
WeWork’s CEO Makes Millions as Landlord to WeWork - dcgudeman
https://www.wsj.com/articles/weworks-ceo-makes-millions-as-landlord-to-wework-11547640000
======
numair
Beyond the entire conversation about whether this is legal or illegal, and
whether this is typical or atypical, there is a much more significant issue.

The entire image and “vibe” of this guy / his team is supposed to be an
egalitarian re-invention of the status quo. The kibbutz story. The “community
adjusted EBITDA.” The rebranding to “We.” But this sort of real estate self-
dealing isn’t a We move, it’s a Me move. And thus, we find ourselves facing a
bigger issue that is far more troubling if you’re a shareholder or employee
(and somewhat enjoyable if you’re a competitor): the emperor has no clothes
and the CEO is full of shit. He is self-serving and isn’t optimizing for the
benefit of those around him.

As others in the tech industry are only beginning to figure out, once your
curated narrative dies and the reality of who you really are comes to the
surface, an unstoppable cycle of “bad press” and “negative sentiment” emerges.
That’s a hard cycle to work out of, especially if the value of your company is
predicated on your image / the image of the company. Hiring Obama’s speech
writer and lobbying Congress doesn’t fix the underlying issue, and eventually
you’re living in a Reverse Metcalf’s Law situation that’s scaling in the wrong
direction.

As WeWork is built on an image of selling “a new, better way of working” to
companies of all sizes, it becomes extremely problematic if people start to
associate the brand with “the rich keep getting richer, and they’re screwing
us over and working us to the bone along the way.” An image of a
“collaborative enterprise” becomes a laughable fantasy novel next to the
reality of, “we are funded by third world despots and our CEO is lining his
pockets with as much of our money as possible, while scheming up ways to do
petty things such as avoid paying the cleaning staff any sort of decent wages
or benefits.”

This isn’t the We Company. It’s the Me Company. That’s not very innovative.
That doesn’t foster greater productivity. And eventually, a lot of tenants
aren’t going to pay for it, because it seems a lot of them really think
they’re paying to be part of a progressive, futuristic environment. If their
smartest and most progressive employees start telling them they don’t want to
visit the office, they’re going to get rid of that office. Companies’ desire
to please their knowledge workers — what originally drove WeWork’s success —
thus ends up killing it.

~~~
dunpeal
> _The entire image and “vibe” of this guy / his team is supposed to be an
> egalitarian re-invention of the status quo. The kibbutz story. The
> “community adjusted EBITDA.” The rebranding to “We.”_

This is all just marketing. It's like believing all the actors in a commercial
really are elated and blissful just because they chose the right brand of
soda.

~~~
alexandercrohde
In this case yes.

But I think it's very important to remember that companies can have moral
standards and follow them. Many companies don't sell-out in crucial ways, and
throwing one's hands up and condemning them all is punishing the ones that
stay true.

I think moral outrage is a very important and effective market force. It will
do things our government never could, like take down facebook. I'm glad we
have this tool.

~~~
dunpeal
> _But I think it 's very important to remember that companies can have moral
> standards and follow them. Many companies don't sell-out in crucial ways,
> and throwing one's hands up and condemning them all is punishing the ones
> that stay true._

I agree, which is why I criticize shallow analysis of a company's motivation
based on its skin-deep marketing veneer.

In this case it's not even moral standards - the implication is that WeWork's
CEO is neglecting his fiduciary duty to maximize shareholder value by lining
his pocket instead.

That's in fact a corruption of capitalism, it's illegal, and he can be sued
for that by shareholders.

> _I think moral outrage is a very important and effective market force._

I completely agree, which is why it's important to look beyond the marketing.

If a company can breach standards of morality and decency, but get away thanks
to some 30 seconds commercial featuring smiling kids, then we will not be
effective as a public in enforcing those very real consequences that companies
should face for their actions.

------
hendzen

      As part of an investment round for WeWork in 2014, he was 
      granted Class B shares that gave him 10 votes per share, 
      and now he has more than 65% of the overall share vote, 
      according to WeWork corporate filings.
    

These multi-class ownership structures need to be reformed. The SEC is already
thinking about it [0].

[0]- [https://www.sec.gov/news/speech/perpetual-dual-class-
stock-c...](https://www.sec.gov/news/speech/perpetual-dual-class-stock-case-
against-corporate-royalty)

~~~
travisoneill1
Why? Everybody who bought those shares knew exactly what they were buying.

~~~
mfoy_
Well, one could argue the more complex the ownership structure is capable of
being, the more opportunity for abuse arises.

For example, by saying he has "special" shares that grant him 10x the votes of
"normal" shares, he can sell way more than 50% of the company and retain 100%
control.

This means shareholders are 100% along for the ride, and get no say in how he
runs the business.

I could see a strong argument for the SEC coming down hard and saying "Okay,
enough is enough. 1 share, 1 vote."

~~~
sokoloff
If a shareholder doesn't want to invest in a company with multi-class shares
or defense industry ties or tobacco or whatever, they can opt out.

~~~
mfoy_
You can use the same reasoning to justify a large variety of predatory
tactics, and scams.

"Buyer beware" doesn't absolve a practice of being, at the very least, scummy.

