A number of commenters here have compared Zenefits' questionable compliance with Uber, Lyft, and Airbnb. What Zenefits was doing is fundamentally different, and much more problematic.
Lyft and Uber skirt similar kinds of seemingly useless regulation but they're completely up front about it. They don't pretend that their drivers are licensed or get any benefit from having licensed drivers in any way. They're simply offering a different product than what taxis offer - getting a ride with a random unlicensed stranger.
Lyft, Uber, and Airbnb are betting that reputation systems (ratings, reviews, etc.) will provide assurance for consumers just as well if not better than government regulation. So far the market is showing they just might be right.
Zenefits seems to have been driven by a similar cultural distaste for onerous and probably out-dated regulation - who can blame them? But instead of letting the market decide how valuable that regulation actually is they simply cut corners when they hoped no one would find out.
That deceptiveness, more so than the regulation dodging itself, is ultimately really bad for a B2B business.
Lyft, Uber, and Airbnb can't avoid regulation forever. They've just been lucky so far. Eventually there will be a high profile incident—someone important will get raped or murdered. The political response will be 1000x what their lobbyists can handle.
It is inevitable. The reality is that this is how a lot of regulation starts. It doesn't always come from an anticompetitive place. We just forget that we actually asked for the regulation. Once we have, it's nice to always be able to blame the government or some regulator when something goes wrong. And then someone else can come in and "disrupt" the market by using a loophole of pretending like the regulation doesn't apply to them, when it's clearly intended to.
> Lyft, Uber, and Airbnb are betting that reputation systems (ratings, reviews, etc.) will provide assurance for consumers just as well if not better than government regulation. So far the market is showing they just might be right.
Like Zenefits, the government regulation that Lyft, Uber, and Airbnb are skirting has one important consequence: It protects the rest of us who are not their customers from them. If a Yellow Cab driver does something dumb, malicious, or against the rules, I can complain to the city regulatory authority and that agency can take action. If it fails to take action, I can pressure my elected leaders to correct that stance. If it takes action in an open way that is transparent to the populace and finds that I am not correct in my complaint, so be it. I need not be a customer of Yellow Cab to complain about the actions of one of its drivers.
Replacing public rules enforcement with "reputation systems" is completely useless if I never enter into a business arrangement with those companies. As it stands, the only way I can complain about any of them--especially with Zenefits actively working to hide its bypass activities from the relevant authorities--is to be a customer and poorly rank some allegedly-independent-contractor. Or I can use Twitter and complain publicly but get drowned out by the noise.
Airbnb regularly pretends that their rentals are legal in their advertisements to consumers despite knowing that the majority of their revenue in places like NYC is derived from illegal whole-apartment-without-the-owner-present rentals.
I believe (after the investigations are concluded) that a word used to describe the operations for Zenefits will be 'fraudulent.'
For the rest, as you state, they have been largely clear about their opposition to perceived out-of-date regulation and have worked tirelessly across the country and world to have new rules or exemptions or trials put in place.
Being disruptive isn't the same thing as breaking the law with willful abandon.
I think the bigger difference is that the rules that Uber, Lyft & AirBnB are bending directly result in customer benefit whereas in the Zenefits case, there is little or no or even negative customer benefit.
The main difference is that Lyft, Uber and Airbnb sell mostly to consumers who are quite happy to make their own decision about which state regulations to bend when it's in their interest.
Zenefits sells to HR departments whose raison d'être is to make sure the company complies with its duty of care to employees, including observing all the relevant regulations. The idea one of their partners might have been using inadequately trained and unlicensed insurance brokers that didn't really know what they were doing to sell their employees expensive health insurance plans is kryptonite for that partnership.
(and I say this as someone who always ran the blindingly obvious "how not to take a bribe or sexually harass your colleagues" compulsory videos in the background whilst getting on with more productive work)
Lyft and Uber both spent years pretending that their drivers were insured while carrying passengers despite very clear evidence to the contrary. Even today they pretend to prospective drivers that they won't end up screwed if they have an accident while 'on the app' but without a passenger. Airbnb did the same thing.
I'm skeptical of the source of this article. My guess is Zenefits spoke off the record to do damage control in Sacks' favor. I have no proof but will lay out why below.
