WeWhat? Money Stuff was on vacation last week but I still checked the news occasionally, and I cannot deny that I picked a bad week to be off. Lotta weird stuff. But the news item that caused me to absolutely lose my mind—the item that, if I were a slightly more dedicated financial columnist, would have had me on the next helicopter back to the office—was this detail about the We Co. (née WeWork Co.) initial public offering: Early this year, WeWork unveiled its new corporate brand: We Co. It then sought to acquire the trademark to "we." The name was owned by We Holdings LLC, which manages some of the founders' stock and other assets. WeWork said it paid the founders' company $5.9 million for "we" this year, based on a valuation determined by a third-party appraisal. WeWork legally changed the company name last month. Okay so first of all: You can trademark "we"? Weird. But that's not the part of this that broke me; no, the really weird thing here is that WeWork founder Adam Neumann (1) owned the name of the company he founded and (2) sold it to the company for $5.9 million.[1] That's unusual! Mark Zuckerberg, it seems silly yet essential to point out, not only invented Facebook, he also named it Facebook. But it did not occur to him to charge à la carte for those services. He does not send Facebook an itemized bill for his services as founder, CEO, name guy, etc. When he negotiated the purchase of Instagram, he did not get a broker's commission. Mark Zuckerberg provides his services to Facebook as an all-inclusive bundle. The bundle costs Facebook $1 per year. Cheap! Mark Zuckerberg is nevertheless a zillionaire, because he owns a big chunk of Facebook and Facebook is worth zillions of dollars. That is a pretty standard approach, the founder-CEO who gets a trifling salary and makes his real money from owning a lot of the company. There is another standard approach, in which the board awards the CEO a whopping great salary and bonus and stock compensation. There are many well-known potential problems with that approach—the board tends to be stocked with the CEO's cronies, compensation consultants inflate pay packages, performance-based pay is often based on metrics that the CEO can game, etc.—but it has some basic transparency at least. The approach where the CEO of the company is like "hey I have an idea" and his subordinates are like "what is it?" and he's like "you'll have to pay me $5 million to find out" and the subordinates are like "what?" and he's like "oh look as the CEO I just wrote myself a check for $5 million to buy the idea" and the subordinates are like "wait what?" and he's like "do you want to hear the idea" and the subordinates are like "sure I guess I mean we paid for it" and he's like "it's: consciousness"[2]—that's a weird approach! The … sort of the whole idea of having a company is that the people who work for the company work for the company; at least the senior managers are in some sort of long-term relationship in which they come up with ideas for the business and give them to the business in exchange for a salary or bonus or equity or whatever. They don't auction off every idea for a separate fee. When they do stuff related to the company, they do it for the company, and the company just naturally owns the results of the stuff they do. WeWork doesn't quite work that way! WeWork is in the business of renting office buildings, subdividing them and leasing them to customers. Who does it rent the buildings from? Sometimes Neumann! Where does he get the money to buy the buildings from? Sort of WeWork! "WeWork Gave Founder Loans as It Paid Him Rent, IPO Filing Shows," is the Bloomberg headline, and it's not literally that they loaned him the money to buy the buildings to rent back to them, but it is, I mean, they really did give him loans as they paid him rent: In 2016, Neumann borrowed $7 million from WeWork at a generous annual interest rate of 0.64%. Neumann paid it back early, in November 2017, with about $100,000 in interest. It was one of several times Neumann borrowed company money. "From time to time over the past several years, we made loans directly to Adam or his affiliated entities," WeWork wrote in the filing. Neumann took out a much bigger loan from WeWork a few months ago. The company lent him $362 million in April at 2.89% interest to help him exercise options to buy stock. This month, Neumann repaid the debt by surrendering the shares back to the company. … WeWork also disclosed details on the widely scrutinized rental arrangements with Neumann. The company said Neumann owns four properties that count WeWork as a tenant. For one building, the company entered a lease within a year of Neumann acquiring his ownership stake. For the other three, it signed a lease on the same day the co-founder obtained his stakes. To be fair the prospectus makes the case that Neumann did this for the company's benefit: "In the early days of our business, at a time when landlords were reluctant to recognize the benefits of WeWork as a tenant, Adam bought four buildings in order to help prove WeWork as a viable tenant to landlords."[3] (And Byrne Hobart argues that it is effectively another WeWork financial arbitrage: "Essentially he's keeping the low-multiple assets"—real estate—"on his personal balance sheet and putting a high-multiple revenue stream"—WeWork's tech-ish business offering—"from them onto WeWork's P&L.") And when we have discussed this potential conflict of interest previously, I have said, and I quote, "ha, yeah, that's the real estate industry for you." Tech companies like the dollar-a-year founder/owner approach; real estate companies like the using-every-part-of-the-cash-flows approach; WeWork is a hybrid tech/real-estate company whose founder both takes no salary and rents buildings to his company.