This Isn’t Facebook: WeWork’s Lesson in Going Public

(Bloomberg) -- The message to Adam Neumann was clear: You’re not Zuckerberg.

Over the past month, as Neumann’s grandiose plans for We Co. started to fray, bankers began warning that he would have to loosen his iron grip on the company.

The old era of Mark Zuckerburg was over, WeWork executives would soon learn. Back in 2012, Zuckerberg could take Facebook Inc. public and still retain extraordinary voting power. But that was then.

And so it was that Neumann, the polarizing co-founder of WeWork, begrudgingly agreed this week to cede some of his powers. The question now: Will that be enough? Already, WeWork’s hoped-for valuation has plunged by more than half, or some $30 billion.

By Friday morning, Neumann’s company had hastily filed an amended prospectus for an initial public offering -- one that will test not only WeWork and its guru-CEO but, in many ways, an entire generation of money-burning, grow-at-all-cost startups.

In a matter of weeks, WeWork’s IPO has gone from one of the most hotly anticipated deals of the decade to perhaps one of the most dreaded. Despite growing skepticism over WeWork’s business prospects, Neumann has resisted corporate-governance changes that would be considered standard elsewhere.

The chaos was apparent Thursday and Friday, as WeWork picked a stock exchange, emailed bankers and filed its new prospectus -- all in about 12 hours.

Nasdaq Listing

Defying skeptics -- among them, some of its own financial backers -- WeWork is plowing ahead with plans to go public on the Nasdaq stock market. Not even Nasdaq officials knew for certain that the company would chose the exchange until the last minute on Thursday, according to people familiar with the matter.

Emails were flying into the night. The new prospectus hit just after 6 a.m. on Friday.

Now, yet another deadline looms: September 27, the Friday before Rosh Hashanah, the Jewish New Year. Neumann is expected to observe the holiday and be out of communication for several days, people familiar with WeWork said. WeWork representatives did not respond to a request for comment.

Neumann didn’t get where he is, atop one of the most talked-about startups of the decade, by sharing. But in a new prospectus WeWork disclosed that Neumann would wield less power via an unusual class of high-voting stock.

Now, executives must persuade investors that their company -- which has raised $12 billion since its founding and never turned a nickel of profit -- is worth billions on the stock market. As of late Friday, it was unclear whether they would be able to start marketing the stock via a roadshow starting on Monday, as many had expected.

$65 Billion Value?

Unclear, too, is just what WeWork might fetch on the open market. Only months ago, some bankers whispered it might be worth as much as $65 billion. Now that figure has fallen to as little as $15 billion.

Beyond a page or so of steps WeWork would take to tighten up its corporate governance practices, Friday’s amended prospectus was little changed from the initial one in August.

The dedication, even the second time, is pure Neumann:

TO THE ENERGY OF WE –

GREATER THAN ANY ONE OF US

BUT INSIDE EACH OF US

Among other things, the company will trim the voting advantage that gives Neumann sway over the board, and no member of his family will be allowed to sit on the board. WeWork will also announce a lead independent director by year’s end.

The move leaves in place a rare three-class stock structure and Neumann still maintains a voting majority, so it’s unclear how much the changes will appease both investors and the banks in charge of managing WeWork’s IPO.

Valuation Questions

Questions remain about how investors will value the fast-growing, money-losing office leasing business that’s backed by SoftBank Group Corp. Both of the company’s lead financial advisers --JPMorgan Chase & Co. and Goldman Sachs Group Inc. -- have previously voiced concerns about proceeding with an IPO at a valuation around $15 billion, people briefed on the discussions have said.

Looking to save the IPO and limit its downside, SoftBank is in discussions to buy about $750 million worth of additional stock in the offering, the people said.

The board will have the ability to remove the CEO, and the updated prospectus has taken out a clause that previously said Neumann’s wife Rebekah -- who’s listed as a founder and chief brand and impact officer of WeWork -- will have a role choosing any new chief. Some criticized the changes as not going far enough.

“This is an example of posturing,” Jeffrey Cunningham, who teaches management at Arizona State University and has served on several corporate boards, said of WeWork’s changes. The company appears to be facing pressure “to go public at a time that is inappropriate and with a governance record that is questionable.”

Still, the moves drove WeWork bonds to be the biggest price gainers in high-yield bond trading for part of Friday. A Fitch Ratings analyst said the changes addressed many of the issues that the ratings company raised in downgrading WeWork’s credit grade last month.

“A key component of WeWork’s model is the ability to restrain growth in the event of a downturn and these governance changes increase the likelihood that an independent board will have the power to enforce such a decision,” Kevin McNeil, a director at Fitch, said in an emailed statement.

(Corrects the size of the drop in WeWork’s hoped-for valuation in fourth paragraph)

--With assistance from Michelle F. Davis, Anders Melin, Tom Giles and Crystal Tse.

To contact the reporter on this story: Gillian Tan in New York at gtan129@bloomberg.net

To contact the editors responsible for this story: Liana Baker at lbaker75@bloomberg.net, ;Michael J. Moore at mmoore55@bloomberg.net, David Gillen

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