Zenefits halves its valuation in exchange for legal claims release

The troubled health benefits broker struck a deal with investors in an attempt to mitigate some of its potential legal issues

Life & Health

By Lyle Adriano

In an attempt to reduce the number of potential legal claims lodged against it, troubled health insurance broker Zenefits struck a deal with a number of investors Thursday to cut its valuation by more than half to $2 billion.

Since its founding two years ago, the HR services company has suffered from delayed sales, layoffs, and questionable management decisions, and has been subjected to regulatory investigations as a result—all symptoms that could shake investor confidence.

On Thursday, the recently-appointed CEO David Sacks confirmed that the company has been in talks with investors to work out a deal, allowing Zenefits to move past its problems.

“Since shortly after becoming CEO, I have been in discussions with a number of our major investors about how we can reset our relationship,” Sacks said in a statement.

Through the proposed agreement, investors that participated in Zenefits’ $500 million Series C preferred-stock round in May would receive additional shares as trade-off for the loss in valuation.

Investors, who once owned a combined stake of 11% of the company under the previous valuation, will now own 25% with the new changes. This effectively revalues the company to $2 billion from $4.5 billion despite the lack of transactions.

While the combined stake of Series C investors has increased with the new deal, those who have invested much earlier and other common shareholders will find their stakes diluted as a result. The company said that investors who participated in the previous two earlier funding rounds will receive stock to compensate for some of the dilution.

Notably, former employees owning common stock—including CEO Sacks and co-founder Laks Srini—will not receive additional shares.

Current employees that own stock in the company will receive a special stock grant consisting of restricted stock units equal to 25% of their current number of shares. According to Zenefits, the new grant will entirely vest in 12 months.

The company has confirmed that Series C investors Fidelity Investments, TPG and Andreessen Horowitz have greenlighted the deal, but announced that it would offer the deal to other preferred shareholders as well.

David Sacks assumed the role of Zenefits CEO after his predecessor, company co-founder Parker Conrad, resigned. Conrad left the company amidst allegations that he had purportedly created software that helped employees secure licenses to sell health insurance faster than legally required, The Wall Street Journal reported.


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