Entrepreneurship · Startups

Is what Zenefits did really that different?

Porfirio Partida Developer at Nearsoft

February 12th, 2016

I understand that zenefits technically broke the law and has compliance failures. I don't condone it, but why are people coming down so hard on them when other startups take the same tact - basically ignore the law until you're big enough to get noticed - uber did it, youtube did it. I don't think we can come down on some and others?

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

February 12th, 2016

Zenifits was operating in regulated industries where companies spend millions on compliance. The idea that start-ups can flaunt the law is just wrong. Uber, DraftKings and the others mentioned have teams of lawyers.  Start-ups that don't get good legal advice are foolish. Nothing like putting your guts into your new venture and have the authorities close it down just as it starts making money. .

John Arroyo Delivering ecommerce and cloud applications, CEO of Arroyo Labs

February 12th, 2016

It's not just that they broke the law, they gave bad advice to companies and left some vulnerable to minor hr violations.  

I used them for a couple years, they made a mess of our health coverage.  Right as they were kicking off their health coverage the health care act (Obamacare) was taking effect and they were giving bad advice in some cases.  Total amature hour stuff if you ask me...not a fake it till you make it scenario 


Joanan Hernandez CEO & Founder at Mollejuo

February 15th, 2016

To further Michael's post. Macro (the software tool which mas making all this mess), simply wasn't forcing brokers to do their licensing process correctly. Specifically, the tool didn't force people to do their 52 hours to become a licensed insurance broker.

It's quite an small detail with big repercussions. It appears that this feature of not forcing the required time, was an intentional one, contrary to a bug. How many people knew about it, remains the question. More importantly, what did Zenefits (or its associates) gained from saving this time? I don't know!

Was it really worth it to take that risk?

Obviously not.

Cheers!

Carey Martell New Media Expert and Entrepeneur

February 12th, 2016

They used unlicensed brokers to sell insurance, including health insurance. This is quite an order of magnitude different than users posting clips of SNL and Family Guy onto YouTube, or somebody giving you a ride downtown for $20. The kind of fraud that can occur without regulating insurance is pretty devastating to people's lives.

Michael Brill Technology startup exec focused on AI-driven products

February 12th, 2016

There are plenty of startups that get into legal trouble. DraftKings, Theranos, etc. Uber has had, what, hundreds of legal battles and routinely pays 7 digit fines. 

The difference with Zenefits is that it got busted doing something fraudulent that was stupid and unethical and plainly illegal. And they did it in an industry with powerful competitive forces.

You might not like how Uber flaunts local regulations but at least they do it out in the open and in courts.

Juan Zarco Managing Director, Silicon Valley Ventures Growth Partners llp

February 13th, 2016

Actually, Zenefits had already various insurance compliance rules that were totally ignored.  In the case of Uber, Youtube, AirBnB and others the regulatory landscape had not been that clear.  For example, to sell insurance or securities, one needs a license...no different from driving a car.  Yes, you can drive a car without a license, until you get caught.  That is what happened to Zenefits.  It might also be pure ignorance, hubris or sheer idiocy found in SIicon Valley.  Rather than even showing effort to comply with the law, Zenefits ignored it at its peril and its CEO got canned.  The impact is on the investors whose valuations wil go down becasue fo the many state regulatory lawsuits and the expenditures reserved for product development and marketing is redirected to lawyers and penalties. Think about it: when you pay a parking fine or  speeding ticket, are you happy about it?  Neither are the investors.

Greg Welch

February 13th, 2016

The question I have is did the Board know, did Investor's know?  Did some of the largest Venture Firms on the planet not know, look the other way, ignore this, or just not care?

I appreciate and agree with all the comments above but was this just the case of a rogue, arrogant or misguided CEO or is the mentality in the Valley, "to become a unicorn at any and all costs"?

Just a question I would love to hear from the group on. 

Michael Brill Technology startup exec focused on AI-driven products

February 16th, 2016

I don't think anyone is saying their management didn't know. Of course they did. My point is that it wasn't viewed internally as a significant fraud... simply a way to improve productivity. There is an intellectual argument that having people sit in front of a computer longer than they need to simply to hit some 'arbitrary' time target is a waste of time. 

That type of intellectual approach works great for startups but, as Greg mentions, they aren't a startup anymore. Do you blame the CEO? Yeah, sort of. But this was the same CEO that got them from a raw idea to a huge success. And keep in mind that they didn't start out operating in a regulated environment... and it's not natural for an early stage executive to want to bring in an extra layer of friction (like a chief compliance officer), so it's not surprising that this happened. I'd push up a big chunk of the responsibility to the board on this one. 

This isn't some sort of massive fraud, failing or step function in the arrogance of venture-funded startups. It's just a company that got a bit sloppy in an environment that doesn't tolerate the sloppiness. They're paying the price and are moving on.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

February 13th, 2016

How could they not know? The company was selling insurance which requires a license.  The Board is obligated to know. If you don't understand teh company's business, what are you doing on the Board? Did the VC funds do no investigation or due diligence before they put down their money? Unlikely? In most cases like this they shopped for a lawyer who would give them the answer that they wanted, because he thought he was too clever to give the answer that 99% of other lawyers would give.

Juan Zarco Managing Director, Silicon Valley Ventures Growth Partners llp

February 13th, 2016

This is a chronic problem in Silicon Valley, but not Wall Street. SV VCs have considerable excess capital to spend on flimsy executions. They only hire the lawyers they know with term sheet expertise, and don't go beyond that. Whereas a Goldman Sachs hire a team for complete due diligence. That is the difference between SV and NYC.

Whose fault is it? No different from Yahoo: the Board appoint the executives and suffer the consequences from bad judgments. If this were a publicly traded company, shareholders would sue both, and with good reasons.