
After Zenefits, Will VCs Rein in Their Unicorns? - jackgavigan
http://www.bloomberg.com/news/articles/2016-02-17/after-zenefits-will-vcs-rein-in-their-unicorns
======
skewart
A number of commenters here have compared Zenefits' questionable compliance
with Uber, Lyft, and Airbnb. What Zenefits was doing is fundamentally
different, and much more problematic.

Lyft and Uber skirt similar kinds of seemingly useless regulation but they're
completely up front about it. They don't pretend that their drivers are
licensed or get any benefit from having licensed drivers in any way. They're
simply offering a different product than what taxis offer - getting a ride
with a random unlicensed stranger.

Lyft, Uber, and Airbnb are betting that reputation systems (ratings, reviews,
etc.) will provide assurance for consumers just as well if not better than
government regulation. So far the market is showing they just might be right.

Zenefits seems to have been driven by a similar cultural distaste for onerous
and probably out-dated regulation - who can blame them? But instead of letting
the market decide how valuable that regulation actually is they simply cut
corners when they hoped no one would find out.

That deceptiveness, more so than the regulation dodging itself, is ultimately
really bad for a B2B business.

~~~
themagician
Lyft, Uber, and Airbnb can't avoid regulation forever. They've just been lucky
so far. Eventually there will be a high profile incident—someone important
will get raped or murdered. The political response will be 1000x what their
lobbyists can handle.

It is _inevitable._ The reality is that this is how a lot of regulation
starts. It doesn't always come from an anticompetitive place. We just forget
that we actually asked for the regulation. Once we have, it's nice to always
be able to blame the government or some regulator when something goes wrong.
And then someone else can come in and "disrupt" the market by using a loophole
of pretending like the regulation doesn't apply to them, when it's clearly
intended to.

~~~
discodave
And by important you don't mean the women who have already been raped or
assaulted by Uber drivers right?

~~~
VeejayRampay
Serious question: what is Uber/Lyft specific about a customer being assaulted?
Is that inherently different than rapes or assaults by taxi drivers? Cause I'm
sure there's been plenty of cases. Don't get me wrong, those are horrific, but
I guess I'm failing to see what in Uber or Lyft makes it easier to happen or
why it might require special regulation.

Maybe the fact that cab drivers need a licence and are thus screened more
thoroughly?

~~~
pjc50
Taxi drivers have a licence to lose.

~~~
salem
But maybe a better chance of getting away with it

------
tyre
I'm skeptical of the source of this article. My guess is Zenefits spoke off
the record to do damage control in Sacks' favor. I have no proof but will lay
out why below.

> In a Feb. 1 meeting at its blandly luxurious Sand Hill Road offices, venture
> firm Andreessen Horowitz urged the chief executive officer of one of its
> most prized and promising companies to resign.

1) The first sentence references a meeting that very few people would know the
details of. Likely only those at a16z plus a few executives around
Parker/Sacks. Unlikely Parker is talking to the press, given the legal issues
swirling.

> Days after Chief Operating Officer David Sacks gave that information to Lars
> Dalgaard, an Andreessen partner who sits on Zenefits’ board, Conrad was out,
> say three people familiar with the matter. At Conrad’s suggestion, they
> replaced him with Sacks

2) Sacks gave the information to a partner, then Conrad (basically blamed for
fraud) suggested they replace him with Sacks. Which raises some questions:

    
    
      a) Why trust Conrad? He's fired + off the board + likely under legal investigation.
      b) As COO, no question as to whether Sacks knew anything or that they needed fresh blood? Also, he was suggested by the person who was just removed for fraud.
    
    

Lastly, we get a picture that sounds a lot less like Conrad giving a voluntary
recommendation:

> At the meeting, Conrad tentatively agreed to resign, relinquish his board
> seat, and make Sacks CEO, say three people close to the company.

------
mrshoe
This story starts out reporting on a board ousting a CEO after a public
scandal involving non-compliance with various laws, which incited multiple
government investigations.

It then takes an abrupt turn and starts repeating everyone's favorite Silicon
Valley trope du jour: the unicorn bubble is bursting, the fundraising
environment is tightening up, and the halcyon days of multi-billion dollar
valuations for everyone are over.

There's really no connection between the two.

