Coworking giant WeWork, now doing business as We, plans to become a publicly traded company.
One of the most bizarre parts, of many bizarre things in We's S-1 form, is the compensation disclosure for WeWork founder and CEO Adam Neumann.
"It certainly raises concerns. It is one of many aspects of this S-1 that raises concerns," said Rosanna Landis Weaver, a corporate-governance and compensation expert from the nonprofit shareholder-advocacy group As You Sow. She called all the disclosures about We's loans, payments, and compensation to Neumann "unsettling."
What Neumann has is "an irrevocable proxy to vote" nearly all the class B and class C shares, even if he doesn't own them, the S-1 says. Each of those shares carries 20 votes per share. (Most super-voting shares at tech companies carry 10 votes per share.)
So he controls the voting rights over shares he doesn't even own, such as the super-voting-rights shares owned by his cofounder Miguel McKelvey.
This means that he will control the vast majority of votes, regardless of how many class A shares the company sells to the public, at one vote per share.
That kind of control means that Neumann can dispense with typical corporate-governance standards, the S-1 says.
He can, for instance, approve any kind of compensation plan for himself that he wants to. The S-1 says (emphasis added):
Because Adam will control a majority of our outstanding voting power, we will be a 'controlled company' under the corporate governance rules for listed companies. Therefore, we may elect not to comply with certain corporate governance standards, such as the requirement that our board of directors have a compensation committee and nominating and corporate governance committee composed entirely of independent directors. For at least some period following completion of this offering, we intend to take advantage of these exemptions.
And one of the things he's done with that power is grant himself 42.5 million shares of the soon-to-be-public company. But even that wasn't straightforward because as soon as he got this giant package, he found a way to make it even better.
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In April, WeWork created the entity We and promptly issued to Neumann 42.5 million stock options, each with an undisclosed strike price. We then loaned Neumann $362.1 million in order to buy those shares. It carried an interest rate of 2.89%, and he had about 10 years to pay the loan back.
But in June, about two months later, We changed its mind about its corporate structure and reorganized again. This time, it became an "Up-C" corporation, a collection of LLCs. We became a holding company that owned some portion of those LLCs. When We goes public, it will be shares in this holding company that it sells.
So the board, controlled by Neumann, canceled all of his stock options and replaced them with something called "profits interests."
Profits interests are typically used as ownership shares in LLCs. Neumann's new profits interests were also grants, not options, meaning Neumann doesn't have to buy them. There's no risk to him if the company's stock price doesn't rise.
And the company tied a bow on it all by allowing him to give back all the options and canceling its $362.1 million loan to him.
We has actually stopped offering all employees options and now just offers them grants. Again, that's nice for the employee, since they don't have to pay for the shares or worry about the stock price.
The structure could let Neumann receive cash payouts
Neumann's "profits-interest" shares carry the same performance restrictions as the stock options, the S-1 says.
That is, about one-third of them, nearly 19 million, vest over five years after the IPO, provided Neumann remains at the company. (He'll get half of them over five years even if the IPO never happens). He also gets another 7.1 million over three years if the company hits a market cap of $50 billion, another 7.1 million over three years if it hits $72 billion, and another 7.1 million over three years if it hits $90 billion.
But, Landis Weaver said, such compensation plans are typically nonbinding, meaning the board, controlled by Neumann, can change its mind and the conditions of these stock awards.
So if We doesn't hit those valuation numbers, it may find another reason to reward him.
On top of that, the S-1 says, "Holders of vested profits interests may also be entitled to limited catch-up distributions."
So from time to time, the company may offer these holders cash in some form. In some partnerships, distributions are made only when the partnership sells assets. In other organizations, they are more akin to a dividend. (We asked We for more information about it, but the company declined comment.)
The S-1 doesn't clarify under what circumstances We would be handing over cash to the people that own these profits shares, which also includes, to a much lesser extent, the company's two other named officers.
But Landis Weaver called the whole situation an area of concern.
"There are so many indications that this is outside the norm of accepted corporate governance," she said. "In the context of all of that, how can a shareholder have faith and confidence that any component of this is not self-dealing?"
Meanwhile, We has also warned would-be investors that if they don't like how Neumann is paying himself, or any other aspect of how he's running the company, they won't be able to do anything about it.
"Even if Adam were to sell a significant number of his shares of our voting stock, the voting power of our outstanding capital stock may continue to be significantly concentrated and the ability of others to influence our corporate matters may continue to be significantly limited," it said.
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