Scandal-Ridden Zenefits Plunges in Value

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Zenefits Inc. (San Francisco), the embattled health-benefits broker, on Thursday said it struck a deal with some investors to cut its valuation by more than half to $2 billion, giving them additional shares in exchange for releasing the company of potential legal claims.

Zenefits, a once highflying startup that in just two years after its founding was valued at $4.5 billion, has been reeling from regulatory investigations, stalled sales, layoffs and management missteps. On Thursday, Zenefits’ recently installed CEO, David Sacks, said the company has been trying to work out a deal with investors to move past the problems.

“Since shortly after becoming CEO, I have been in discussions with a number of our major investors about how we can reset our relationship,” Mr. Sacks said in a statement.

Mr. Sacks took over as CEO in February when his predecessor, co-founder Parker Conrad, resigned amid allegations that he had created software that helped employees secure licenses to sell health insurance more quickly than legally required. A spokesman for Mr. Conrad didn’t respond to a request for comment, the Wall Street Journal reported.

Under the structure of the proposed agreement, investors that participated in the company’s $500 million Series C preferred-stock round last May would get additional shares to make up for the loss in valuation.

Instead of owning 11% of the company, those investors will now own 25%, effectively revaluing the company to $2 billion from $4.5 billion without any cash being exchanged.

As the combined stake of the Series C investors increases, earlier investors and some common shareholders are on the losing end as their stakes are diluted. Zenefits said investors in the company’s earlier two funding rounds will receive stock to make up for some, but not all, of the dilution.

And former employees owning common stock, as well as Mr. Sacks and co-founder Laks Srini, won’t receive any additional shares. Zenefits is making up the difference for current employees with a special stock grant equal to 25% of their current number of shares.

The new grant, consisting of restricted stock units, will entirely vest in 12 months, Zenefits said. Zenefits said Series C investors Fidelity Investments, TPG and Andreessen Horowitz have approved the deal, but it will offer it to other preferred shareholders as well.

Steve’s Take: David Sacks, the newly appointed CEO of human resources software startup Zenefits, sure has his work cut out for him, as I learned from a juicy piece in Fortune.

The PayPal and Yammer co-founder has been trying to undertake a huge makeover, including reforming a corporate culture that’s been likened to a frat house, according to Fortune. And here’s where the story gets spicy. Come on, we all like silicon valley tech scandals. Not meaning to morph into tabloid mode, the prior week, Sacks banned alcohol at the office; but that’s just the beginning.

According to Fortune, last June an employee responsible for the startup’s relationship with building management sent a memo to the company’s San Francisco-based workers reprimanding them for having sex in the stairwells, according to an email message reviewed by the Wall Street Journal.

“It is been brought to our attention by building management and Security that the stairwells are being used inappropriately,” wrote Emily Agin, the company’s director of real estate and workplace services, in a companywide note. “Cigarettes, plastic cups filled with beer, and several used condoms were found in the stairwell. Yes, you read that right, do not use the stairwells to smoke, drink, eat, or have sex,” Miss Agin added.

Zenefits declined to comment on the report, but spokesman Kenneth Baer told Fortune that the startup is indeed undergoing a “cultural transition.” (I added the quotation marks.) I’m not naïve enough to believe this situation is a one-off. But it sure begs the question of where this cultural transition is headed and whether the company will shrink even further in value, or go “poof.”