~~~
travisoneill1
To be predatory it has to be deceptive or complex in a way that leads people
to misunderstand. This is not the case here. It is crystal clear that a non
voting share gives the buyer no control over the company, and if he buyer
accepts that then he should get no such control.

~~~
mfoy_
What's complex is the ownership structure of any company with multiple classes
of shares, especially with different voting weightings.

Simple would be "1 share = 1 vote".

\-----

What's deceptive is the conflict of interest he created for himself that makes
it unclear whether or not he is actually fulfilling his fiduciary duty.

Clear and conflict-free would be renting from someone unrelated, and renting
his building out to different company.

------
Traster
There seems to be an archetype in silicon valley today of people viewing
companies basically just as convenient extensions of themselves rather than
distinct legal entities with separate interests.

Why would a WeWork object to paying Neumann's rent? WeWork is bascially
Neumann anyway! Why would Tesla object to buying Musk's other companies? Tesla
is basically Musk anyway! Why wouldn't levandowski just employ his own company
to supply components he was procuring for Google? Why wouldn't Shkreli pay his
hedge fund investors back with cash from one of his other companies?

It's amazing how often 'innovation' and business success turns into corrupt
self-enrichment. Unfortunately justice tends to only come once someone
suitably senior gets screwed. With Levandowski that was Google, with Shkreli
that was the government. I suspect with WeWork the law suits will come the
second the investment value drops - investors won't do a thing until they
start losing money, rather than just making less money than they otherwise
would have.

~~~
pjc50
Not just in silicon valley by a long way.

MG Rover: [https://insolvencyandlaw.co.uk/why-didnt-insolvency-
service-...](https://insolvencyandlaw.co.uk/why-didnt-insolvency-service-
prosecute-mg-rovers-phoenix-four/administration/)

BHS: [https://www.theguardian.com/business/2018/mar/27/philip-
gree...](https://www.theguardian.com/business/2018/mar/27/philip-green-
escapes-company-director-ban-for-bhs-1-deal) /
[https://www.theguardian.com/business/2017/feb/28/philip-
gree...](https://www.theguardian.com/business/2017/feb/28/philip-green-agrees-
pay-363m-bhs-pension-fund)

Maplin:
[https://www.taxresearch.org.uk/Blog/2018/02/28/40831/](https://www.taxresearch.org.uk/Blog/2018/02/28/40831/)

(fundamentally in a capitalist society that recognises no moral restraint on
money and it's not illegal ... why not? Surely you take as much money from the
investors as you can and pocket exactly as much as you can get away with
without being prosecuted? Anything less would be economically inefficient! /s)

~~~
humanrebar
It's worth noting that luminary capitalists like Adam Smith were very much
concerned with privately enabled rent seekers in addition to government
enabled ones.

There's nothing inherently capitalist about corruption. It's a property of
power, not capitalism.

~~~
coldtea
> _There 's nothing inherently capitalist about corruption. It's a property of
> power, not capitalism._

That's the same argument that says "USSR/DDR/Cambodia/NK/etc was no real
communism".

We might excuse a few diversions from a political/economic system, but after
some point, like with anything else, capitalism is what capitalism does time
and again.

~~~
maratd
Not sure this makes sense to me? There's corruption in every system,
regardless of the ideology behind it. Are you saying there's no corruption in
communism? Because I have news for you, if you do.

It seems like corruption is simply endemic to the human condition. It has
nothing to do with capitalism/communism/etc. Whatever the system happens to
be, we will find a way to corrupt it.

~~~
mAEStro-paNDa
It doesn't appear to be what this person is saying. Rather, that we can't
deflect from flaws in ideology having to do with the system in place, and the
issues that stem from that.

Having said that, I find it to be rather unproductive and pessimistic to
assert corruption is endemic to humanity and has nothing to do with ideology.
Instead I would argue that the nature of the corruption has everything to do
with the ideological foundations of said system.

~~~
maratd
> Instead I would argue that the nature of the corruption has everything to do
> with the ideological foundations of said system.

How so? Is corruption different somehow depending on the ideological
foundations of the system? Corruption is corruption. Every system has rules.
When you subvert those rules for personal gain, that's corruption.

~~~
coldtea
> _How so? Is corruption different somehow depending on the ideological
> foundations of the system?_

Of course.

Different systems enable, empower, and encourage, different types of
corruption.

(Corruption being an abstract word, in programming terms there's no corruption
"class", just corruption instances. So the nature of those corruption
instances depend on the classes defined in the program -e.g. capitalism.c-
you're running...).

(And of course share some basic corruption types, present in all
societies/systems, e.g. theft -- the POSIX of corruption).

~~~
maratd
We're now pretty deep in this thread and you still haven't given a single
example?

~~~
coldtea
We've started the thread with concrete examples...

Check the @pjc50, @Traster etc comments at the top.

