Over the years, I’ve received some doubt from three types of people regarding the feasibility of negotiating a severance package.
The first set of people I’ll call the holier than thou employees. They tell me that “they’d never do such a thing” to their employer, as if their employer was a sacred cow. But what they don’t seem to realize, probably due to having never experienced a recession, is that corporations won’t hesitate to lay them off as soon as times get tough.
The second set of people are those who do not know their worth. They are the type that let colleagues and bosses step all over them because they are too afraid to speak up. They also fear they do not provide enough value to warrant a severance, even though they provide enough value to have a job.
The final set of unbelievers are those who think they are God’s gift to their employers. They think they provide so much value they can’t fathom an employer paying them to leave. But what these people don’t realize is that it is precisely because they are so valuable that they have leverage to negotiate a severance to ensure continuity in the job. No employer wants to have its superstar employee leave suddenly and not have an immediate replacement. Further, once you indicate you want to work something out, no employer will want you to stay long-term.
Despite the doubters, I believe with all my heart that trying to negotiate a severance package is the financially savviest move if you plan to retire early, take a break, go back to school, or change careers. If you plan to leave anyway and if you negotiate the situation properly, there is no downside to having a conversation.
If I had not received a severance package, it is highly unlikely I would have left my job at 34. I would have kept on working until at least 40. When I look back and realize how much more stress and unhappiness I would have had to endure had I stayed for six more years, my severance package only appreciates in value. Being able to travel, pursue other interests, start a family, be a stay at home dad, and build Financial Samurai have been priceless endeavors.
Now that my severance negotiation book is on its third edition, I’ve heard back from hundreds of readers who’ve successfully negotiated between $10,000 – $700,000 severance packages. But in this article, I want to highlight the one that takes the cake.
The Largest Severance Package Ever
Adam Neumann, founder of WeWork, was able to negotiate a ~$1.7 billion severance package from Softbank, operator of the Vision Fund, the largest venture capital fund in the world.
Neumann will get the ability to sell up to around $1 billion in stock back to SoftBank. He’ll also receive a $500 million loan to repay a credit line. Further, he will get an estimated $185 million consulting fee. In exchange for this severance package, Adam will leave the board.
Although the dollar amount is truly staggering, what is even more amazing is the fact that Adam got a severance package at all!
An Employee Shall Do No Wrong
A severance package is usually given to an employee only if there is no fault. When I was working in investment banking, our bonuses had a clawback provision where if an individual, department or the firm was found to have done something wrong, the firm could “clawback” the employee bonuses for the past three years.
Our bonuses were already structured in a way that kept us handcuffed for years. For example, the most our bonus could be paid in immediate cash was between 10% – 30%. The remainder of the bonus was paid out in cash and stock over a three-year time period. Therefore, if you quit before the three-year time period was over, you forfeited a portion of your bonus. The only way you could be made whole was to negotiate a severance and get all your deferred compensation as part of the package.
The clawback provision is a way to encourage employees to always do the right thing. Shareholders loved it, as they should.
Although Adam and his management team were able to get private investors like Softbank to invest in them at a $47 billion valuation before 2019, public investors balked at the valuation once the S-1 was filed for public review.
Investors realized there were a lot of corporate governance issues going on between Adam and the company. For example, ahead of its initial-public-offering filing, WeWork reorganized and rebranded as The We Company. To rebrand itself around the word “We,” the company, paid Adam $5.9 million for trademark rights. Smart by Adam when the company was private but suspect as a publicly owned company.
WeWork also disclosed details on some interesting rental arrangements with Adam. The company said Adam owned four properties that had WeWork as a tenant. For one building, the company entered a lease within a year of Neumann acquiring his ownership stake. For the other three, it signed a lease on the same day the co-founder obtained his stakes.
It’s nice to be able to own your own building and then collect rent from the company you own as a private company. But as a public company, shareholders are going to balk at this double dipping arrangement.
Then there was investor doubt in the sustainability of WeWork’s business model. WeWork would take out long-term leases (~$43 billion worth with an average duration of 15 years) and collect short-term rents after remodeling a space. The business model works in a booming economy, but in a recession, the business model collapses because short-term tenants aren’t locked in.
Instead of commuting to a WeWork office and paying rent for a room, workers would work from home or a free coffee shop. Meanwhile, companies would reduce their usage of WeWork office space as well.
