Criminal charges likely for $4B "Unicorn" start-up Zenefits

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Guevara

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Regulatory agencies in California and Washington caution that Zenefits and current or former employees could face criminal charges related to the alleged sale of health insurance without proper brokers' licenses.

In Washington state, a decision on whether to pursue legal penalties could come in a matter of weeks, according to a spokeswoman for the Office of the Insurance Commissioner.

"The best I can say is, I believe it's soon," spokeswoman Stephanie Marquis told the Business Times on Tuesday. "Within a month."

Zenefits co-founder and former CEO Parker Conrad resigned a week ago from the San Francisco-based HR and insurance brokerage startup. Former top marketing executive Sam Blond was replaced later in the week.

Regulators in California said they too are investigating Zenefits for allegedly having employees without proper credentials selling insurance. And newly named CEO David Sacks acknowledged that some compliance processes and controls "have been inadequate, and some decisions have just been plain wrong."

Late in the week, Sacks also disclosed that "many of our California sales representatives" had access to a software tool that may have helped them circumvent California law, by bypassing required pre-licensing training material online.

http://www.bizjournals.com/sanfranc...s-insurance-licensing-conrad-david-sacks.html

These grand promises were bolstered by Zenefits’ early growth. Its annual recurring revenue — an accounting measure preferred by subscription-based software companies — reached $1 million by the end of 2013, the year Zenefits was founded. Recurring revenue hit $20 million by late 2014, and was projected to reach $100 million by late 2015.

The exponential growth was catnip to investors. The start-up raised $500 million last year at a $4 billion valuation, one of the largest financing rounds in a year of mega-fundings. At one point, Andreessen Horowitz, Silicon Valley’s pre-eminent venture firm, had invested more in Zenefits than in any other company. In total, Zenefits has raised about $581 million.

http://www.nytimes.com/2016/02/18/t...at-start-ups.html?partner=rssnyt&emc=rss&_r=0

Pretty fascinating scandal going on, the very short version is: Zenefits is a hot start-up that sells insurance. Many of its sales people weren't licensed to sell insurance. And worse, someone within Zenefits made software to help cheat the licensing process. The CEO stepped down recently and the new CEO promised a robust compliance regime.
 
I own a company and we took a good hard look adopting Zenefits. They promised to save us massive amounts on premiums for all kinds of insurance (health, workers comp, disability, etc)

Seemed too good to be true and we didn't bite.

Phew!
 
Is this what tech disrupting an industry looks like?
Well, we can argue the difference in say, uber, and something like this. Circumventing outdated taxi cartels is quite different from practicing a highly regulated profession like medicine law or insurance. Insurance sales are also not the same as those others I mentioned, but any company receiving insurance advice from unlicensed non professionals puts itself at huge risk of liability, penalties, and compliance issues with law and regulations.
 
Licensed insurance salespeople are often awful already, can't imagine what unlicensed are like😒

Yup. They're pretty lousy and don't know what they're talking about I have found over the years. Can't imagine how much worse it can get now.

I'm more interested to see how Anderseen and Horowitz have reacted to the news. I'm sure this won't put them out of business.
 
They'll get a very light slap on the hand and business will continue like usual.

The size of any potential fines are a joke, anyway.
 
NYTimes said:
To increase revenue, the company moved beyond small businesses to customers with hundreds of employees — and the software struggled to keep up. Instead of pausing to fix bugs, Zenefits simply hired more employees to fill in where the software failed, including repurposing product managers for manual data entry.

What.
 
http://www.wsj.com/articles/zenefits-once-told-employees-no-sex-in-stairwells-1456183097

Zenefits’s new chief executive, David Sacks, last week banned alcohol in the office of the health-insurance brokerage startup as he tries to reverse its rambunctious culture, especially among sales staff.

But it wasn’t just drinking booze that gave the San Francisco headquarters a frat-house feel.

Last June, Emily Agin, the company’s director of real estate and workplace services, sent a note to San Francisco-based employees to cut out crude behavior, lest the company lose access to the building’s stairwells.

The email, reviewed by The Wall Street Journal, read in part:

“It has been brought to our attention by building management and Security that the stairwells are being used inappropriately....Cigarettes, plastic cups filled with beer, and several used condoms were found in the stairwell. Yes, you read that right. Do not use the stairwells to smoke, drink, eat, or have sex. Please respect building and company policy and use common sense...”


In a series of memos to staff this month, Mr. Sacks said it is important to cultivate a more mature work atmosphere befitting a company in the highly regulated health-insurance industry. In a note to staff on Wednesday instituting a new alcohol policy, Mr. Sacks said “it is too difficult to define and parse what is ‘appropriate’ versus ‘inappropriate’ drinking in the office.”

In a statement on Monday, Zenefits spokesman Kenneth Baer said: “As Zenefits’ new CEO has made clear, it is time to turn the page at Zenefits and embrace a new set of corporate values and culture. Zenefits is now focused on developing business practices that will ensure compliance with all regulatory requirements, and making certain that the company operates with integrity as its number-one value.”