And @humanrebar already put this in abstract form: "It's worth noting that
luminary capitalists like Adam Smith were very much concerned with privately
enabled rent seekers in addition to government enabled ones"

~~~
maratd
> Check the @pjc50, @Traster etc comments at the top.

Those are specific examples of corruption here in the US. Are you asserting
that you wouldn't be able to find the same corruption, for example, in China?

Please provide a single example of corruption that can occur under capitalism,
but wouldn't occur under another economic system. Because I'm asserting they
do not exist.

> And @humanrebar already put this in abstract form: "It's worth noting that
> luminary capitalists like Adam Smith were very much concerned with privately
> enabled rent seekers in addition to government enabled ones"

Yes, he was perfectly right to. There are always private parties. Even under
communism.

------
mcv
This reminds me of the boardgame _1830 Railways & Robber Barons_. You're an
investor buying shares in railroad companies, and personally running any
railroad of which you are the largest shareholder. A popular opening strategy
is to first buy an expensive private company, then start a public company and
have the public company buy your private company at inflated price.

It's a great way to shunt some money from the company treasury to your private
wallet, which is otherwise impossible to do (except for dividend payments, but
those are limited and go to all shareholders and not just to you).

It's absolutely a robber baron move.

~~~
braythwayt
1830 is such an amazing game. Also, a personal shout-out for 1856, its sibling
game set in Upper Canada. That game is all about making money before
everything gets bought up.

~~~
mcv
There are actually dozens of games in that genre. 1835 in Germany is very
constructive and buildery, and aggressive 1830-style play is not going to do
you any good. 1841 in Italy is epic in its complexity; borders popup and
disappear, forcing splits and mergers. Companies can buy each other and start
new subsidiary companies. There are several games in England, France, Europe
as a whole, India, China, Russia, the Isle of Wight, several games for
individual states in the US, and most recently, Lilliput. Many of them self-
published. Worth checking out if this is your thing.

18EU is probably my favourite. Feels epic, but plays remarkably quickly.

~~~
braythwayt
I am familiar with the series, the problem with checking out new ones is that
these games require a SERIOUS investment of time and energy.

They aren't your run-of-the-mill Euro game you pull out after Thanksgiving
Dinner and teach to the family over coffee.

~~~
mcv
True. I keep trying to plan a game with my dad and my brother, but somehow we
never get around to it. I can't bring my kids, because that's not going to
work. Though pretty soon my oldest son may be old enough to join.

------
petervandijck
For the people in this thread wondering whether this is ok: double dipping is
never ok.

Once you get to a level where you have financial decision making power, don't
pick a provider (even a great one, even at a competitive price) if you have a
meaningful financial interest in them. The incentives are all wrong and it
leads to badly run companies. In this particular case, it's so far over the
line, it's pretty bad.

The board might not be able or want to force him out right now, but long term
the tone has been set.

~~~
bilbo0s
> _double dipping is never ok..._

...for companies that are structured as public companies.

If your companies are all private, with no investors, go ahead and do whatever
you like. It's all just your money, (or your family's money), anyway.

But to do that with money from public investors is, and this is only my
opinion, but I think it's extremely unethical. Obviously the issue is that
there is nothing explicitly illegal about what people like the WeWork CEO are
doing. I'm not sure why?

~~~
stilley2
I'm not a lawyer, but I suspect this may cause you to lose the liability
protection of the corporation. From [1]:

"The veil of liability protection provided by an entity may be pierced based
on the following theories:

Alter Ego Theory. If you run your company as little more than your “alter
ego,” as a mere extension of yourself (this will generally be the case where
there is a lack of separateness between you individually and the company
itself, due to commingling of funds, lack of proper governance, and other
factors)."

1 [https://businessattorneyinaustin.com/llc-corporation-
liabili...](https://businessattorneyinaustin.com/llc-corporation-liability-
protection/)

~~~
bilbo0s
Re-read what the WeWork CEO did. It was not commingling of funds, it was what
would loosely be termed as double dipping. One of his corporations, doing
business with another. ie - each of his corporations making independent
decisions, via the mechanisms not wholly dependent on himself, about what to
do with money in their own accounts. Not money in his accounts. It happens a
lot nowadays precisely because it is legal. Usually in parts of the business
that deal with real estate, like we see here, or another one is benefits. For
instance, you get a basket of funds to choose from for your 401k, but some of
them are funds run by "Bigshot Investor X", who also happens to be an investor
in the company at which you're working. If you tried to go after corporations
or individuals for these kinds of things on the basis of alter ego you would
be laughed out of court.

That's why this stuff is legal, because it by definition, is _NOT_ an alter
ego situation. My point is that while it is not _illegal_ , it is definitely
_unethical_ , and probably _should_ be illegal. Not because of the doctrine of
Alter Ego, which is obviously not violated in these sorts of instances. But
rather because all of these corporations, while acting independently, are
clearly acting in concert to benefit a third party that is _NOT_ the general
shareholder class. There is no explicit, sort of generic, law against that
right now.

As I said, if your companies are private, do whatever you like in this regard.
All of your companies can, and probably should, concert to benefit you and
your family. I'm just saying for companies with public investors, that's just
not cool.

~~~
stilley2
I see that does make sense. Thanks for clarifying.

------
cluoma
The ex-CEO at my wife's previous company did this. Signed a multi-year lease
for the company on a building she owned a few months before leaving the
company.

A real dick move for sure. They were growing at the time and being constrained
to such a tiny space for so long was quite rough for them.

~~~
technofiend
My wife's church sold a multi-million dollar parcel to the museum across the
street because one of the church members is a real estate agent and made a
commission.