[4] We have talked a lot over the past few years about shifting power dynamics between investors and founders. There used to be a sort of balance of power in which entrepreneurs wanted to raise money and investors wanted to invest in good ideas, and there was a whole tradition of corporate governance that grew out of and reflected that balance. The entrepreneurs are essential to the companies, so they get a large measure of control and a lot of financial rewards, but the investors also used to be essential, so they got some checks on the founders' control, and a reasonable promise of financial reward for themselves. But in recent years the investors have started to seem a little less essential. There are so many of them and they have so much money and they are so transparently thirsty about giving it to entrepreneurs. The balance of power has shifted, and that shift has been reflected in the corporate structures. In the olden days the expectation was that shareholders would have the right to vote to elect the company's directors; this was not an especially powerful right—most director elections are uncontested and most investors are pretty docile—but it was at least a theoretical check on the founders' power. The new norm, at many tech companies, is that the founders keep control of the voting stock; sometimes, public shareholders get no voting rights at all. The company is not a joint venture between the founder (who provides the vision and the work and the name) and the investors (who provide the money); the company belongs to the founder, and the investors are hired providers of a relatively low-value input (money), who can expect only a grudging economic share, not any sort of say in running the business. WeWork—I know it is called We(TM), but I might stick with the old name—is the logical endpoint of that trend. It is going public, sure, but Neumann does not need your money. Basically if you can imagine a possible source of money, Neumann is able to tap it, either to fund WeWork or to fund his personal lifestyle or both. The most famous symbol of excess in private-tech-company funding, the SoftBank Vision Fund, is WeWork's biggest outside investor. Some of the banks underwriting the IPO also lend money to WeWork, and some of them also lend Neumann money personally. WeWork used to lend Neumann money. Neumann could probably just win the MegaMillions if he needed some spare cash. The guy walks down the street and money flies at him. And so look what investors get. Obviously not voting power. This is barely mentioned in the articles I've read about WeWork, not only because there's so much weirder stuff but also because it is so self-evident that Neumann will control the company after it's public. But, yes, there will be three classes of shares, two with 20 votes per share and one with one vote per share; Neumann, according to the prospectus, will own enough of the high-vote shares to "control a majority of our outstanding voting power" for his lifetime and beyond. ("In the event of his death, the shares of high-vote stock that Adam owns will transfer to the persons or entities that he designates.") But this is the least of it. Mark Zuckerberg has absolute control over Facebook, but he has also made his outside investors hundreds of billions of dollars. The founders of Snap Inc. have even more absolute control over their company, and they haven't made public investors particularly rich, but they could. Like if Snapchat does become the dominant social media platform and worth a trillion dollars, its shareholders will probably appropriate those gains. (Probably.) Maybe WeWork won't make any money; it is not profitable now, and many people doubt its business model. But the prospectus actually tells a pretty straightforward story. WeWork is, it argues, a best-in-class finder and renovator and renter and operator of office space. Instead of renting space and building it out and stocking it with beer and cleaning it and generally being in charge of their own space, companies can come to WeWork and get better space for less money with more flexibility. WeWork, meanwhile, claims to have "strong unit economics"; it is losing money because it is spending a lot on finding and building out space, but its existing locations are profitable. The prospectus contains an amusingly remedial explanation of how WeWork—how any company, really—makes money: "As we move through the different lifecycle phases of each location, the cash flows shift from outgoing during the find and build phases, during which we invest to scale our location portfolio, to incoming during the fill and run phases, during which we seek to monetize our platform." First we spend money to do stuff, then we sell it and collect money. But what if WeWork is a smashing success? What if it continues its rapid growth and achieves economies of scale and branches into new not-quite-real-estate businesses and generally accomplishes its stated goal of "elevating the world's consciousness"? Who will get rich? The We Company owns its operations through a web of subsidiaries, some of which are partly owned by its founder. It does those operations in buildings, a few of which are owned by its founder, and many of which might eventually be owned by its affiliated real estate fund. The founder controls the board, for his lifetime and beyond. And when he changed WeWork's name recently, he charged for it. Perhaps all of this is just the messiness of starting and growing a company, and it was all sort of accidental and in good faith, and as WeWork goes public it will develop robust procedures to manage conflicts of interest and put shareholders first. But what if WeWork is pushing the boundaries previously established by other tech companies, in which public shareholders gave up control in exchange for an economic interest in a hot tech company? What if WeWork's investors are