The story behind Zenefits

Is what Zenefits did really that different?

Porfirio Partida
Developer at Nearsoft

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?

John Arroyo

John Arroyo Entrepreneur • Advisor
Develop Web Apps, eCommerce, and Advise Start Ups
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
Carey Martell

Carey Martell Entrepreneur
New Media Expert and Entrepeneur
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
Michael Brill Entrepreneur
Building the first global direct marketplace for winemakers |
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.
Irwin Stein

Very experienced (40 years) corporate,securities and real estate attorney.
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. .
Juan Ramon Zarco

Juan Ramon Zarco Entrepreneur
President, COO at AllRest Technologies LLC
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

Greg Welch Entrepreneur
Founder, President & CEO at SquishClip
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.
Irwin Stein
Very experienced (40 years) corporate,securities and real estate attorney.
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 Ramon Zarco
Juan Ramon Zarco Entrepreneur
President, COO at AllRest Technologies LLC
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.
Irwin Stein
Very experienced (40 years) corporate,securities and real estate attorney.
Mr. Zarco: I have represented VC funds that conduct significant due diligence. There are many good lawyers in SV.. Yes there are many stupid people in Silicon Valley and on Wall street as well. Any lawyer who looked a term sheet for Zenifits, saw that they were not licensed to sell insurance and recommended an investment committed malpractice. If any VC fund doesn’t actually investigate companies into which they invest, I have a bridge to sell them.
Michael Brill
Michael Brill Entrepreneur
Building the first global direct marketplace for winemakers |
It’s not arrogance or too much money or stupid people. It’s simply that a 1,000+ person company is too big to take the same shortcuts that help startups achieve rapid growth. Many, many startups take shortcuts: you scrape sites in violation of TOS or ignore local regulations because you’re under the radar. If you get busted, maybe you get a cease & desist or a stern look by a regulator. A “my bad” usually suffices. This is part of what makes scrappy startups execute so much better than incumbents.

It’s entirely conceivable that the board didn’t know about Macro because it wasn’t considered material… just a productivity hack. The failure is that the transition from scrappy startup to significant entity didn’t bring with it additional controls – controls that would probably be viewed as friction by almost any industry outsider.
It’s hard to shift from “move fast and break the rules” to “dot i’s and cross t’s.” It slows down growth and it’s no fun. If there’s any failure on the board’s part (and it’s a extremely smart board), it’s that it took this long to get a chief compliance officer.
Joanan Hernandez
Joanan Hernandez Entrepreneur
CEO & Founder at Mollejuo
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.

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