An S-1 filing – also known as a prospectus – is the form filled out by a company to register with the US Securities and Exchange Commission (SEC) ahead of a planned initial public offering (IPO). It contains the sort of basic business and financial information required for investors to make an educated choice of whether to invest in your company or not.
It is, by its nature, a long and boring document, with lots of boilerplate legal language. Then there is the S-1 filing for the We Company – parent company to the ubiquitous office-space leasing provider WeWork.
Published by the SEC yesterday and since pored over by potential investors and a voracious tech media (largely questioning why they are covering a real-estate company), the filing is a treasure trove of creative accounting, eye-popping financials, bizarre marketing language and admissions of some unusual business practices by its senior executives. Here are our five main takeaways.
Losses, lots of losses
The first place to go here is the finances, as WeWork sets itself apart from all the other 'tech unicorns' of its class by deciding to float while racking up annual losses of $1.9 billion.
Ride-sharing giant Uber, which successfully floated earlier this year, loses money at an unprecedented rate, burning through $5 billion in the last three months. The We company comparatively racked up net losses last year of $1.9 billion, with $3.5 billion in total expenses, including rent (WeWork leases offices, does them up and subleases them to smaller companies and freelancers), operating costs, sales and marketing.
That being said, it has genuinely incredible revenue growth, bringing in $1.8 billion last year, up from $886 million in 2017, and already has $1.5 billion in revenue for the first six months of 2019, with a grand plan to turn that growth into profitability...
Global scale = profit
The interesting part is how WeWork justifies its explosive growth and sets out a future course for profitability, thus making it a viable public company.
The basic plan is to continue expanding the WeWork footprint aggressively, and improve its profit margins over time as brand awareness and economies of scale improve.
Or, as the company puts it: "We strive to operate our business so that each new location is accretive to our long-term financial performance, resulting in growing contribution margin. We strategically cluster locations in cities, leading to greater brand awareness and economies of scale, which, in turn, drives stronger monetisation of our global platform."
The company hopes to expand to 280 target cities with an "estimated potential member population of approximately 255 million people in aggregate," accounting for a total addressable market opportunity of $1.6 trillion, as laid out in the prospectus.
Breaking this down, We is saying that as it lands and expands in new territories its initial costs will start to recede, and if that sounds complicated, that's because it's meant to be.
WeWork believes that as its locations mature, the profit margin improves, so it will burn cash for the foreseeable future but turn this into sustainable profits as it matures. A 'mature location' is defined in the paperwork as one that has been open for more than 24 months.
Once a location reaches this point, the company argues, "occupancy is generally stable, our initial investment in build-out and sales and marketing to drive member acquisition is complete and the location typically generates a recurring stream of revenues, contribution margin and cash flow." At the time of writing only 30 percent of WeWork locations are identified by the firm as mature.
Bloomberg reporter and close We-watcher Ellen Huet tweeted yesterday that WeWork had tweaked this metric in the past couple of years. Huet said: "New change in the S-1: "mature locations" now means offices open 24 mos. or more; used to be 18 mos. Earlier this year, they expanded the definition of "enterprise" customers to include smaller companies."
how WeWork tweaks its metrics definitions:— Ellen Huet (@ellenhuet) August 14, 2019
new change in the S-1: "mature locations" now means offices open 24 mos. or more; used to be 18 mos
earlier this year, they expanded the definition of "enterprise" customers to include smaller companies https://t.co/TuwPAyWqqO
Not just an office space
Anyone unfamiliar with the We company beyond having had a cold brew at one of its premises may be struck by the evangelical tone of the S-1 filing.
It reads: "We are a community company committed to maximum global impact. Our mission is to elevate the world's consciousness. We have built a worldwide platform that supports growth, shared experiences and true success."
Its CEO and founder Adam Neumann once famously told a Forbes reporter in in 2017 that WeWork's 11-figure valuation had less to do with its revenue than its "energy and spirituality" and is known for his sunny, or if you are more negatively inclined, cult-like outlook about his company.
His story is well known at this point, and the prospectus characterises Neumann as "a unique leader who has proven he can simultaneously wear the hats of visionary, operator and innovator, while thriving as a community and culture creator." As tech founders go, Neumann is as central to everything his company does and represents as anyone in Silicon Valley.
Neumann has plenty of skin in the game when it comes to pumping up the value of WeWork before it goes public, not least as the equity rewards section of the prospectus lays out that he would be awarded 7,078,861 stock options over three years if We attains a public market capitalisation of $50 billion, 7,078,861 options over two years if it reaches $72 billion and 9,438,481 options over two years if it gets to $90 billion.
Most risk factors – essentially a long caveat emptor for investors – in a prospectus are pretty boilerplate, but not the We Company.
One unusual risk factor to see in a prospectus is the possibility of a global recession, which has long been cited as a spectre hanging over the We business by analysts.
The prospectus reads: "While we believe that we have a durable business model in all economic cycles, there can be no assurance that this will be the case. A significant portion of our member base consists of small- and mid-sized businesses and freelancers who may be disproportionately affected by adverse economic conditions."
WeWork was founded just nine years ago in 2010, two years after the last global financial crisis.
We also puts in black and white another risk to its business: by not owning the majority of the offices it operates, it is at the mercy of commercial landlords, and that relationship could change very quickly if market conditions were to shift under the company's feet.
It reads: "Our ability to negotiate favourable terms to extend an expiring lease or to secure an alternate location will depend on then-prevailing conditions in the real estate market, such as overall rental cost increases, competition from other would-be tenants for desirable leased spaces and our relationships with current and prospective building owners and landlords, and may depend on other factors that are not within our control."
Another unusual risk factor notes: "If our involvement in online news articles published about the Company were held to be in violation of the Securities Act, we could be required to repurchase securities sold in this offering. You should rely only on statements made in this prospectus in determining whether to purchase our shares."
This is directly related to a set of interviews given by Neumann in May 2019 with Axios and Business Insider that could be deemed in violation of regulatory rules.
"We do not believe that our involvement in the May 2019 online news articles or other news articles constitutes a violation of Section 5 of the Securities Act," the prospectus states.
If it was deemed to be in violation, however, the company could be forced to repurchase the shares sold to purchasers in this offering at the original purchase price, plus interest, for a year following the date of the violation.
The Related Party section of an IPO is not normally a page turner, but as Bloomberg reporter Shira Ovide tweeted: "I have only read the related party section in the WeWork IPO filing so far, and I am not kidding that it is THE MOST BANANAS THING I HAVE EVER READ."
In there are tidbits such as this:
- WeWork CEO Adam Neumann has been loaned tens of millions of dollars secured against his WeWork stock in the past.
- Neumann bought the rights to the We brand from a company called We Holdings LLC for $5.9 million, a company which was controlled by... Adam Neumann.
- The CEO's wife is one of a handful of people responsible for picking a successor if Adam Neumann was to die.
A date for the IPO has yet to be set but for any potential investors we say: let the power of WE be with you.