~~~
sandworm101
Successful startups all, and I mean ALL, have serious compliance issues. They
probably do not not realize their problems. Some actively try to avoid
knowing, such as by shunning legal advice that may inform them of inconvenient
obligations. Part of the going public and/or being bought out process involves
measuring the rate of non-compliance.

A unicorn wants to go public, but that means first getting your compliance
ducks in nice rows. The growing realization that unicorns are in fact very
non-compliant pushes them towards the easier route of being acquired/merged.
So there is a direct link between compliance and the very existence of
unicorns.

~~~
twright0
> Successful startups all, and I mean ALL, have serious compliance issues.

This feels like a very hyperbolic claim. There are definitely high-profile
examples of startups that had compliance issues and are struggling to bring
them under control or remain in arguably grey areas (Zenefits is an example of
the former, Airbnb the latter). But it's hard to imagine that it's a truly
universal problem; many startups are in industries without heavy regulatory
rules. Can you elaborate on what makes you believe this to be the case?

~~~
sandworm101
A successful startup is one that has grown rapidly in recent years. No growth
= not successful, and not recent = not a startup. Any tech company that grows
quickly starts bumping up against any number of compliance issues, both legal
(ie HIPAA) and private (ie PCI). Today's growth curves don't keep pace with
many of these regulations. As you expand laterally into new markets you
constantly run into new obligations. And as you expand vertically (increased
sales) you trigger new expectations, especially the PCI DSS. The chances of
anything rationally called a startup having accommodated these things is
astronomically low.

Ask any tech lawyer to list all the laws applicable to a startup. Bring a
lunch. Until a company has devoted resources (ie a full-time compliance team
including lawyers) and has a decade or so of experience with the relevant
rules, imho proper compliance is a pipe dream. At best you can hope to keep
the wolves away long enough to get whatever they want ready asap.

Anyone here working at a startup, just have a look at the PCI DSS,
specifically the SAQ you are meant to fill out every year (if you handle
credit cards). And this is basic compliance 101 stuff, no lawyers required.

[https://www.pcisecuritystandards.org/documents/SAQ_D_v3_Merc...](https://www.pcisecuritystandards.org/documents/SAQ_D_v3_Merchant.pdf)

~~~
nostrademons
Isn't that why many companies are using Stripe and similar payment processors
now?

[https://support.stripe.com/questions/do-i-need-to-be-pci-
com...](https://support.stripe.com/questions/do-i-need-to-be-pci-compliant-
what-do-i-have-to-do)

~~~
sandworm101
>> "Just go to your security settings and click on “View completed document”.
We have pre-filled the documents for you."

Services like these are part of the problem. They can verify that the service
they provide is compliant, but nobody can determine remotely whether or not
you are compliant with something like PCI. You cannot outsource compliance. It
is something you have to actually do.

And fyi these "iframe" services that allows a merchant to opt for SAQ-EP
rather than the longer SAQ-D, that might be going away in the next couple
years. Merchants may have to go with a full redirect, not a frame, if they
want to wash their hands of chd.

------
JonFish85
Considering Airbnb and Uber, two of the largest and considered most-successful
startups are carefully dodging the law, the upside is worth the risk. I
disagree with it, but I think VCs don't care much about following legal
frameworks until it's too late.

~~~
phibit
Does anyone have any more information about the "52 hour online training
program" that "the Macro" allowed them to skip? If that training program is
any bit as useless as "online driving school", I can sort of understand how
the Macro came to be...

~~~
pj_mukh
If everyone agrees it is a "silly" requirement (especially because it was
circumvented so "easily"), why are we so mad at Zenefits?

We certainly don't want giant companies influencing policy changes (though,
that happens frequently). I think a good indicator of whether a policy can
justifiably be circumvented is if it actually hurt anybody. Has the "macro"
hurt anybody yet? The articles have been vague.

~~~
timv
_Has the "macro" hurt anybody yet?_

The employees who used it and then signed a false declaration are at risk of
jail.

That was their choice, but they were seemingly under pressure from their CEO,
so it seems fairly evident (to me) that Parker created a real problem for his
team, even if the customers are OK.

[Edit: Removed out-of-place "committed"]