This not only denied the church any revenue from making the parking lot a
parking garage as the museum did but prevented them from doing anything else
with the land in case of expansion or simply a future sale if they move. Talk
about stepping over dollars to pick up pennies.

~~~
WrtCdEvrydy
There's been a couple of studies that confirm people will sell out their
employers for as little as an extra $500.

~~~
vorpalhex
I suspect most employers will sell out their employees for about the same
amount or a bit less.

------
code4tee
This is basically the textbook definition of conflict of interests.

Given that WeWork is also a very unprofitable business it raises serious
fiduciary duty questions regarding his role at WeWork (it would be a big issue
even if they were profitable but seems crazy bad when they are not).

------
dpflan
"The building’s value, meanwhile, has gone up, and the owners have been able
to borrow more money by refinancing the property’s debt. Late last year,
Messrs. Neumann and Tahari took out a $77.5 million loan, according to loan
adviser Meridian Capital Group, $7.5 million more than the prior loan to buy
the building."

I'm amazed. When does this information about self-leasing show up in due
diligence by investors? The prospect of return to the investors must
overshadow such data? Is the real-estate market just so inflated at the moment
that if you can play it why not do so?

The self-leasing strategy + WeWork makes the property value higher (presumably
because the rent-ability of the property is proven when a WeWork tenant moves
in). Then the property owners can leverage the property. Others have raised
the point of conflict of interest and fiduciary responsibility and the not-so-
sound financials of the business (e.g. Softbank backs down from $16B to $2B in
new investment (still a big number)). I'm curious what is going on here or is
it obvious?

~~~
Traster
Somewhere between "Hey guys I just bought a Wave-pool company because I've
gotten really into surfing recently" and "We're going to re-invent EBITDA"

------
uberdru
This needs to called what it is, corruption. "Self-dealing is the conduct of a
trustee, attorney, corporate officer, or other fiduciary that consists of
taking advantage of his position in a transaction and acting in his own
interests rather than in the interests of the beneficiaries of the trust,
corporate shareholders, or his clients." This is supposedly why boards exist
in the first place.

[https://en.wikipedia.org/wiki/Self-
dealing](https://en.wikipedia.org/wiki/Self-dealing)

------
mathattack
This type of self dealing rarely ends well for the company in question. How
can the CEO be trusted to do right by the company?

------
verganileonardo
That is quite common in retail. Usually the family owns all the stores and
just rent them to the retailer. (At least in Brazil)

Although it sounds bad, not sure how it is perceived in real estate

~~~
fastbeef
Apparently this is McDonald’s modus operandi as well. They’re basically a real
estate company who happens to specialize in fast food resturants.

~~~
sjcsjc
Are you sure? Surely the company itself owns the properties, which is very
very different from a controlling family owning the properties.

~~~
dahdum
80% of McDonalds are franchise, so it’s often a similar situation. 2/3rds of
locations are owned by McDonald’s and leased by the franchisee, who also pays
royalties and purchases from corporate affiliated suppliers.

Ripe for abuse if McDonald’s were too short term focused.

Source: [https://www.fool.com/investing/general/2016/04/03/what-
perce...](https://www.fool.com/investing/general/2016/04/03/what-percentage-
of-mcdonalds-restaurants-are-owned.aspx)

~~~
notahacker
That's a way for McDonalds to make more money for McDonalds shareholders (at
the expense of a private franchisee who's well aware who he's leasing from and
probably feels more secure leasing the location from someone that isn't going
to turf him out for a higher rent offer from KFC). From a MCD investor point
of view, them owning the real estate and earning money on that too is a good
thing. It's a bit different from a hypothetical scenario in which McDonalds
picks locations personally owned by McDonalds' CEO Steve Easterbrook, in a
manner which probably tends to benefit him personally far more than McDonalds'
shareholders.

~~~
frankydp
I would suggest that MCD corp regularly turfs out established O/O's, just for
the opportunity to re-sign lease agreements for better rent %s. ie
renegotiating from 90's rates around 5% to 2010's rates at 10% of gross.

IMO, MCD has been administratively leveraging there negotiation position with
regards to rental %s as the near sole driver of profit increases for about
18-22 years. They are very very near max sustainable extraction, which is
evident by their huge offloads of corporate owned stores in the last 3 years.

Addition: They could also be positioning for a REIT transition.

------
Dowwie
This is like paying for your startup with a credit card and being called out
on it by reporters when the bill gets paid by the company rather than the
individual, but on a much larger scale. There are perfectly valid, ethical
reasons why you're using alternative sources of credit to fund a startup!

Here's why this article is an opinion piece searching for scandal that fails
to reveal one:

Consider the legal definition of "self-dealing": "One important duty of a
fiduciary is to act in the best interests of the benefited party. When a
fiduciary engages in self-dealing, she breaches this duty by acting in her own
interests instead of the interests of the represented party. For example,
self-dealing occurs when a trustee uses money from the trust account to make a
loan to a business in which he has a substantial personal interest. _A
fiduciary may make such a transaction with the prior permission of the trust
beneficiary, but if the trustee does not obtain permission, the beneficiary
can void the transaction and sue the fiduciary for any monetary losses that
result_."[1]

Every decision WeWork made to lease new commercial space was made with board
support. The CEO and family members conducted deals with WeWork that he or
family personally benefited by, but it was done in a transparent manner and
with board support.

