WeWork co-founder, Adam Neumann, is under intense scrutiny from potential IPO investors for cashing out more than $700M ahead of the company’s IPO. In fact, Neumann has been reducing his position in WeWork since 2014 and I would argue that startup founders could learn a lot from his diversification efforts. Investors like Benchmark’s Bill Gurley are critical of such sales, but given the binary nature of the startup game these early sales are prudent. While Neumann provides a good example for diversification his conspicuous consumption can give founders a good idea of what not to do as well.
When Adam Neumann co-founded WeWork almost a decade ago he was advised to diversify his holdings during each funding event. Following that advice, beginning five years ago, he began selling his shares each time the company raised capital. To date Neumann has personally raised more than $700M from these diversification efforts. Typically, investors are critical of pre-IPO sales by founders, but they are more common than you might think.
- Zynga Founder Mark Pincus — Sold $100M Prior to IPO
- Groupon Founder Eric Lefkofsky — Sold $300M Prior to IPO
- Snap Founder Evan Spiegel — Sold/Borrowed $28M Prior to IPO
- Slack Founder Stewart Butterfield — Sold $4M Prior to IPO
- Secret Founder David Byttow — Sold $6M Prior to IPO (Chapter 11)
- Buffer Founder Joel Gascoigne — Sold $2.5M Prior to IPO
While Bill Gurley’s fund is an early investor in WeWork he made it clear that his criticism of founders who cash out prior to a company’s IPO were not directed at Neumann specifically. The truth of the matter is if a company has a successful IPO no one will remember early sales by founders. On the other hand if a company fails founders risk scorn (or worse) from the investment community. For example, when Secret blew-up shortly after co-founder David Byttow sold more than $6M of his shares, Bill Maris from Google Ventures suggested that they had been robbed and demanded that Secret’s founders return the money. For most founders the answer is simple: take the money when you can get it.
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While it makes a lot of sense to diversify, founders should be VERY careful about how they spend their new found wealth. Neumann is perhaps the perfect example of what not to do. With his $700M pre-IPO warchest, the WeWork founder, has spent more than $80M on at least five homes including $10.5M Greenwich Village townhouse, $15M Westchester farm, $1.7M Hamptons house, and $21M Bay Area house (including a guitar-shaped room). He also is leasing a condo on Gramercy Park for $46K per month while his townhouse is being renovated. While these purchases are examples of the sort of conspicuous consumption founders should avoid prior to their company’s IPOs — Neumann’s greatest sin may be his real estate purchases that have created unnecessary conflicts of interest for the founder.
According to the Wall Street Journal, Neumann worked with JPMorgan Chase to borrow against his stock to facilitate loans to purchase office properties in New York and San Jose — four of which he leased to WeWork who in turn pays Neumann millions in rent. Investors pointed out that JPMorgan could have easily arranged those same loans for WeWork directly. After inquires from the media WeWork announced that they were going to buy the properties at cost from Neumann to eliminate the conflict. This is just the sort of unforced error that founders who cash out early need to avoid at all costs.
Founders should take away two things from Neumann’s example — sell early and often but avoid conspicuous consumption (i.e. no houses, planes, boats, or cars). Of course, as with most of my advice I haven’t followed it — for example when I was in my 20s, just a few days after I raised $15M for my first startup I bought a convertible Porsche — a move that created terrible optics on so many levels.
Alexander Muse is a serial entrepreneur, author of the StartupMuse, and managing partner of Sumo.
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organizations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution, and data analytics both in Nigeria and across the world