giving up the economic interest too? What if the deal is just, the investors give an entrepreneur money to build a risky but fast-growing business, and if the business works out he gets to keep all the benefits? Isn't that the logical place for the unicorn boom to go? The purpose of the corporation On the one hand, sure, yes, of course: The Business Roundtable said Monday that it is changing its statement of "the purpose of a corporation." No longer should decisions be based solely on whether they will yield higher profits for shareholders, the group said. Rather, corporate leaders should take into account "all stakeholders"—that is, employees, customers and society writ large. It is a major philosophical shift for the association, which counts the chief executives of dozens of the biggest U.S. companies as its members. The group, led by JPMorgan Chase & Co. CEO James Dimon, is a powerful voice in Washington for U.S. business interests. The Business Roundtable's old statement of purpose espoused economist Milton Friedman's decades-old theory that companies' only obligation is to maximize value for shareholders. "Each of our stakeholders is essential," the new statement says. "We commit to deliver value to all of them, for the future success of our companies, our communities and our country." Shareholders don't "own" the corporation in a straightforward sense, the corporation is a political construct and a complex entity with obligations to many constituents, the idea that its obligation is solely to maximize shareholder returns is a well-known myth, etc., we have gone over this ground many times before. On the other hand, Friedman's theory is not exactly that corporate profits are good and societal benefits are bad. I mean, it is that, a little. But really the theory is about agency costs. The chief executive officer of a public company does not generally own the company; she works for someone else, and is answerable to them. It is conventional to say that she works for the shareholders (and that they own the company), but maybe that's wrong and she in fact works for a set of overlapping stakeholders all of whose interests she should watch out for. If she just works for the shareholders, it is relatively easy to figure out if she's doing a good job: Profits are high, the stock price is up, that sort of thing. If she works for the benefit of all competing stakeholders, that evaluation is harder: Maybe profits are down because she is doing a bad job and handing out bloated executive salaries, but maybe profits are down because she is doing a good job and fulfilling her responsibility to employees (by paying them a lot). She will have more arguments, and those arguments will be incommensurable with each other, not "the project we did had a higher net present value than the project we passed on" but "the project we did lost money but it was better for the environment." There will be no single measuring stick to decide what to prioritize. Who is equipped to evaluate those arguments? Not the shareholders, who are just one of several competing constituencies. The managers and the board, in this version of the corporation, are the only ones representing all of the constituencies, so they are the only ones qualified to evaluate their own performance. If an activist shareholder comes in and says "we should replace the board because performance is bad," the board and the CEO can respond "no you are just saying that as a greedy shareholder and we shouldn't listen to you." Another way to put it is that the corporation really does have to serve many different stakeholders, but in practice most disputes over corporate governance are not between shareholders and employees or shareholders and polluted watersheds, but between shareholders and managers. And these disputes tend to follow a stereotyped pattern in which disgruntled shareholders say "the stock price is low" and the managers say "ah but in the long term it will be high." Because—on the agency-cost view—it is just harder to measure the long term (since it hasn't happened yet), so you can't hold the managers to it. Similarly, if managers can respond "ah but the stock price is low because we are serving other constituencies," that gives them another argument against the shareholders.[5] It is productive—not 100% accurate, but a useful heuristic—to assume that all corporate governance debates in the U.S. are about whether shareholders or managers should have more power to control the corporation. There are other stakeholders, sure, but they are mostly tools in the shareholder/manager fight, not power centers in themselves.[6] So when an association of big public-company CEOs gets together and declares that corporations should serve the community, take care of the environment, and be responsible to employees and customers, not just shareholders, that might be because the CEOs have thought it over and decided that employees and the environment are getting a raw deal, but it is also possible that the CEOs have thought it over and decided that shareholders are annoying. Don't do this This happened early last week and I have nothing really to say about it but it does seem like Money Stuff has an obligation to mention the 23-year-old first-year analyst and former NYU Stern class president who got arrested for alleged insider trading: According to the SEC's complaint filed in federal court in Manhattan, Bill Tsai, a junior investment banker in the bank's New York office, learned of the acquisition when Siris consulted the bank about providing financing and advice on the transaction. The SEC alleges that soon after learning about the deal, Tsai purchased EFII call options, which he sold for a profit of approximately $98,750 shortly after the deal was announced in mid-April 2019. Tsai allegedly attempted to hide his illegal activity by conducting