~~~
pj_mukh
I still don't see how the macro allowed them to do anything different from
just scrolling to the end of a list of terms and conditions. AFAIK, they still
had to pass an exam?

~~~
stonedge
Some of the compliance training I've had to take didn't have an exam. But the
software tracked how quickly you went through the training. If you went
through too quickly, you didn't get credit.

------
manishsharan
Can someone tell me why is it such a big deal when person sells an insurance
without having a proper license? Its not as if the insurance policy itself is
fraudulent. The buyer is buying the insurance policy and not the credentials
of the broker.

Other wise it seems to me that is requirement is just as unnecessary as
requiring cosmetology license for hair braiding ( see
[http://www.texastribune.org/2015/04/06/bill-would-
untangle-m...](http://www.texastribune.org/2015/04/06/bill-would-untangle-
messy-hair-care-regulations/))

~~~
ubernostrum
Because even for people who are actual high-level experts on it, correctly
representing what a policy does and does not offer, and explaining that in a
way that's factually correct, compliant with the local laws governing
insurance, _and_ understandable without being misleading to a potential
customer, is incredibly difficult, to such a degree that your comparison of it
to hair braiding should be _prima facie_ evidence of lack of good faith on
your part.

~~~
rosser
> _your comparison of it to hair braiding should be prima facie evidence of
> lack of good faith on your part._

I wouldn't go that far. It's just the naïveté of "Why there gotta be so many
laws obstructing my disrupting?!" taken to its logical extreme.

------
tommynicholas
This is such nonsense. Zenefits allegedly broke the law under Conrad's
leadership and he was ousted. This is not a sign of any macro changes -
companies that break compliance regulations that could send their employees to
jail have never been in fashion.

Read Ben Thompson's piece about how this differs from more "gray area"
compliance breaches:

[https://stratechery.com/2016/zenefits-and-
regulation/](https://stratechery.com/2016/zenefits-and-regulation/)

------
pbreit
I'm not sure there's a whole lot from this story to apply elsewhere. David
Sacks is who you want to be running the show. He has 2 fairly epic successes
under his belt (PayPal and Yammer), one of the keenest product minds in the
business, nearly unlimited access to funding and talent, moral authority as a
founder and lawyer and operator to clean up the mess, etc.

~~~
minimaxir
"Don't break the law" is arguably a good lesson many startups could learn.

~~~
optimusclimb
Doesn't the YC application process ask you about clever times you've hacked
the system or painted a little outside the lines?

------
minimaxir
Note that this article has new information compared to the previous articles
about the Zenefits incident. (namely, a16z's involvement as the catalyst for
the ouster)

~~~
jackgavigan
And also (I think) the fact that Parker created the Macro™.

~~~
exw
No, that information was already mentioned in the second BuzzFeed article:

<<That was how executives discovered the macro, which Conrad had created based
on a belief that 52 hours was too long to spend in training, the lawyer for
Sacks said.>>

[http://www.buzzfeed.com/williamalden/zenefits-program-let-
in...](http://www.buzzfeed.com/williamalden/zenefits-program-let-insurance-
brokers-fake-training#.usg7PpaK6K)

~~~
jackgavigan
I stand corrected!

------
rokhayakebe
I don't buy this.

I have no issues with Zenefits and I am actually happy they were able to see
phenomenal growth. However I must say this whole situation of the CEO stepping
down feels staged to me.

It is as if everyone was in on it and this move was calculated by all of them
a long time ago. Like when we ready and my stocks are safe and sound blame it
on me.

~~~
draw_down
Oh, _you_ have no issues with Zenefits so the whole thing must be staged! Of
course! As if it's so hard to believe a CEO would engage in unethical
behavior. Sheesh.

~~~
rokhayakebe
I have no issue with them because I did not fully read a single article to
form an opinion on whether or not they are guilty.

However what I am sure of is there is absolutely no way this 4.5 Billion
company was acting illegally and only one person , the CEO, knew about this
for YEARS and is responsible for it end to end.

------
smaili
It really is a pity we live in a world where a few can ruin the party for all.
I'm sure there are worthy startups out there with a solid product, solid team,
and solid practices but they may suddenly die out from VC capital because of
the fear/panic triggered by the couple of bad ones.

~~~
minimaxir
Presumably if they indeed have a solid product, they have a solid way to drive
revenue and be self-sustaining in case of events such as this.

~~~
gautamnarula
One issue for these startups could be that their facing competition with deep,
VC-lined pockets. I actually faced this to some extent with a bootstrapped
startup I ran--we were sort of competing against a startup with millions in VC
funding that was handing out promotions like there was no tomorrow, and is
still chugging along despite an unsustainable business model. It wasn't the
primary reason we shut down, but it certainly didn't help.