WeWork is navigating uncharted territory. This makes those working in finance
apprehensive. Underwriters have certain requirements that a borrower must meet
before a loan is approved. A rapidly expanding, growth-oriented business like
WeWork may not qualify to lease new space as quickly as it requires. However,
perhaps individuals who pledge their own collateral might. Commercial space
was leased by individuals (or other entities) and then re-leased to WeWork.

I could be wrong about this case, but if I am then this will likely grow into
a scandal and self-dealing will be revealed.

[1] [https://legal-dictionary.thefreedictionary.com/Self-
Dealing](https://legal-dictionary.thefreedictionary.com/Self-Dealing)

~~~
hn_throwaway_99
> This is like paying for your startup with a credit card and being called out
> on it by reporters when the bill gets paid by the company rather than the
> individual, but on a much larger scale.

I've seen this happen in multiple cases, and I find it highly unethical. At
the very least it means the CEO is raking in thousands of dollars a month in
credit card points for purchases across the entire company.

~~~
kickopotomus
I'm on the fence about it. It seems unethical initially but the CEO is taking
a personal financial risk using their own funds. I would say it's definitely a
gray area but wouldn't call it flat out unethical. As with most things, it is
very dependent on the situation.

------
deforciant
I remember in my first job our CEO was quite proud that he bought the whole
office building himself and then rented out to his company. He said whole
mortgage will be repaid in 8 years... :) I guess the only difference was that
it is a small company and not a 'unicorn'.

------
lorenzobr
Although it doesn't sound right, on the other hand why would Neumann rent his
commercial real estate assets to WeWork competitors?

Maybe the question should be, why the hell Neumann bought properties directly
instead of using the WeWork vehicle?

We all know the answer to that I think.

------
mightymuse
This is just the start/continuation of the WeWork world unraveling. I am
familiar with the internals and there is a lot more being hidden that has yet
to come out.

When the 2010's documentary gets made and they get to the section about the
start-up world unraveling and being exposed, it's gonna be Theranos, Fyre and
WeWork highlighted throughout. 2019 is perfect timing.

------
evanweaver
This kind of conflict indeed looks sketchy, and I don't think Neumann should
do it, but the risk and opportunity still run both ways.

Neumann is assuming the capital risk. Does WeWork and its investors (including
Neumann!) want these assets and associated liabilities on its books? Probably
not. Is Neumann making money from this transaction long term? No way to tell;
he himself probably doesn't even know if these deals are profitable for him
now.

What he is definitely doing is increasing his levered bet on WeWork, which
could be good or bad for WeWork, and good or bad for him, depending on how
everything turns out.

~~~
mabbo
Neumann is the one making the deals for rentals- including the price. As the
representative of the company he is incentivized to reduce the rental price as
much as possible. But as the owner on the other side of the same deal, he's
incentivized to increase the price as much as possible.

The problem with this is that as CEO, he's talking about someone else's money
(investors) while the other side he's talking about money in his pocket.

How can there not be a conflict of interest?

~~~
evanweaver
I didn't deny there was a conflict. I'm just saying it's not a conflict that
automatically benefits him at the expense of the company.

------
smithmayowa
This sort of self benefiting deals should not be acceptable in any
organization from their executives, just as they are not acceptable from
democratic government officials.

------
bluedino
I thought this was common? Many owners of companies also own a real estate
holding company and lease a building to their main company.

~~~
moccachino
There is a difference if it is the sole/main owner of the company that also
owns the real estate holding company, or if it is the CEO who's doing it to
funnel some cash to himself.

I think the legit thing to do would be to have three companies. SuperCo
Holdings, SuperCo RealEstate and SuperCo Operations. SuperCo Holdings owns
both the others 100% and investors buy the Holdings company.

~~~
jaxn
You are assuming he bought the building with company resources. If he spent
his own money/took on the liability personally, that is his business.

Yeah, you gotta be extra careful that it's not divergent from company
interests (right place, right price). But this isn't shady unless there is
some reason it harms the company.

~~~
usrusr
> You are assuming he bought the building with company resources. If he spent
> his own money/took on the liability personally, that is his business.

It would be his business if he rented out his property to an organization that
he can't sign contracts for. But as it stands, he is transferring money from
an account he only partially owns (but fully controls, with legal obligations
to his co-owners which he seems to be breaking) to an account that he owns
fully. It's a sneaky way to give himself a raise that is easier to get past
the board. The article even cites WeWork with "approved by the board or an
independent committee", which implies that not all of those arrangements
happened worth explicit board approval. How he got into the possession of the
means by which the transfer from controlled-but-only-partially-owned to owned
was facilitated is an unrelated topic.

------
myth_drannon
I thought it was a very common practice. I know daycare owners who complained
about high lease prices for the house/building. What they usually do is take a
mortgage, buy a building and don't pay the lease just the mortgage. It's
cheaper this way and you end up owning the building after finishing paying the
mortgage.

~~~
koolba
That’s taking advantage of price differences between residential and
commercial property. Many locales do not allow leasing out a house as a
business location but they _do_ allow running a business out of your home.