It isn’t unusual for startups in Silicon Valley to stock alcohol in the office, or to organize social events, but Zenefits may have taken fraternizing to the extreme. Ultimately the company said its freewheeling sales culture contributed to the resignation of Zenefits founder Parker Conrad as CEO this month.

In a strongly worded letter to staff announcing Mr. Conrad’s departure earlier this month, Mr. Sacks said the company’s culture and tone were inappropriate, and criticized the company’s business practices. “The fact is that many of our internal processes, controls, and actions around compliance have been inadequate, and some decisions have just been plain wrong,” Mr. Sacks said in the letter. “As a result, Parker has resigned.”

Mr. Conrad didn’t respond to a request for comment.

Partying at the startup didn’t mean employees weren’t working hard. Former employees say 15-hour days were common, especially during peak periods.
 
These companies man... If you aren't out here and working for a start-up, it's crazy how frat-like they are. It doesn't surprise me at all that people are screwing around at work.

Not only are they basically kids working together all day, but many of them will live together in big Real World style houses too, party together, go on vacations together. It's just weird.
 
These companies man... If you aren't out here and working for a start-up, it's crazy how frat-like they are. It doesn't surprise me at all that people are screwing around at work.

Not only are they basically kids working together all day, but many of them will live together in big Real World style houses too, party together, go on vacations together. It's just weird.

Probably a trend of millennials entering the workforce?

Gonna be a little weird when the baby boomers retire (if they don't work 'til they drop dead) and the millennials start becoming CEOs and managers.

Wonder if work situation will improve and stuff.
 
Sales reps getting drunk and banging each other in stairwells is funny, but as someone in the group benefits industry I'm more concerned with the rapid movement towards turning health and life insurance into a commodity. Ancillary products are already there. Won't be long before medical is also easier to sell via drop down boxes than finalist meetings. Going to disrupt a lot of jobs.
 
Probably a trend of millennials entering the workforce?

Gonna be a little weird when the baby boomers retire (if they don't work 'til they drop dead) and the millennials start becoming CEOs and managers.

Wonder if work situation will improve and stuff.

I don't know. I used to work in NY and saw nothing like this.

Really, it's that a start-up can be majority 20 year olds. Whereas a more mature company would have a few young people but also mature people.
 
These companies man... If you aren't out here and working for a start-up, it's crazy how frat-like they are. It doesn't surprise me at all that people are screwing around at work.

Not only are they basically kids working together all day, but many of them will live together in big Real World style houses too, party together, go on vacations together. It's just weird.
God. I live with one of my cofounders and it works, but I cannot imagine actually living with multiple co-workers. I would go insane

So you can grow your valuation even further by the time your next round comes.

So many startups have developed a positively unhealthy obsession with their valuation.

Everyone's chasing that exit. Fast money is a powerful motivator
 
The more I read about these sort of stories the more pissed I get at investment culture frankly. We're busting our asses to raise money for a company with strong and stable revenue and a goddamn frat party company engaged in questionable practices like this can raise $500 million. Isn't due diligence supposed to be a thing?
 
The more I read about these sort of stories the more pissed I get at investment culture frankly. We're busting our asses to raise money for a company with strong and stable revenue and a goddamn frat party company engaged in questionable practices like this can raise $500 million. Isn't due diligence supposed to be a thing?

Let's not paint "investment culture" with broad strokes. What goes on at Kleiner Perkins is pretty different from, say, the Fidelity Magellan Fund.
 
As the Zenefits Turns...

“Today, Zenefits is reducing our headcount by roughly 250 employees, or about 17 percent of total employees,” said Sacks. “These changes are almost entirely in the Sales organization, with about a dozen employees in Recruiting. This reduction enables us to refocus our strategy, rebuild in line with our new company values, and grow in a controlled way that will be strategic for our business and beneficial for our customers.”​

http://venturebeat.com/2016/02/26/zenefits-confirms-250-layoffs-17-of-company-workforce/

Sales and recruiting. Who needs those?
 
Oh man, gossipy piece from Buzzfeed

Last May, after arriving in Vegas, the Zenefits employees boarded a party bus and headed to the Cosmopolitan, where suites cost more than $500 a night, according to people who were there. The revelers enjoyed Mexican food and drinks at Javier’s Cantina, before descending on the Omnia at Caesars Palace, where Calvin Harris was spinning. Reserving one table near the dance floor there would cost around $15,000 in minimum drinks expenditures. Zenefits, according to attendees, got three.

The next day, employees congregated at an Encore Beach Club bungalow, which would require at least $15,000 in food and drink spending.
One video obtained by BuzzFeed News shows a shirtless Blond, then the head of sales, dancing poolside to a thumping beat from the Swedish D.J. Avicii, with colleagues lounging nearby in orange Zenefits hats. In quintessential Vegas fashion, the group cooled off with a champagne shower, which, at the cheapest level of $6,000, includes one three-litre bottle of Veuve Clicquot, for drinking, and five bottles of house bubbly — for spraying.​

http://www.buzzfeed.com/williamalden/how-zenefits-big-bet-on-sales-went-wrong#.ioMEgVq1B5
 
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