(Bloomberg)—In the late 1920s, American investors bought stock for pennies and borrowed to pay off the balance, betting the price would go up. We all know how that ended.
In the mid-2000s, banks made questionable loans to subprime borrowers and then packaged them and sold them off in complex financial instruments, part of a perilous gamble that home prices would keep heading skyward. Cue the global financial crisis.
I was thinking about those fin de siècle cataclysms, the result of normally sane people behaving insanely, when I read last week’s story in the Wall Street Journal about WeWork co-founder Adam Neumann offloading hundreds of million of dollars in WeWork stock and borrowing against his equity before his company is even public. WeWork probably won’t bring on the next economic recession, regardless of what happens with the initial public offering planned for the near future, but the sort of continued-prosperity mindset around the company represents a historically dangerous way of thinking.
Everything about the stock sales seems to fly against technology startup norms. Founders are supposed to stay invested and focused on their startups before going public. (Or in Matt Levine’s poetic words, “You are supposed to wear hoodies and eat ramen and live in monkish asceticism while you build your company.”) Excessive wealth can prove distracting right when a company needs an executive’s full attention; and current investors, who hope founders are working on their behalf, can get disgruntled if they view the move as harming their own prospects.
Even against the recent history of tech execs cashing in some shares pre-IPO (like the founders of Zynga, Groupon and the triumvirate behind Airbnb), Neumann’s We Cashout is a breathtakingly large number. Axios reported he has sold about $300 million in stock over the years, most recently in October 2017. Another $400 million or so were loans.
Several venture capitalists expressed incredulity when asked about the sales. “It’s highly unusual and hard to read as anything but a negative signal about the stock,” David Pakman, a partner at New York-based Venrock, wrote in an email.
Citing a person close to WeWork, Axios said Neumann used part of his loans to purchase stock options, pay taxes, set up a philanthropic foundation and buy property, including a Bay Area mansion, apparently with a guitar-shaped room. He has also acquired commercial properties and leased them back to WeWork, another move that has drawn scrutiny from investors. He told Bloomberg Businessweek in May that he would sell those to a WeWork-controlled real estate fund for the same price he paid.
While he remains WeWork’s most powerful shareholder thanks to super-voting stock, you can probably see why it all draws comparisons to past financial calamities. At its heart, WeWork—sorry, the We Company—is a collection of properties around the world, bundled together by a cultish operating philosophy, whose real-world peers are traditionally assessed in a much more sobering way than whatever logic has propelled investors to peg WeWork’s valuation at $47 billion.
Add to that the fact that WeWork lost almost $2 billion last year. Attempts to make the business less reliant on real estate arbitrage—leasing space, redesigning it and then subleasing small parcels to workers—is coming more slowly than anticipated. Though its losses narrowed slightly last quarter, none of this exactly inspires confidence.
It will all work out swimmingly, as long as the economy keeps humming and real estate values keep going up. Does that sound familiar? If the economy turns south, then the We Company could be the We Crater, and the We Cashout will be another blaring sign that reason has long since left the tech economy.
To contact the author of this story: Brad Stone in San Francisco at [email protected].
To contact the editor responsible for this story: Mark Milian at [email protected]
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