boards, said of WeWork’s changes. The company appears to be facing pressure “to go public at a time that is inappropriate and with a governance record that is questionable”.

Still, the moves drove WeWork bonds to be the biggest price gainers in high-yield bond trading for part of Friday. A Fitch Ratings analyst said the changes addressed many of the issues that the ratings company raised in downgrading WeWork’s credit grade last month.

“A key component of WeWork’s model is the ability to restrain growth in the event of a downturn and these governance changes increase the likelihood that an independent board will have the power to enforce such a decision,” Kevin McNeil, a director at Fitch, said in an emailed statement.