WeWork lost $1.6 billion on $1.8 billion in revenue in 2018. It’s hard to see profitability improving without massive restructuring and downsizing. It’s hard to see WeWork surviving without new capital.
Despite having gotten SoftBank to invest in WeWork at a $47 billion valuation, WeWork faced an icy reception during its IPO process. Even at a $15 billion valuation, institutional investors weren’t even interested, which is why they shelved the IPO.
In a face-saving move, Softbank decided to bailout WeWork with $5 billion in further funding, $1.5 billion of which had already been pledged for the future, plus an additional $3 billion tender offer for existing shareholders outside Softbank. This is where Adam Neumann’s billion-dollar severance package comes into play. Softbank now owns ~80% of the company.
How Much To Blame
The media is making WeWork’s collapse to be all Adam’s fault. I think that’s unfair to him given there’s a board of directors and other top management involved in making company decisions. But let’s say the $32 billion valuation collapse was 10% due to Adam, that’s still a $3.2 billion hit.
In every severance negotiate I’ve ever been involved with or witnessed, if you materially hurt the company, you will not get a severance. You will get fired and be forced to forfeit all stock and deferred compensation. You will probably also be fined or sued for causing harm.
Part of the fallout from the valuation collapse is that not only do 12,000 employees fail to get rich and liquid from an IPO, it’s estimated that some 4,000 employees will also get laid off. It is unclear whether these employees will get severance packages, but if they do, you can bet they won’t be very good.
As a result of all the carnage, Adam should not get a severance package, let alone one that is valued at over $1.5 billion. He already cashed out $700 million in stock in late 2017.
Lessons Learned From The Largest Severance Package Ever
Here are some lessons we should all learn from this debacle:
1) To get rich, you must own equity. About $1 billion of Adam’s severance package comes from Softbank buying out Adam’s stock at roughly a $9 billion valuation. It’s very hard to get rich off salary alone because salaries get turned off once you lose your job. Salaries are also valued at a 1:1 ratio. Whereas equity is valued at a multiple of earnings. You want to be able to earn a salary and grow your equity to supercharge your wealth.
2) To get rich, you must learn how to sell. Adam was able to sell his vision extremely well. He convinced smart investors from Softbank, Benchmark, JP Morgan, Goldman Sachs, T. Rowe Price, Wellington, Harvard Corp, and the former CEO of Boston Properties to believe WeWork was a technology company that deserved a higher valuation multiple despite it really only a poorly capitalized REIT.
3) To get rich, always go fishing. There’s a fun saying that goes, “If you don’t know who the sucker is in the room, it’s you!” There is always a sucker out there you can take advantage of because they either have empire-building tendencies, have too much money, found other suckers to invest in their fund, or simply don’t understand what’s going on. You’ve always got to go fishing to catch a sucker.
Although it may seem like Softbank’s $100 billion Vision Fund is the sucker, it’s not really since Softbank only funded around 28% of the fund. Softbank was able to convince Saudi Arabia’s sovereign wealth fund to invest around $45 billion into the fund and Abu Dhabi’s national wealth fund to invest $15 billion into. In other words, it’s always awesome to get rich off other people’s money without the corresponding downside risk.
As a startup, you hope Softbank launches its Vision Fund II so you can raise even more money or cash out to them.
4) You should diversify your wins. You can never lose if you lock in a win. I know we all think we’re geniuses in this 10+-year bull market, but bad things still do happen. Adam brilliantly sold $700 million of stock before IPO at a huge valuation, despite trying to convince the public to buy part of his company. Even if he didn’t get the $1.7 billion severance package, he would be set for life. When things are going splendidly well, that is when you should worry the most.
5) You probably shouldn’t work for a startup. If 90% of startups fail, then by definition, 90% of employees will not get richer than if they worked at a traditional firm for a higher salary. So many people thought working at Uber or Lyft would be financial home runs as well. But if you joined either of these companies after 2015, you’re likely just treading water with your equity.
Work at a startup if you don’t need the money or just want to gain a lot of experience and responsibility so you can start your own startup one day.
6) Obviously, negotiate a severance. If Adam can negotiate a $1.7 billion severance despite torpedoing his company, you too should be able to negotiate a severance if you work with your employer to provide a smooth transition. Employers want to work something out with their employees. Stop believing you have no power.
Go Get That Money!
There is so much money out there for the taking. It’s up to you to develop awareness and your selling and negotiation skills. Once you do, you’ll come to realize how much money is left on the table every day.