> In a Feb. 1 meeting at its blandly luxurious Sand Hill Road offices, venture firm Andreessen Horowitz urged the chief executive officer of one of its most prized and promising companies to resign.
1) The first sentence references a meeting that very few people would know the details of. Likely only those at a16z plus a few executives around Parker/Sacks. Unlikely Parker is talking to the press, given the legal issues swirling.
> Days after Chief Operating Officer David Sacks gave that information to Lars Dalgaard, an Andreessen partner who sits on Zenefits’ board, Conrad was out, say three people familiar with the matter. At Conrad’s suggestion, they replaced him with Sacks
2) Sacks gave the information to a partner, then Conrad (basically blamed for fraud) suggested they replace him with Sacks. Which raises some questions:
a) Why trust Conrad? He's fired + off the board + likely under legal investigation.
b) As COO, no question as to whether Sacks knew anything or that they needed fresh blood? Also, he was suggested by the person who was just removed for fraud.
Lastly, we get a picture that sounds a lot less like Conrad giving a voluntary recommendation:
> At the meeting, Conrad tentatively agreed to resign, relinquish his board seat, and make Sacks CEO, say three people close to the company.
This story starts out reporting on a board ousting a CEO after a public scandal involving non-compliance with various laws, which incited multiple government investigations.
It then takes an abrupt turn and starts repeating everyone's favorite Silicon Valley trope du jour: the unicorn bubble is bursting, the fundraising environment is tightening up, and the halcyon days of multi-billion dollar valuations for everyone are over.
Successful startups all, and I mean ALL, have serious compliance issues. They probably do not not realize their problems. Some actively try to avoid knowing, such as by shunning legal advice that may inform them of inconvenient obligations. Part of the going public and/or being bought out process involves measuring the rate of non-compliance.
A unicorn wants to go public, but that means first getting your compliance ducks in nice rows. The growing realization that unicorns are in fact very non-compliant pushes them towards the easier route of being acquired/merged. So there is a direct link between compliance and the very existence of unicorns.
One tangential connection...Startup makes progress flouting the law, they hit a wall they can't overcome (get persecuted for). Uber has run the same risk (more lax laws), but approach was basically the same.
Correct. What went wrong at Zenefits and other places was failure to correctly execute the kind of submarine approach to compliance exemplified by PayPal. Lots of startups skate near the edge and sometimes get dinged by regulators. The question is whether you do it to excess and/or make yourself a target. Failure to navigate this can make you an ex-unicorn, but it says nothing about unicorns in general.
The obvious connection to me is that when the numbers are excellent, you have to do something pretty egregious to attract scrutiny. But when the numbers are ok or bad, suddenly people become much more interested in the details.
I note that the Zenefits CEO was ousted after missing targets and during a time when I think we can all at least agree that the industry is less exuberant. Maybe he would have gotten sacked anyhow, but missing the numbers sure didn't help him.
Considering Airbnb and Uber, two of the largest and considered most-successful startups are carefully dodging the law, the upside is worth the risk. I disagree with it, but I think VCs don't care much about following legal frameworks until it's too late.
I work building compliance software, and the Zenefits situation stood out to me immediately as very different from other stories. Ben Thompson nailed the reasons why - the comparison doesn't hold:
Does anyone have any more information about the "52 hour online training program" that "the Macro" allowed them to skip? If that training program is any bit as useless as "online driving school", I can sort of understand how the Macro came to be...
Dodging the law is risky but can have upsides. Maybe you get Aereo'd or maybe you can pull an Uber. Both airbnb and Uber exploited holes in current regulation.
The limited-liability corporation is fundamentally flawed when it comes to massive negative externalities. Even if regulators take AirBnB and Uber for every cent they have (and I hope they do, both have shown themselves to be fundamentally inimical to the rule of law), the people and organizations that funded their criminality will get away with nothing worse than losing their investment.
Can someone tell me why is it such a big deal when person sells an insurance without having a proper license? Its not as if the insurance policy itself is fraudulent. The buyer is buying the insurance policy and not the credentials of the broker.
Because even for people who are actual high-level experts on it, correctly representing what a policy does and does not offer, and explaining that in a way that's factually correct, compliant with the local laws governing insurance, and understandable without being misleading to a potential customer, is incredibly difficult, to such a degree that your comparison of it to hair braiding should be prima facie evidence of lack of good faith on your part.