------
habitue
Thinking out loud here, it seems like this behaves very similarly to leverage
in that it kind of magnifies his gains or losses from wework. If Wework
succeeds he can squeeze the company for more rent. If Wework fails, suddenly
he also has a bunch of broken leases. (Although he has a floor to his losses
from the real estate since he can eventually rerent it, maybe at a lower
price)

Another interesting aspect of this is that he can basically insider trade with
impunity since real estate isn't a security. Who knows when/where WeWork will
open an office next? Well, he does, and can buy a place cheaply (I don't
imagine WeWork presence affects the real estate price much, but in principle
it could).

~~~
thesausageking
He wins either way. He sold some of his WeWork stock, bought buildings with
the proceeds, and then had WeWork sign leases with them. If WeWork folds, he
still owns the buildings and can sign new tenants. Before it does, the faster
it expands, the more often he can do this, and the more money he can make.

That's the conflict of interest. WeWork shareholders want WeWork to build a
great business and eventually IPO, but it maybe better for him personally if
WeWork simply grows as fast as possible at any cost by doing things like
signing expensive leases it can't make the unit economics work for.

~~~
achillesheels
Very elegantly worded, thank you.

------
kpwagner
I'm not a subscriber of WSJ, so I can only read the first paragraph. Based on
the headline and the first paragraph, I don't see the problem. Wouldn't WeWork
have to lease the space from someone? Why is it a problem if that someone is
the CEO of WeWork? If WeWork is paying above market rent, then sure, that is
corrupt.

A lot of people hop on the band-wagon of bashing "rent-seeking", mostly
misusing the term in the process, confusing rent-seeking with leasing/renting
land or capital. WeWork's whole business is built on renting as far as I can
tell.

~~~
biztos
Others have mentioned this but to reiterate: imagine a WeWork location should
move to a larger space, but the CEO doesn't own a sufficiently large space.

At this point the CEO has a conflict of interest: on the one hand, he should
move the location, because that's best for WeWork; on the other hand, he
should keep it where it is because that's best for his real-estate company.

There are many potential conflicts but that's probably the easiest to use as
an illustration.

------
ineedasername
This unfortunately is not uncommon outside of silicon valley either. The
recent Sears debacle was helped along quite a bit by a CEO that was self-
dealing to his own personal financial interests. And in a case very similar to
the CEO of WeWork I recall the CEO of a restaurant holding corporation
personally purchased the land where he knew he'd direct his company to build
restaurants and lease it back to the company at exorbitant rents. (Though he
was also jailed for criminal conduct as well, basically soliciting outright
bribes from vendors.)

------
dunpeal
Just something to remember the next time a startup CEO tells you that "we"
have to "work hard and give up some of our compensation" to "make a positive
change in the world".

------
whack
If I were an investor in WeWork, I would be concerned about this as well.
Except that I'm not an investor, and I'm assuming 99% of angry commenters
aren't either.

Devil's advocate: Conflicts of interest are absolutely everywhere and can
never be avoided completely. For example, here's a conflict of interest in my
own job: I want my employer to pay me as much money as possible, and my
employer wants to pay me as little as possible.

And if I were a manager/director/executive, I would want to hire as many
people as possible to boost my stature. And the company would want to hire as
few people as possible to keep their expenses low.

The fact that a conflict of interest exists, isn't in itself a irreconcilable
problem. It only becomes one if one party tries to hide it from the other, and
deceives them to get what they want. Presumably that isn't happening at
WeWork.

If you're an investor in WeWork, I can understand your concern, and your
wanting your board representatives to take a close look at these agreements.
From what I hear though, the investors and board of directors are all
perfectly happy with the arrangements that have been made. Perhaps a little
less soapboxing from the peanut gallery is in order.

------
chank
Wasn't there also an article recently about WeWork losing funding because it's
basically a real estate company with a tech facade?

------
majia
We should add two mandatory clauses to cooperate law: 1\. Major shareholders
must disclose any business relationships between the company and shareholders'
other business interests. 2\. Shareholders can demand a vote on whether an
above-mentioned business relationship causes a conflict of interest. If so,
the relationship must be terminated.

------
gammateam
I am more surprised that Neumann allows his name to be known in these
investment groups

Just form the Wyoming Series LLC or BVI segregated portfolio company, no
beneficial owner information will be in public records, but even the state and
registered agent can be kept in the dark if you want.

I expect value has been extracted this way for centuries.

Oops!

------
kolbe
Reminder: the Saudi Sovereign Wealth Fund is the majorly of money in
SoftBank’s Vision Fund. And SoftBank is by far the largest investor in WeWork.

I have to admire Neumann’s balls in trying to play Mohammed bin Salman for a
chump. But I don’t think this will end well for him.

------
mychael
WeWork is another Theranos waiting to happen.

\- Unicorn status. Check.

\- Douchey founder(s). Check.

\- Shady dealings and corruption. Check.

------
bogomipz
The article states:

>"Mr. Neumann owes his personal wealth largely to sales of WeWork stock. It is
unclear how much WeWork stock he has sold, but he has told some friends it is
in the hundreds of millions of dollars."

Honest question - are investors OK with this? Isn't he essentially enriching
himself with VC money that has yet to see a return realized?

Couldn't this be seen as a hedge that even if investor loose their shirts he
himself has managed to enrich himself with a real-estate portfolio?

------
hkmurakami
It was amusing to me that this sorry of thing is seen as potentially quite a
big issue in tech yet is totally common in the real estate industry. I was
made aware of this by today's Matt Levine piece
[https://www.bloomberg.com/opinion/articles/2019-01-16/even-c...](https://www.bloomberg.com/opinion/articles/2019-01-16/even-
cheaters-don-t-always-win)

------
CodeSheikh
"Adam Neumann, WeWork’s chief executive, who leased the property to WeWork
after buying it.." Is this even legal? I smell conflict of interest.

------
defterGoose
Oh hey, look, another person living rich on schemes to simply move money
around instead of doing something societally productive. Neat.

------
convivialdingo
My wife’s family did this also. They owned the buildings and leased them back
to the company.

It saved their butts when a partner they took on tried to take over their very
valuable company.

I don’t see the problem unless there’s obvious overpricing, corruption, or
failures to disclose. At some point it makes better sense to put property
under a holding company or similar.

------
ryanmercer
See... this is apparently quite legal but insider trading gets you prison.
This is arguably more of a conflict of interest/questionable act than insider
trading.

I imagine the company could also find cheaper places/better terms for leasing
than the CEO owned properties which, to me, is mismanagement if not low-level
fraud.