his trading in a brokerage account that he concealed from his employer, and by circumventing the bank's policies that require employees to pre-clear securities trades. Not a Money Stuff reader! Honestly whoever is in charge of the undergraduate curriculum at Stern needs to get rid of, like, accounting and replace it with a semester on the Laws of Insider Trading. Don't! Insider! Trade! By! Buying! Short-dated! Out-of-the-money! Call! Options! On! Merger! Targets! That really is the first place they look; I keep saying it, but it keeps being true. If you're just some guy who plays golf with a CEO and doesn't know how things work, I can understand why you'd mess this up, but if you are the class president at a target undergraduate business school you've really got to get this one right. Some good guff Again, there's not much to say about this pretty garden-variety Securities and Exchange Commission case against an allegedly fraudulent crypto-token offering called Veritaseum, but I can't resist quoting some of Veritaseum's marketing guff: Brochure 1 claimed that Veritaseum, Inc.'s "Potential Market LITERALLY Boggles the Mind!" in that "We Get a Potential Market of . . . $225,520,000,000," which could yield "well over a BILLION dollars in annual cashflow [sic]," such that "UltraCoin is valued over $20,000,000,000, " and that Veritaseum, Inc. was "the only one with a functional product, not to mention the only one ready to bring a product to market," and a "Renown [sic] CEO proven to have the pulse of both finance and technology market booms and busts." Another publicly available brochure ("Brochure 2") touted Veritaseum's access to "$1.635+ Quadrillion – Literally the Market of All Money" and "Cumulative Revenues" as "The Shape Every Investor Wants to See," and that Veritaseum was "Ready to go to market! NOW!" A third publicly available brochure ("Brochure 3") stated that "With Veritaseum, one can literally tweet an entire trade, or click a Friend on Facebook to take the other side of a short Goldman long Facebook trade." Brochure 3 said that the Bitcoin Software offers the "ability to do practically everything your bank and brokerage offers through your browser." Love the four-digit precision, softened by the plus sign, on "$1.635+ Quadrillion"! Love the aestheticizing description of the cumulative revenues, which are not just large (well, I mean, pretend large) but also shapely! I do not quite know why people fall for this but if they'd sent me these brochures I might have given them a few bucks just on general tipping-for-entertainment grounds. Things happen SoftBank to Lend Founder and Employees Billions to Invest in Fund. Why Ivascyn's Pimco Income Fund Fell as Long Bonds Rallied. Large Firms Trim Debt, Fueling Surge in Bonds at Center of Leverage Concerns. Europe's banks warned on ending interest rate benchmark. "One institutional investor — who is on the spectrum — speculated that, based on the number of due diligence meetings his firm has, the rate of autism spectrum disorder is almost certainly higher in finance professionals than in the general population." Battle over Unizo points to surge in activist investing in Japan. "He had a nose for splashy trades, a fondness for the Bentley Continental, and a vague enough resemblance to George Clooney that there was even a joke among some bankers: 'What would George do?'" This AI startup claims to automate app making but actually just uses humans. Are log scales illegal? This woman implanted her Tesla Model 3's valet key into her arm. Service dogs attend theater performance as part of training. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] Well, $5.9 million worth of stock, sort of. "In consideration of this contribution and in lieu of paying cash, the Company issued to WE Holdings LLC partnership interests in the We Company Partnership with a fair market value of approximately $5.9 million, which was determined pursuant to a third-party appraisal." [2] "Our mission is to elevate the world's consciousness," says We's prospectus. (Says Our prospectus?) [3] That's from the "Certain Relationships and Related Party Transactions" section of the prospectus, which my colleague Shira Ovide called "THE MOST BANANAS THING I HAVE EVER READ." [4] Also the particular arrangement here is on the way out; WeWork "recently launched a global real estate platform to acquire and manage real estate," called ARK, and Neumann will let ARK manage his properties and give it the option to buy them from him. "The purpose of this management agreement is to provide the Company with the ability to take advantage of the real estate opportunities Adam had identified, while at the same time eliminating any conflict of interest between Adam and the Company." Of course ARK, which we have discussed previously, presents its own possible conflicts. [5] This is the stereotypical pattern but not the only one, and in fact we've talked a few times about BlackRock Inc., a shareholder, calling on companies to be more socially responsible and arguing that in fact that will be good for long-term shareholder value. [6] Again: Useful heuristic! Not completely true! For one thing there are plenty of other power centers (unions, regulators, etc.) who can make corporations do stuff, though in ways that are not usually called "corporate governance." For another thing there are sometimes proposals to give those other constituencies real power in corporate governance, for instance by giving workers representation on corporate boards. When those proposals come from politicians or regulators, you might conclude that they are meant sincerely. But when big-company CEOS or big institutional shareholders talk about other stakeholders, it might be useful to assume that they're really thinking about their own power. | 
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