Even as the company behind WeWork, the We Company, seeks to attract even more investors through its initial public offering, its $47 billion valuation is being heavily questioned by many naysayers who point to the company’s lack of profitability.
But based on WeWork’s Wednesday IPO prospectus, CEO Adam Neumann and its current investors appear to think the company has a chance at reaching a market cap of $90 billion—which would make the firm larger by value than General Electric, which is valued at about $82 billion, CVS Health ($78 billion), and T-Mobile ($76.8 billion).
Indeed, Neumann, who earned no equity awards from the company prior to 2019, could be rewarded with hundreds of millions in equity depending on how shares of We Company trade in the public sphere. Neumann is set to earn 9.4 million so-called profits interests, which entitle the holder to one Class C Common share of the We Company, if WeWork becomes a $90 billion company and maintains that market capitalization for at least 60 days. Neumann is also set to earn two separate 7.1 million profits-interests payouts should WeWork attains a valuation of $50 billion and separately $72 billion for at least 60 days each.
To be clear, the profits interests, or a stake in the company’s overarching limited liability holding firm, the We Company Partnership, entitles the owner to one Class C common share of We Company, which is worth 20 votes.
The equity came as part of a plan to convince the firm’s leaders to file for an IPO, per the filing.
“As the Company grew, our board of directors desired to provide a significant incentive to Adam to conduct an initial public offering, based on the premise that the Company’s value would be maximized as a public entity rather than remaining privately held,” the S-1 filing read.
As such, Neumann will also receive 9.4 million profits interests that vest over a period of five years upon the completion of the offering. Prior to the IPO filing’s reveal, Neumann also posted an IOU to the tune of $362.1 million to the company in order to acquire some 9.4 million stock options, which he later repaid by surrendering shares in the company. WeWork later issued profits interests to Neumann equal to the number of shares he surrendered.
It’s unclear if Neumann will receive additional compensation beyond these shares, as the CEO does not have an employment agreement with WeWork.
One commonly repeated argument against WeWork’s $47 billion valuation centers around the financials of its publicly traded and much more mature competitor, Luxembourg-based IWG. That firm offers shared workspaces in several countries and claim a global square-footage of about 50 million compared to WeWork’s potential 40 million. Even when focused purely on financial statements, IWG is larger. It booked revenue of $3.4 billion and income of $149.7 million in 2018; WeWork posted revenue roughly half of that at $1.8 billion in 2018 and loss of $1.6 billion.
But that pecking order crumbles when it comes to how investors value the company. While IWG is trading with a valuation of around $4.5 billion (implying investors are willing to pay roughly $30 for a dollar of profit), WeWork is still in the red but is valued at over ten times IWG.
And with these new market capitalization-based incentives, Neumann and his team are not necessarily being incentivized to improve the company’s financial metrics, says Professor Jay Ritter, an IPO expert at the University of Florida.
“A company can boost its market cap by making stock-financed acquisitions and issuing shares in follow-on offerings, even though these actions might actually hurt the per share value of the company,” he said in an email. “The incentive compensation should be based on the total return (capital gains plus dividends) per share if the purpose is to align the interests of management and shareholders.”
Granted, Neumann is the company’s largest shareholder already—which arguably is plenty of incentive to keep things running smoothly. And to WeWork’s credit, revenue has been growing rapidly, clocking in at $1.5 billion in the first six months of the year, compared to $1.8 billion for all of 2018.
But in a market that is in the late stages of a bull run and signs of a global slowdown emerging, WeWork is certainly facing an uphill battle.
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