An important part of growing and being better tomorrow is learning from the past. That is applicable to your personal life or your startup’s life. WeWork, which is currently valued at approximately $47B, has grown substantially over the past 9+ years of its existence as a company and revolutionized the co-working industry.
WeWork’s recently released S-1 filing contains a lot of very intriguing information. After reviewing some of the more interesting sections (and the media commentary), there are two basic, but important lessons startups can learn, which could help them avoid the same scrutiny WeWork has endured. It should be noted that this blog post does not presume or imply WeWork has done anything illegal. But as mentioned in the opening line, it’s important for people to learn from past mistakes, whether your own or someone else’s.
(1) Respect your corporate entity; keep personal and business dealings separate:
Individuals decide to form corporate entities (whether it’s an LLC, Corporation, Partnership, or the like) for many reasons. Among these reasons is to protect themselves against personal liability. While each U.S. state (or individual country) has its own rules about corporate entities and personal liability protection, as a general concept, you must acknowledge and appreciate that your corporate entity is a separate legal “person”, and you as an individual should keep your personal dealings separate from your business dealings, from day one. In some instances, when you’re a sole proprietor or single-member LLC, you’re given a little more leeway, but generally speaking, separation will keep things cleaner.
In the case of WeWork, the company’s CEO buying real estate personally, and then leasing the building(s) to the company he owns might smell funny to some. If those transactions were not properly documented, they could lead to a host of legal issues. One of those issues could be a court deciding that the company was simply (via actions of the owner) an alter-ego of the owner and not a separate entity. In doing so, the court could allow the “corporate veil” (liability protection) to be pierced and subject the owners, members, stockholders, etc.. to personal liability for the company’s debts. Even though Delaware (the state where “The We Company” is incorporated) is very reluctant to pierce the corporate veil, in certain circustances they will do so.
(2) Intellectual property should belong to the company; not an individual founder:
Intellectual property, such as copyrights, trademarks, patents, and trade secrets ( collectively, “IP”), is the life-blood of many companies. When founders get together and assess each person’s talents and decide who is bringing what to the table, some (or all) of the founders will own or be developing the IP that becomes the product or service. At the very beginning, it’s important for founders to assign the underlying IP to the company, or, be developing the IP and registering it under the corporate entity’s name. Properly drafted confidential information and IP assignment agreements and/or employment agreements would take care of this and should be signed by the founders and/or employees shortly after the company is established.
In the case of WeWork, the company paid the CEO $6M dollars for the right to use the “WE” trademark. An amended S1 filing has shown that this agreement was unwound/reversed and the CEO gave the money back. Besides not passing a smell test in this instance, the reason why founders shouldn’t engage in this type of arrangement is that many investors want to know the company itself (remember a corporate entity is a legal person) owns the IP rights. That’s important because if a founder leaves after a big payout, the IP would stay with the company (assuming the appropriate documents were signed in the beginning).
In Sum: It is important for founders to learn from the mistakes and failures of others in order to prevent those same mistakes from ruining their startups. WeWork, as successful as it is, presents plenty of learning opportunities for startups.