At a guess (and completely a guess), legal compliance. Insurance laws can vary widely, and subtly state-by-state. A licensed broker will understand the relevant intricacies and be able to sell you a policy that is compliant with them.
If you buy a policy from an unlicensed broker, and it turns out not to be in compliance, the carrier probably isn't obligated to pay out, whether you're paid up on your premiums or not. The carrier doesn't want to be at fault for not having to pay out, so they offload that onto the broker, and "protect" the consumer (really, though, themselves) with a licensure regime.
Insurance companies, being in the business of managing and mitigating risk, have all kinds of meticulous i-dotting and t-crossing procedure and regulation. This is — again, at a guess — just another example of that.
I think the broker does make a number of attestations that if not properly done are fraud and render the policy void (as the insurance companies wrote the law).
It is for a similar reason why buying from a broker stocks, bonds, futures, ect have to pass the series 7 and 63/65/66 from FINRA. Insurance is a financial product, letting someone buy the wrong insurance because they misunderstand it and you will make more money from that purchase is a form of fraud.
This is such nonsense. Zenefits allegedly broke the law under Conrad's leadership and he was ousted. This is not a sign of any macro changes - companies that break compliance regulations that could send their employees to jail have never been in fashion.
Read Ben Thompson's piece about how this differs from more "gray area" compliance breaches:
I'm not sure there's a whole lot from this story to apply elsewhere. David Sacks is who you want to be running the show. He has 2 fairly epic successes under his belt (PayPal and Yammer), one of the keenest product minds in the business, nearly unlimited access to funding and talent, moral authority as a founder and lawyer and operator to clean up the mess, etc.
Note that this article has new information compared to the previous articles about the Zenefits incident. (namely, a16z's involvement as the catalyst for the ouster)
I have no issues with Zenefits and I am actually happy they were able to see phenomenal growth. However I must say this whole situation of the CEO stepping down feels staged to me.
It is as if everyone was in on it and this move was calculated by all of them a long time ago. Like when we ready and my stocks are safe and sound blame it on me.
Stepping down? He was fired by the board. He did a damn good job growing the business but didn't bother with the necessary compliance, legal, and bureaucratic steps. The company needs a new type of leader to take them to IPO otherwise we'll have another disaster like we did with Groupon and Andrew Mason.
Oh, you have no issues with Zenefits so the whole thing must be staged! Of course! As if it's so hard to believe a CEO would engage in unethical behavior. Sheesh.
It really is a pity we live in a world where a few can ruin the party for all. I'm sure there are worthy startups out there with a solid product, solid team, and solid practices but they may suddenly die out from VC capital because of the fear/panic triggered by the couple of bad ones.
My company used Zenefits for a while, mainly because one of our execs is friends with one of theirs. We had many, many problems with payroll. When you have employees repeatedly coming to you because their paychecks are screwed up, you've got to do something. We ended up switching away, and now use ADP for payroll instead. We've had no problems since. (This was before the big public slap fight between Zenefits and ADP, which was made even more amusing given our experience.)
I would not recommend anyone use Zenefits for any reason, regardless of whether it turns out they complied with legally-mandated training requirements or not. The fact that they were so incredibly sloppy is just inexcusable. You cannot mess around with people's pay like that.
(Posted with a throwaway account for hopefully obvious reasons.)
I rather agree this article seemed to connect two related but definitely not connected things.
That being said, it is interesting how many visible unicorns are either flaunting the law or outright frauds (i.e. zenefits, uber, airbnb, theranos).
Happily or sadly (per your point of view) - it's seems still worth it. The Zenefits ex-CEO lost his job but he never ever needs to work again (and can afford the best of the best lawyers if needed)
A lot of the HN-cynic crowd is forgetting here that if anything, they were bypassing stupid sets of regulations. There is nothing ethically or morally wrong here.
[+] [-] skewart|10 years ago|reply
Lyft and Uber skirt similar kinds of seemingly useless regulation but they're completely up front about it. They don't pretend that their drivers are licensed or get any benefit from having licensed drivers in any way. They're simply offering a different product than what taxis offer - getting a ride with a random unlicensed stranger.
Lyft, Uber, and Airbnb are betting that reputation systems (ratings, reviews, etc.) will provide assurance for consumers just as well if not better than government regulation. So far the market is showing they just might be right.
