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Zenefits Loses Over Half Of Its Value

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Parker Conrad, former CEO of Zenefits, in happier times.Photograph by Drew Alitzer

Zenefits, the HR software startup that has accused its founder and former CEO of regulatory impropriety, is slashing its valuation to $2 billion from $4.5 billion.

This is not a so-called “down-round,” in which a company raises new equity at a lower share price than the last time around. Instead, this is a repricing of existing stock.

The move was announced internally today via an email to Zenefits employees by current CEO David Sacks, who was cleared of wrongdoing by the same investigation that found former boss Parker Conrad had written a software program called Macro to circumvent state licensing requirements.

In the email, Sacks says that he has spent several months “in discussions with a number of our major investors about how we can reset our relationship… and get fully aligned with the new Zenefits.”

Per terms of the agreement, investors who participated in the company’s $500 million Series C round in May 2015 will have their ownership stake increased from around 11% to around 25%. The Series C investors also will receive a permanent board seat, while the board also will create a compliance committee. Those that invested in the Series A and Series B rounds “will receive small adjustments to offset their dilution.”

Related: Will ex-Zenefits employees sue the company?

So far the investor agreement has been approved by such Zenefits investors as TPG Growth, Fidelity Investments, Insight Venture Partners and Andreessen Horowitz. Sacks writes that the company “will be offering it to all our investors shortly.”

Other existing Zenefits shareholders include Comcast Ventures, Founders Fund, Foresite Capital, Institutional Venture Partners, Khosla Ventures, Panorama Point Partners, Otter Rock Capital, Peregrine Ventures and Sound Ventures.

“This is a unique situation, we’ve never seen it before and we don’t expect to see it again,” said a spokesperson for Andreessen Horowitz.

All investors who sign the agreement also are being required to sign a release of claims against the company. Excluded from the release, however, are claims against the $10 million of stock that Parker Conrad sold personally via earlier financings.

Investors that do not sign the agreement will still have the value of their shares diluted, but would retain the right to sue.

Sacks’ email also includes information for employees concerned that the recapitalization will negatively impact the value of their own equity in the company.

Each non-executive employee of Zenefits will be “trued up” through a special stock grant equal to 25% of their current number of shares. This new grant will vest 100% in 12 months. It will consist of RSUs rather than options so that employees don’t have to pay a strike price. Our executive team will also receive additional 4-year grants to incentivize them. However, co-founder/CTO Laks Srini and I have offered not to participate in this true-up in order to ensure that there are enough shares for employees. We will be diluted to the same extent as any other common stockholder.

Finally, Sacks writes that Zenefits recently offered all employees the option of a two-month separation package, but that only around 10% accepted. That means that, post separations, Zenefits will have around 900 remaining employees.