~~~
jaxn
Why do you assume that? He may be willing to bet on WeWork's viability in ways
that other landlords won't.

Landlords may have been asking him to personally guarantee leases.

~~~
ryanmercer
>He may be willing to bet on WeWork's viability in ways that other landlords
won't.

Perhaps, but as someone else in this thread said

>The self-leasing strategy + WeWork makes the property value higher
(presumably because the rent-ability of the property is proven when a WeWork
tenant moves in). Then the property owners can leverage the property.

And never mind the fact that he's basically guaranteeing he has a tenant for
each building, that will also likely making physical improvements to lure in
customers (which will mostly carry over for a future tenant) and effectively
building free equity in the property so even if WeWork suddenly folds he can
sell the properties at competitive prices and still walk away with a profit.

>Landlords may have been asking him to personally guarantee leases.

Perhaps with the first location or two but a quick google search shows they've
raised billions in funding which would be more than adequate (unless they are
growing too fast, which appears to be the case, see below).

Now as far as guaranteeing rent here's something interesting

>In March 2018, SEC filings indicated that WeWork had raised over $400 million
alongside private equity fund The Rhone Group to start a fund to purchase
properties directly.[33] In April, documents filed by the company in
association with a plan to raise $500 million through the issue of high-yield
bonds showed that the company's revenues rose in 2017, but costs rose faster,
and the company owed $18 billion rent

[https://en.wikipedia.org/wiki/WeWork#History_and_funding](https://en.wikipedia.org/wiki/WeWork#History_and_funding)

I don't know how many of the sites he owns but even if it is only 10% there is
1.8 billion 'free' money servicing loans on commercial properties he owns.

------
exabrial
I don't see a problem with this if it's properly disclosed to investors,
workers, and users of the service. If you don't like it, literally nobody is
making you give your wealth to him, and there are plenty of alternatives that
would benefit the local economy wherever you are.

------
clamprecht
Who said it - "No conflict, no interest"?

Edit: Fred Wilson attributes it to John Doerr - [https://avc.com/2010/04/no-
conflict-no-interest/](https://avc.com/2010/04/no-conflict-no-interest/)

------
PurpleRamen
Ah yeah, the old McDonalds farming-scheme. Buy some land, raise some cattle
under your flag and milk them till they are dry. They have all the work and
risk and you get all the fat money. At least a good farmer knows how to
maintain them well for longterm-milking.

------
jamez1
Often the operating business is floated and the vendors keep the buildings,
this is nothing new and much more endemic than appears.

You're only just seeing an article on this behavior because a high profile
tech company is doing it rather than a factory or a shop.

------
epa
Why does it matter? If the board of directors are aware and approved it there
is no issue here.

------
whatok
I can understand (but definitely wouldn't approve) if this happened early in
the company's life but given when it happened and what the company has been
valued at in the past few years, I really do not understand what this guy is
doing.

~~~
yani
He owns a building that is suitable for what WeWord does. What if he has a
plane and his company needs a plane. Why is it bad to use it?

Companies always try to hire people from our network first - relatives,
friends and friends of friends. Suddently it is bad.

~~~
ascagnel_
As long as WeWork isn't paying more than market rates on its rent, then it's
fine. But if they're paying more, then the CEO is corrupt -- he's using his
control of his company to enrich himself personally rather than steering the
company towards success.

~~~
notahacker
It's not just about rent being in line with market norms. In order for it not
to be personal enrichment at WeWork's expense, it's also got to be assumed
that these particular leases on this particular properties were sincerely
believed to be the _best_ possible use of the $110m of WeWork shareholders'
funds committed to properties its execs had an ownership interest in: i.e.
that there were no competing locations (or capital investments) that might
have been expected to yield higher customer revenues and nothing comparable on
offer at below market rates. Additionally, we've got to assume WeWork execs
were not in competition with WeWork to acquire actual [part]-ownership of the
buildings (the article provides an example of Neumann trying to personally buy
a stake in a building knowing that WeWork wanted to occupy it but WeWork
blocking it because they were happy to stump up for title deeds as well as the
lease. It certainly doesn't rule out the possibility he used his knowledge of
WeWork's requirements to acquire other freehold titles which WeWork might have
preferred to buy rather than just lease though).