Zenefits seems to have been driven by a similar cultural distaste for onerous and probably out-dated regulation - who can blame them? But instead of letting the market decide how valuable that regulation actually is they simply cut corners when they hoped no one would find out.
That deceptiveness, more so than the regulation dodging itself, is ultimately really bad for a B2B business.
[+] [-] themagician|10 years ago|reply
It is inevitable. The reality is that this is how a lot of regulation starts. It doesn't always come from an anticompetitive place. We just forget that we actually asked for the regulation. Once we have, it's nice to always be able to blame the government or some regulator when something goes wrong. And then someone else can come in and "disrupt" the market by using a loophole of pretending like the regulation doesn't apply to them, when it's clearly intended to.
[+] [-] techsupporter|10 years ago|reply
Like Zenefits, the government regulation that Lyft, Uber, and Airbnb are skirting has one important consequence: It protects the rest of us who are not their customers from them. If a Yellow Cab driver does something dumb, malicious, or against the rules, I can complain to the city regulatory authority and that agency can take action. If it fails to take action, I can pressure my elected leaders to correct that stance. If it takes action in an open way that is transparent to the populace and finds that I am not correct in my complaint, so be it. I need not be a customer of Yellow Cab to complain about the actions of one of its drivers.
Replacing public rules enforcement with "reputation systems" is completely useless if I never enter into a business arrangement with those companies. As it stands, the only way I can complain about any of them--especially with Zenefits actively working to hide its bypass activities from the relevant authorities--is to be a customer and poorly rank some allegedly-independent-contractor. Or I can use Twitter and complain publicly but get drowned out by the noise.
That's no substitute, in my opinion.
[+] [-] JohnTHaller|10 years ago|reply
[+] [-] davidu|10 years ago|reply
For the rest, as you state, they have been largely clear about their opposition to perceived out-of-date regulation and have worked tirelessly across the country and world to have new rules or exemptions or trials put in place.
Being disruptive isn't the same thing as breaking the law with willful abandon.
[+] [-] pbreit|10 years ago|reply
Here's a good take: https://stratechery.com/2016/zenefits-and-regulation/
[+] [-] notahacker|10 years ago|reply
Zenefits sells to HR departments whose raison d'être is to make sure the company complies with its duty of care to employees, including observing all the relevant regulations. The idea one of their partners might have been using inadequately trained and unlicensed insurance brokers that didn't really know what they were doing to sell their employees expensive health insurance plans is kryptonite for that partnership.
(and I say this as someone who always ran the blindingly obvious "how not to take a bribe or sexually harass your colleagues" compulsory videos in the background whilst getting on with more productive work)
[+] [-] jacalata|10 years ago|reply
[+] [-] tyre|10 years ago|reply
> In a Feb. 1 meeting at its blandly luxurious Sand Hill Road offices, venture firm Andreessen Horowitz urged the chief executive officer of one of its most prized and promising companies to resign.
1) The first sentence references a meeting that very few people would know the details of. Likely only those at a16z plus a few executives around Parker/Sacks. Unlikely Parker is talking to the press, given the legal issues swirling.
> Days after Chief Operating Officer David Sacks gave that information to Lars Dalgaard, an Andreessen partner who sits on Zenefits’ board, Conrad was out, say three people familiar with the matter. At Conrad’s suggestion, they replaced him with Sacks
2) Sacks gave the information to a partner, then Conrad (basically blamed for fraud) suggested they replace him with Sacks. Which raises some questions:
Lastly, we get a picture that sounds a lot less like Conrad giving a voluntary recommendation:> At the meeting, Conrad tentatively agreed to resign, relinquish his board seat, and make Sacks CEO, say three people close to the company.
[+] [-] unknown|10 years ago|reply
[deleted]
[+] [-] mrshoe|10 years ago|reply
It then takes an abrupt turn and starts repeating everyone's favorite Silicon Valley trope du jour: the unicorn bubble is bursting, the fundraising environment is tightening up, and the halcyon days of multi-billion dollar valuations for everyone are over.
There's really no connection between the two.
[+] [-] sandworm101|10 years ago|reply
A unicorn wants to go public, but that means first getting your compliance ducks in nice rows. The growing realization that unicorns are in fact very non-compliant pushes them towards the easier route of being acquired/merged. So there is a direct link between compliance and the very existence of unicorns.
