Business Insider
- A lawsuit filed by former WeWork CEO Adam Neumann this week contains allegations unlikely to help the tech giant’s already tarnished reputation among startup founders, according to industry insiders.
- The lawsuit alleges that SoftBank removed Neumann’s required signature when he refused to agree to change the terms of a planned tender offer, and worked behind the scenes to scuttle a rollup of a China joint venture that was a condition of the offer.
- “This lawsuit is another nail in a coffin that is pretty well sealed,” according to a Columbia Business School professor who has been following SoftBank’s investments closely. “It’s usually not a good idea for a VC to get involved in a really messy lawsuit against one of its largest ventures.”
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SoftBank’s willingness to cancel a tender offer for WeWork insiders including Adam Neumann, who filed a lawsuit earlier this week, is the latest sign the tech investor isn’t worried about its reputation with startup founders who may be already reluctant to take its money.
That’s one conclusion to come from reading the suit Neumann, the founder of WeWork who was ousted last year, filed in Delaware Chancery Court on Monday.
It contains allegations that some startup founders may find distasteful and may preclude an extended legal fight that does more to turn founders away from partnering with SoftBank in the future, according to industry insiders and watchers.
“This lawsuit is another nail in a coffin that is pretty well sealed,” said Len Sherman, a professor at Columbia Business School who has been closely tracking SoftBank’s investments. “It’s usually not a good idea for a VC to get involved in a really messy lawsuit against one of its largest ventures.”
There’s recent precedent, of course. Benchmark Capital moved to oust Uber Technologies’ CEO Travis Kalanick and also had a representative on the WeWork board when Neumann was ousted, sparking concern it may be damaging its founder-friendly reputation.
But SoftBank and Neumann’s fight looks to take the founder-investor spat to another level. Over 32 pages in Neumann’s suit, three law firms representing the WeWork founder detail a series of steps SoftBank took to scuttle a deal to allow shareholders to sell $3 billion in shares back to SoftBank.
Benchmark and Neumann would have been the largest beneficiaries of the sale, with Neumann having the option to sell as much as $970 million. The sale was part of a larger agreement, which included terms for Neumann to hand over control of the company.
While Neumann handed over control to SoftBank, who used it to name a new CEO and slash thousands of jobs, the tender offer never went through.
In particular, Neumann alleges SoftBank took steps to deceive him. When he refused to agree to a change in the documents that would have allowed SoftBank to provide debt financing to WeWork before completing the tender offer, in contravention of the original agreement, it “simply removed Plaintiffs’ signature block from the document,” the lawsuit said.
In another example, Neumann alleged that SoftBank actively tried to prevent the roll up of its China joint venture which was a condition to closing the tender offer. SoftBank instead found an alternative financing route for the China JV with a minority investor, which would “give [SoftBank] an excuse for refusing to close the Tender Offer,” Neumann’s lawsuit said.
The tender offer was part of a larger $9.5 billion rescue package that SoftBank arranged for WeWork in October after the coworking company canceled its initial public offering and came within weeks of running out of money. SoftBank backed out of the tender last month, telling shareholders that certain conditions had not been met.
In the communication, reviewed by Business Insider, the company cited numerous investigations initiated after the original agreement was signed, COVID-19-related restrictions that have been placed on WeWork, and the failure to close the China JV and a second one for Asia outside China and Japan.
“SoftBank will vigorously defend itself against these meritless claims,” Rob Townsend, SoftBank’s chief legal officer, said in a statement emailed to Business Insider this week. “Under the terms of our agreement, which Adam Neumann signed, SoftBank had no obligation to complete the tender offer in which Mr. Neumann – the biggest beneficiary – sought to sell nearly $1 billion in stock.”
A SoftBank spokesperson declined to comment further for this story.
The lawsuit, plus another one filed last month by a special committee of WeWork’s board, will come down to what each side can prove with documents about the timing and intent of their actions.
“There is already a fair amount of damage to their brand with startups,” said Sandy Kory, managing director at the boutique tech investment bank Horizon Partners.
As recently as a year ago, SoftBank founder Masayoshi Son enjoyed a reputation in Silicon Valley for being friendly to founders, showering idealistic startup creators with, in many cases, more money than they’d ever seen. In many cases his largesse often meant the difference between playing it safe and shooting for the stars. In a subset, his money was the difference between going after an idea and relegating it to an unattainable dream.
In those days, Son would shower entrepreneurs with attention and money, inviting them to his Tokyo headquarters or his Woodside, California mansion. Son would often meet with founders for minutes, deciding whether he wanted to back their company. The meetings were “exhilarating,” Cohesity founder Mohit Aron told CNBC in 2018.
All of that changed in October, when SoftBank, in the wake of WeWork’s failed public offering, flipped a switch and began pushing companies to prioritize profits over growth.
That month, newly installed WeWork executive chairman Marcelo Claure told employees the firm would begin slashing expenses. SoftBank-backed car leasing company Fair.com fired 40% of its staff, with the Verge reporting that SoftBank had pushed the company to trim operating costs during a series of meetings over the preceding month.
In all, SoftBank-backed companies have slashed more than 7,500 jobs since last fall, many of them added when growth was the mandate. It also took steps to replace executives, canceled deals, or tried to renegotiate terms. The tactics angered some founders who felt the script had been unfairly flipped.
Are you a founder who has taken SoftBank’s money and want to share your perspective? Do you have a tip about working at a SoftBank-backed company? Email the reporter at dcampbell [at] businessinsider [dot] com or reach him by phone, text, Signal or WhatsApp at 917-673-9252.
SoftBank has pushed out founders in the past. In 2015, for example, SoftBank-backed Indian property firm housing.com ousted its founder. But with the raising of the $100 billion Vision Fund in 2017, SoftBank’s actions have been scrutinized.
Even so, there are reasons to understand why SoftBank may be willing to follow through with a messy legal dispute, according to Kory and Sherman.
One is that Neumann’s reputation isn’t spotless. “They realize that Neumann isn’t an icon,” Kory said. And even if they scare off some founders, SoftBank will still be able to invest in startups, he said.
Another is that there’s a lot of money at stake. Looking at SoftBank’s portfolio which is suffering from a spate of damaged companies, it makes sense for them to recover whatever they can, Sherman said.
“Why shouldn’t they fight it? $3 billion is $3 billion,” Sherman said. “That’s a lot of money.”
In the long run, this will be just one of many factors that go into determining how founders think about taking SoftBank money in the future, according to Zach Weinberg, the co-founder of Flatiron Health, the electronic medical records and oncology research platform sold to Roche for $2 billion in 2018.
“I’m not sure it’s a single thing like this that will impact its ability to source, but the overall narrative of them being fairly sloppy investors,” Weinberg said by email. “It’s a combination of everything.”
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