------
NorthOf33rd
Oh, self dealing. Shocking. For what happens when this gets rampant enough,
please see DOMO. Wouldn't be surprised if Neumann owned a coffeeshop or fast
casual restaurant ala Cubby's and mandated that said eatery cater all
locations.

------
michalu
Classic Ponzi Scheme. People have been wondering how WeEork has't gone
bankrupt yet. Well you don't go bankrupt if you can keep raising/lending more
to pay up your losses. Until the day you can't anymore.

------
linkmotif
How is this wrong? Is WeWork publicly funded? Either way, is he withholding
his status as landlord from investors? How is this even a conflict of
interest? This sounds like a normal real estate deal: sale-leaseback to a
management company.

~~~
detaro
Conflict of interest: The CEO, who is supposed to have the companies best
interest in mind, would benefit if the company made bad financial decisions
like renting too much property from him.

------
whatok
Bloomberg is saying that this was disclosed in last year's bond prospectus. To
me that's the minimum required but it's probably just better to avoid the
appearance of any sort of conflict of interest.

------
antr
Just look at WeWork's WEWORK COMP. 18/25 REGS bond. Total junk. Can't wait for
an economic slowdown in 2019/20, and see WeWork default on its debt holders.

------
rwmj
Why is WeWork any different from a company like Regis, or any number of
managed offices in the 80s, which have been doing the same thing for years?

------
daveheq
Article requires subscription to WSJ to read... this really shouldn't be
bumped to the top and show up in my notifications.

~~~
hrrsn
[https://outline.com/WMUaqc](https://outline.com/WMUaqc)

------
Animats
That's not uncommon. It's how Roy Kroc got rich with McDonalds. His real
business was leasing land to franchisees.

------
yeukhon
But WeWork owes billions of rents...

------
oregontechninja
This is just like McDonald's, the real money is made owning the land they sit
on.

------
crsv
Uh oh. WSJ's picked a new target, it's going to be Theranos all over again.

~~~
p1necone
Not sure what you're getting at here, Theranos was "targeted" because they
were completely fraudulent.

------
hmart
From Dan Abramov Twitter timeline: "-watches Mad Men:

woah, they were so backwards in 60s

-looks at the tech industry:

oh no"

------
linguistbreaker
This is how an oligarchy works

------
thrillgore
This sounds awfully similar to what the current CEO of Sears is trying to do.

------
kgwgk
Matt Levine today:
[https://www.bloomberg.com/opinion/articles/2019-01-16/wework...](https://www.bloomberg.com/opinion/articles/2019-01-16/wework-
ceo-adam-neumann-is-also-a-landlord)

"Yes it really does seem like a conflict of interest! “A WeWork spokesman said
all related-party deals are reviewed and approved by the board or an
independent committee and disclosed to investors,” so that is good, but on the
other hand, “Mr. Neumann, the 39-year-old executive who founded WeWork in
2010, is WeWork’s largest individual shareholder and has voting control over
the company,” so it is not clear that the board can say no. (He got that
control in 2014 with some super-voting stock; before that, he once tried to do
a related-party deal and got turned down by the board.)

"One thing I will say, though, is that if you told me that a privately owned
real estate company was engaging in transactions with its controlling
shareholder and CEO that raised possible conflicts of interest, I would be
like “ha, yeah, that’s the real estate industry for you.” Conflicts of
interest are more common there, as everyone knows these days after years of
stories about Donald Trump’s business dealings, and it is not surprising for a
founder/controller/CEO to be involved in a deal with his company on multiple
sides and in multiple ways. Private tech startups, on the other hand, tend to
be a bit more pristine. They are not complex moneymaking structures for their
founders but mission-driven enterprises where everyone’s incentives are
ostentatiously and lavishly aligned: If the company gets big, the founder
becomes a zillionaire; if not, he walks away with only his modest salary and a
track record for failing ambitiously. WeWork is a weird company because it is
a real estate company that thinks it’s a tech startup; it seems to have the
culture and New-Age-y patter and grandiose ambition and valuation of a tech
company. But what if, deep down in its heart, it really is a real estate
company?"

------
rekshaw
Reminds me a little of the McDonalds movie!

------
gdsdfe
CEOs are just hustlers in fancier clothes

------
mbostleman
Sounds like Ray Kroc's model.

------
janismajoris
Regus have been doing this ages.

------
pl0x
WeWork is a giant ponzi scheme on the brink of financial collapse. 2008 is
happening all over again.

------
mk926
how can I read the article?

------
chatmasta
As landlord, isn't he taking on the risk of WeWork defaulting on rent?
Shouldn't he be compensated for that risk?

~~~
TomBombadildoze
> WeWork’s CEO Makes Millions as Landlord to WeWork

What risk? He's already pocketed the profits. If WeWork defaults, his property
management company takes the loss, possibly sells the property, and perhaps
files for bankruptcy. It doesn't affect his personal finances.

"Risk" has become cognitive poison. There can be, and often is, a huge divide
between _financial risk_ and _risk of grave personal consequences_.