[+] [-] jmspring|10 years ago|reply
[+] [-] Zigurd|10 years ago|reply
[+] [-] wpietri|10 years ago|reply
I note that the Zenefits CEO was ousted after missing targets and during a time when I think we can all at least agree that the industry is less exuberant. Maybe he would have gotten sacked anyhow, but missing the numbers sure didn't help him.
[+] [-] steele|10 years ago|reply
[+] [-] JonFish85|10 years ago|reply
[+] [-] tommynicholas|10 years ago|reply
https://stratechery.com/2016/zenefits-and-regulation/
[+] [-] phibit|10 years ago|reply
[+] [-] rhino369|10 years ago|reply
Just breaking the law is stupid.
[+] [-] lmm|10 years ago|reply
[+] [-] manishsharan|10 years ago|reply
Other wise it seems to me that is requirement is just as unnecessary as requiring cosmetology license for hair braiding ( see http://www.texastribune.org/2015/04/06/bill-would-untangle-m...)
[+] [-] ubernostrum|10 years ago|reply
[+] [-] rosser|10 years ago|reply
If you buy a policy from an unlicensed broker, and it turns out not to be in compliance, the carrier probably isn't obligated to pay out, whether you're paid up on your premiums or not. The carrier doesn't want to be at fault for not having to pay out, so they offload that onto the broker, and "protect" the consumer (really, though, themselves) with a licensure regime.
Insurance companies, being in the business of managing and mitigating risk, have all kinds of meticulous i-dotting and t-crossing procedure and regulation. This is — again, at a guess — just another example of that.
[+] [-] jmount|10 years ago|reply
[+] [-] shanacarp|10 years ago|reply
[+] [-] tommynicholas|10 years ago|reply
Read Ben Thompson's piece about how this differs from more "gray area" compliance breaches:
https://stratechery.com/2016/zenefits-and-regulation/
[+] [-] pbreit|10 years ago|reply
[+] [-] minimaxir|10 years ago|reply
[+] [-] minimaxir|10 years ago|reply
[+] [-] jackgavigan|10 years ago|reply
[+] [-] rokhayakebe|10 years ago|reply
[+] [-] rokhayakebe|10 years ago|reply
I have no issues with Zenefits and I am actually happy they were able to see phenomenal growth. However I must say this whole situation of the CEO stepping down feels staged to me.
It is as if everyone was in on it and this move was calculated by all of them a long time ago. Like when we ready and my stocks are safe and sound blame it on me.
[+] [-] meritt|10 years ago|reply
[+] [-] minimaxir|10 years ago|reply
[+] [-] draw_down|10 years ago|reply
[+] [-] pbreit|10 years ago|reply
[+] [-] jsprogrammer|10 years ago|reply
Of course it was staged: you have a corporate guard change. What don't you "buy" about this story?
[+] [-] smaili|10 years ago|reply
[+] [-] minimaxir|10 years ago|reply
[+] [-] throwaway479384|10 years ago|reply
I would not recommend anyone use Zenefits for any reason, regardless of whether it turns out they complied with legally-mandated training requirements or not. The fact that they were so incredibly sloppy is just inexcusable. You cannot mess around with people's pay like that.
(Posted with a throwaway account for hopefully obvious reasons.)
[+] [-] draw_down|10 years ago|reply
[+] [-] tempodox|10 years ago|reply
The most valuable asset of a startup seems to be hot air.
[+] [-] dufalop|10 years ago|reply
That being said, it is interesting how many visible unicorns are either flaunting the law or outright frauds (i.e. zenefits, uber, airbnb, theranos).
Happily or sadly (per your point of view) - it's seems still worth it. The Zenefits ex-CEO lost his job but he never ever needs to work again (and can afford the best of the best lawyers if needed)
[+] [-] jonesb6|10 years ago|reply
[+] [-] tempodox|10 years ago|reply
[+] [-] hoodoof|10 years ago|reply
The language indicates that the VC's are the controlling owners of these companies.
[+] [-] luckydata|10 years ago|reply
[+] [-] jsprogrammer|10 years ago|reply
Anyone know the investment thesis on that?
[+] [-] rajacombinator|10 years ago|reply