Update: The We Company canceled its road show that was expected to kick off this week issued a statement Sept. 16 postponing the IPO. We says it now expects to complete the initial public offering by the end of the year. 

What a difference four weeks makes. 

WeWork's path to becoming a public company has gone from promising (if ambitious) to approaching a train wreck.  

The We Company, WeWork's parent organization, which had at one point reached a $47 billion valuation after a funding round in January, was reportedly considering going public at a valuation as low as $10 billion. This despite raising more than $12 billion in funding to date. On Sept. 16, the company issued a statement saying it is delaying the IPO and expects to complete the offering by the end of the year.

We's beleaguered initial public offering has elicited questions and concerns about its corporate governance since the company unveiled its IPO paperwork last month. At the center of the controversy is co-founder and CEO Adam Neumann, who, despite not taking a salary in 2018, sold the trademark "We" to his own company for $5.9 million. Neumann has since returned the money. On Friday, We attempted to course correct further. The company said it was reducing Neumann's supervoting power from 20 to 10 votes per share. It also scrapped a proposed plan that allowed Neumann's wife Rebekah to pick his successor under certain circumstances.

For a business that claims its mission is to "elevate the world's consciousness," We's IPO process reveals a glaring lack of self-awareness. In case you missed it, here are a few of the biggest issues threatening the IPO, and what the company is doing to fix them before it starts trading on Nasdaq later this year.

Neumann's finances and influence

Controversy over the "We" trademark is only the tip of the iceberg. WeWork's founder and CEO has cashed out around $700 million via stock sales and loans, the Wall Street Journal reported in July. The figure has caused concern among investors because it raises questions about Neumann's confidence in the success of his company. The company's IPO documents also revealed Neumann has an ownership stake in four buildings where WeWork is a tenant, a fact some people have criticized as a potential conflict of interest.

On Friday, the company said Neumann would give We "any profits he receives from the real estate transactions he has entered into with the company." It also stated Neumann would not be allowed to sell any of his stock for the first year following the IPO, and limit his ability to sell shares on the second and third year to no more than 10 percent of his stake. The new filing also said We's board of directors could remove Neumann from its CEO role and promised to add one more director within a year of the company's IPO. In September, We recruited HBS professor Frances Frei to its board, following criticisms for having an all-male board of directors.

Inflated valuation

WeWork's $47 billion valuation has raised more than a few eyebrows among public investors. The company, which made $1.8 billion in revenue last year, is still unprofitable and booked a $1.6 billion loss in 2018. In the first six months of this year, We also reported a $1.3 billion loss on revenue of $1.5 billion. For comparison, publicly-traded competitor IWG, which also rents co-working spaces to companies and individuals, has a market cap of $3.5 billion as of the writing of this piece. Unlike WeWork and its parent company, IWG is profitable--it banked an operating profit of £50.6 million ($62.8 million) on $1.6 billion in revenue for the first half of 2019.

To allay investors' concerns, We is considering cutting its valuation down to $10 billion or $12 billion, according to Reuters. WeWork's dramatically shrinking valuation has been met with resistance by Softbank, which has already poured around $10 billion into the company. Softbank has asked We to shelve its IPO plans until 2020, according to a September 9 report by the Financial Times. Given We seems determined to move forward with the offering, however, Softbank is weighing buying up to $750 million worth of shares on its IPO, the Journal reported Friday. 

Transparency

One of the biggest questions around WeWork is its path to profitability and the viability of its business model. Because We's business model hinges on securing long-term leases and then subleasing those spaces to its tenants at a premium for short-term durations, the company must pay the rent even when there's no one occupying the buildings. According to its financial disclosures, We is on the hook for $47 billion in long-term leases. To minimize its risks, the company increasingly has signed on enterprise customers, which tend to have longer lease commitments and now represent 40 percent of its customer base, compared to 20 percent in 2017. Still, some worry that the way We reports its results does not give investors sufficient insight into the company's finances.

Much of the trouble in which We currently finds itself could have been resolved--or at least tempered--long before the company subjected its financials and corporate governance to public scrutiny. Neumann's double role as tenant and landlord, for instance, had already drawn criticism in January. The bigger concern is, why didn't We and its leadership realize how many red flags its own long list of disclosures would raise? It's a tough business trying to raise the world's consciousness, especially when you have yet to do enough soul-searching of your own. 

Published on: Sep 16, 2019