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In Rare Move, Zenefits Slashes Own Valuation Following Scandal

July 1, 2016

SAN FRANCISCO -- In an unusual and dramatic move, scandal-plagued startup Zenefits is willingly slashing its own valuation by more than half in an effort to restore its relationship with investors.

As part of a rejiggering of the $500 million Series C fundraising round the company closed last year, Zenefits will trim its $4.5 billion valuation down to $2 billion. The change is intended to appease investors who poured money into the company before news broke that its employees were selling health insurance coverage without meeting licensing requirements.

“We have been working on a new basis on which they can recommit to the company and get fully aligned with the new Zenefits,” CEO David Sacks wrote in an email to employees, a copy of which was obtained by this newspaper. Sacks announced the change Thursday afternoon.

The San Francisco-based HR software startup has been under fire since revelations emerged that the company used a secret program that enabled employees to fudge training required for health insurance brokers. The company lost its CEO and cut 250 jobs in the wake of the scandal, followed by another 106 jobs last month.

Sacks, who replaced former CEO Parker Conrad, also offered employees voluntary buyouts as part of his post-scandal cleanup efforts -- but 90 percent chose to stay, he wrote Thursday.

Sacks’ retooling of the Series C funding round increases those investors’ ownership of Zenefits from 11 percent to 25 percent, thereby reducing the value of the company. Investors who agree to the deal also will give up their right to sue the company.

Sacks says the agreement has been approved by several key investors, including Fidelity and Andreessen Horowitz.

“This is a unique situation -- we’ve never seen it before, and we don’t expect to see it again,” an Andreessen representative wrote in an emailed statement. “We continue to believe in our investment in Zenefits; the company serves 20,000 businesses today and is one of the best examples of product-market fit we’ve ever seen.”

These days, it’s hardly unusual to see “unicorn” startups forced to lower their sky-high valuations in order to drum up more cash from investors. DoorDash, Foursquare and Jawbone have been among the victims this year.

But what is unusual is to see a startup take such a cut on a round of funding that’s already closed.

Sacks pointed out one reason he decided to take such a rare step: “At some point,” he wrote, “this company will want to sell its shares again, and future prospective shareholders will look closely at how we treated our current shareholders.” Marisa Kendall covers startups and venture capital. Contact her at 408-920-5009 and follow her at Twitter.com/marisakendall .