------
throwaway479384
My company used Zenefits for a while, mainly because one of our execs is
friends with one of theirs. We had many, many problems with payroll. When you
have employees repeatedly coming to you because their paychecks are screwed
up, you've got to do something. We ended up switching away, and now use ADP
for payroll instead. We've had no problems since. (This was before the big
public slap fight between Zenefits and ADP, which was made even more amusing
given our experience.)

I would not recommend anyone use Zenefits for any reason, regardless of
whether it turns out they complied with legally-mandated training requirements
or not. The fact that they were so incredibly sloppy is just inexcusable. You
cannot mess around with people's pay like that.

(Posted with a throwaway account for hopefully obvious reasons.)

~~~
grahamburger
I'll bet your employees hate ADP. I know I do. Would it kill them to make a
useable web interface? It's not like we've been doing this for 20 years or
anything.

~~~
cmdrfred
I was thinking of doing a write up on ADP's workforce product recently, some
things about the website I've noticed. The site uses cookies to determine if
you have two windows open of the site. The problem is this doesn't work
correctly and I often have to blow out my cookies to log in. On mobile I have
to turn on screen rotation to be able to use the menu bar on the top of the
screen, then I have to turn it back to be able to see the punch in buttons.

------
draw_down
Unless consequences affect the investors or members of the board, and not just
the CEO, what is the incentive to change behavior?

------
tempodox
> _...valuations often became detached from the underlying fundamentals..._

The most valuable asset of a startup seems to be hot air.

------
dufalop
I rather agree this article seemed to connect two related but definitely not
connected things.

That being said, it is interesting how many visible unicorns are either
flaunting the law or outright frauds (i.e. zenefits, uber, airbnb, theranos).

Happily or sadly (per your point of view) - it's seems still worth it. The
Zenefits ex-CEO lost his job but he never ever needs to work again (and can
afford the best of the best lawyers if needed)

------
jonesb6
I don't think they included a safety switch on those things.

------
tempodox
Question: Is there any fixed definition of the term “unicorn”?

------
hoodoof
"Will VCs Rein in Their Unicorns? "

The language indicates that the VC's are the controlling owners of these
companies.

------
luckydata
of course not.

------
jsprogrammer
$4.5 billion valuation on $60 million annual revenue from non-compliant
activity?

Anyone know the investment thesis on that?

~~~
pbreit
Fastest growing SaaS business ever? The non-compliant activity was not crucial
for success and easily rectified. The service offered is core to pretty much
every business on the planet and touches every single employee in the
business.

~~~
jsprogrammer
Easily rectified? The top shareholder/exec got dumped; the entire business is
under multiple states' investigations; employees may have purjured themselves
at the behest of the business; and clients may have purchased critical
business infrastructure from unlicensed agents (which may affect their
coverage).

Clearly someone bought in to the pitch, but what strategy would they believe
would easily rectify this situation?

~~~
rhino369
A non start up would pay a law firm to do more investigation and then settle
with the government for a pound of flesh but nothing crazy. In the scheme of
things skipping a video won't kill a company.

But start ups are all about momentum and PR.

Plus they'll need money for investigations and settlements. VC capital is
expensive.

~~~
seanhunter
| In the scheme of things skipping a video won't kill a company.

Skipping the video is not in itself what could potentially kill the company.
However if clients are able to claim that their insurance was mis-sold by
Zenefits, it seems to me that could. Mis-selling of payment protection
insurance in the UK has already resulted in settlements north of 5 billion
GBP, and the issue is not fully resolved yet.

------
rajacombinator
A lot of the HN-cynic crowd is forgetting here that if anything, they were
bypassing stupid sets of regulations. There is nothing ethically or morally
wrong here.

~~~
timv
I'll leave aside the question as to whether _individuals_ faking their 52
hours is "ethically or morally wrong".

For Zenefits/Parker to facilitate and encourage their staff to do it is most
certainly _ethically wrong_.

Telling your staff that they should cheat the rules, sign a false document and
perjure themselves is completely unacceptable. Zenefits employees face the
risk of jail time because they did what their CEO told them to do - that
should never happen and Parker deserved to go for that reason alone.

~~~
rajacombinator
Hmm good point, I stand corrected.

