WeWork Was a Family Affair, Until Things Got Complicated

Adam Neumann spent some of his final days as WeWork’s chief executive officer the same way he had for countless weekends in recent years: surrounded by family at his house in the Hamptons. With the company’s plan to go public smoldering, his control over the business dwindling and its biggest investor starting to turn against him, Neumann gathered his wife and business partner, Rebekah, and their five kids, piled into a car and drove east to the tony beach community.

As the Neumanns unplugged at sundown last Friday to observe the weekly Jewish ritual of Shabbat, SoftBank Group Corp.’s Masayoshi Son was preparing for an ouster. Son’s businesses had more than $10 billion riding on the company in the form of stock and loans. Over the course of a month, financial advisers to WeWork determined that the shares were worth about a quarter of the price SoftBank paid in January. The problem, Son reasoned, was Neumann.

WeWork long had the image of a family business: a husband-and-wife pair at the helm and company slogans about how life is “better together.” Although Adam Neumann started the business in 2010 with Miguel McKelvey, a kindred spirit who, like Adam, spent time on a commune during childhood, they rewrote the founding story over the years to include Rebekah. The three were listed as founders in registration documents for an initial public offering published last month. Rebekah, 41, was also chief brand and impact officer of the parent company We Co., CEO of an education arm of the business called WeGrow and one of three people assigned to select a replacement for her 40-year-old husband if he dies.

There were a lot of things about WeWork that made public investors recoil. For every $1 of revenue, it incurred about $2 in expenses and didn’t make a convincing case it could reverse that equation. It sought to be valued as a technology business but operated much like a real estate company. Its corporate structure looked like a schematic for a microwave.

And the Neumanns seemed to embody it all with a sense of arrogance, as one financial analyst put it. The IPO prospectus offered a litany of apparent conflicts of interest. Adam Neumann hired multiple family members besides his wife, including her brother-in-law, who also left the company this week. Neumann borrowed company money, collected rent from WeWork on space in buildings he owned and charged the company $5.9 million for the rights to a trademark he held on the name “We.” He had effective control of management decisions through stock with special voting rights, though it ultimately wouldn’t be enough to keep him in power.

This account of Adam and Rebekah Neumann’s nine-year reign and swift fall is based on interviews with seven current and former WeWork employees, advisers and investors, and multiple other people familiar with the company. SoftBank declined to comment, as did representatives for Neumann and WeWork, citing regulatory restrictions around a pending IPO.

After an initial onslaught of investor criticism in recent weeks, WeWork took steps to address many of these issues and lessen Neumann’s grip on the company, but he still held onto his job. Son, a 62-year-old Japanese billionaire known for his own eccentricities and mystical pronouncements, had been a giddy supporter of Neumann for years. This appeared to be the case as recently as last week, when SoftBank was anticipating Neumann’s attendance at its corporate retreat in Pasadena, California to deliver one of his corporate gospels. But after he postponed the IPO at the urging of SoftBank and other investors and advisers, he backed out of the speech, saying he might come on the last day of the conference, which was that Thursday. Ultimately, he didn't appear at the gathering at all.

On Sunday, Neumann returned from the Hamptons. The same day, SoftBank’s plan to remove him as CEO of the company became public. Son’s allies included Benchmark’s Bruce Dunlevie and John Zhao, founder and CEO of Chinese private equity firm Hony Capital, both members of the board. By Tuesday, Neumann relented. Before the board was ready to get on a conference call and vote, everyone knew the outcome, and Neumann voted with the rest of the members to oust himself. The decision was unanimous, according to a person familiar with the matter.

SoftBank Gives ‘Very Public Lesson’ to Founders in WeWork Ouster

The chief executive officer of Japan’s SoftBank Group Corp. told company leaders gathered at the five-star Langham resort they need to become profitable soon and stressed the importance of good governance, according to a person who attended the event. Public investors aren’t going to tolerate gimmicks, like super-voting rights or complicated share structures, that privilege founders over other stakeholders, he said, adding they should get in shape years before they consider going public.

The “or else” part of the message became clear just days later when SoftBank led the ouster of WeWork’s controversial co-founder Adam Neumann. The co-working giant’s plans to go public this month imploded, with investors balking at paying a premium for a money-losing real estate venture controlled by an eccentric founder. More WeWork executives with close ties to Neumann quickly followed him out the door.

The messy, high-profile coup tarnishes Son’s reputation for picking winners. But Neumann’s removal also shows a new side of Son -- an investor willing to enforce the kind of discipline that public investors demand at his portfolio companies.

“It’s a very public lesson for all the entrepreneurs,” said Chris Lane, an analyst at Sanford C. Bernstein & Co. “No one will want to be Adam.”

A spokeswoman for SoftBank declined to comment on the private event. The three-day affair also featured a performance from singer John Legend, and a four-legged robot from portfolio company Boston Dynamics stalked across the hotel’s lawn.

Son, the smiling billionaire with a 300-year vision and a goal for his portfolio companies to create “information revolution-happiness for everyone,” has been considered founder-friendly for decades. In 1995, he wrote a $2 million check during his first meeting with Yahoo! co-founder Jerry Yang. Five years later, he invested $20 million in Jack Ma’s Alibaba Group Holding Ltd., a stake that’s now worth more than $100 billion.

That was just a warm-up for his unprecedented $100 billion Vision Fund, raised in 2017. It’s since put money into more than 80 companies in a dizzying array of sectors, from ride-hailing and genomics to vertical farms and satellites. In June, Son claimed his returns were 62% so far. But Silicon Valley venture capitalists were quick to cite WeWork as evidence of SoftBank’s failures.

“Welcoming all the converts to the SoftBank is horrible position,” wrote one VC on Twitter.

Now, SoftBank will have to decide whether to write down the value of its stake. The We Co. IPO has been delayed for now, but when it does occur, the market may value the company at about a third of its valuation when Son last put money into it.

Neumann didn’t make it to Pasadena last week, according to the person. But as the festivities wound down on Thursday, WeWork’s board and its institutional investors including SoftBank arrived at a consensus: WeWork’s IPO could not proceed with Neumann at the helm. It took another three days for long-time SoftBank directors Ron Fisher and Mark Schwartz to get WeWork’s co-founder to come around. On Tuesday, he stepped down from his CEO role, taking the title of non-executive chairman.

SoftBank’s strategy of taking non-controlling stakes in the world’s leading tech companies and encouraging them to cooperate means that Son doesn’t have direct influence on how they are run. But the massive infusions of cash, ranging from about $100 million into the billions of dollars, come with accelerated growth schedules and an increased need for cash.

“If you are dependent on someone to provide the funding, it doesn’t matter how much they own,” Bernstein’s Lane said. “In the case of WeWork, the public markets clearly weren’t willing to step in. Their only viable option was the Vision Fund.”

WeWork isn’t SoftBank’s first intervention. Its investment in Uber Technologies Inc. included a deal to block controversial co-founder Travis Kalanick from taking a CEO or chairman position.

More recently, Brandless Inc. CEO Tina Sharkey stepped down in March in a move that’s been attributed to growing tension with its shareholder. SoftBank had agreed to invest $240 million in installments in the maker of unbranded goods last year. Tensions had arisen when SoftBank began pressuring the company to turn a profit, according to news site The Information, which cited people with knowledge of the discussions who it didn’t name.