The stairwells are condomfree rooms will soon be renamed after inspirational entrepreneurs. Kegs have been replaced with coldbrew coffee.
Acks knew there was a problem
Sas soon as he walked into the Jessika Pava room, named after an X-wing pilot who fought against the First Order in the battle of Starkiller Base. Five lawyers, including a few he’d never met, sat grimly in orange swivel chairs. It was late afternoon on Jan. 25, and they’d come to Zenefits to present the results of a threemonth investigation the company had initiated. Sacks knew it doesn’t take five lawyers to deliver good news.
Zenefits had hired Cooley, a law firm, along with consulting firm PWC, after Buzzfeed published a series of articles about Zenefits’ use of unlicensed brokers. Washington state’s insurance commissioner had already opened a formal investigation into the company; according to Buzzfeed, 83 percent of all Zenefits sales in the state were made by unlicensed brokers. The company could be fined as much as $20,000 for each violation. If this were true in other states, Zenefits was looking at millions of dollars in fines.
The lawyers laid out a more damning situation. In California, they found, some of the sales team used Conrad’s macro to systematically cheat on the state’s training course, which included a section on ethics. “As far as a company doing what Zenefits has done, I don’t know that we have seen this before,” says Nancy Kincaid, press secretary for the California Department of Insurance, which has also opened an investigation. In March, Massachusetts’ division of insurance opened a third. Zenefits confirms that other states have since followed but won’t say which ones or even how many.
Sacks says he knew of the macro but didn’t know its significance or about Conrad’s involvement until the lawyers explained it to him in January. Cooley confirms Sacks’s account in a memo obtained by Bloomberg Businessweek. The memo also says that during its investigation, “Mr. Conrad acknowledged that he had authored the macro.” Meanwhile, a person close to Conrad claims he had told one of Zenefits’ lawyers about the macro more than a year earlier. Some of the Zenefits employees who weren’t properly licensed worked as benefits advisers, not salespeople. They reported up the chain to Sacks. Sacks says he wasn’t aware of their licensing problems until everything else came to light.
On Feb. 1, Zenefits held an emergency board meeting. The licensing problems and the macro were discussed. Dalgaard suggested to Conrad that, as the person who created the program, he needed to leave. Conrad resigned from Zenefits on Feb. 8; since then he’s spent part of his time at home binge-watching Star Wars: The Clone Wars, according to a friend. A person close to Conrad says he regrets resigning and is already working on a new company.
Sacks became CEO and is guiding Zenefits through its crisis cleanup. He has banned alcohol at the office and changed the company motto from “Ready. Fire. Aim.” to “Operate With Integrity.” In February the company laid off 250 employees, including the enterprise team. Sales Vice President Blond, Semaan’s boss, and any executive or manager known to have helped disseminate the macro are also gone. Zenefits says it has self-reported the findings of its internal investigation to all 50 states and is working with those that have opened formal inquiries. Fidelity Investments, which owns a stake, has slashed its valuation of Zenefits from $4.5 billion to less than $2 billion. There are rows of empty desks at the San Francisco office; the company plans to downsize from four floors to three. The Star Wars- themed conference rooms will soon be renamed after inspirational entrepreneurs. Kegs have been replaced with cold-brew coffee. The stairwells are condom-free. And yet, despite his downfall, Conrad is still a coveted name in Silicon Valley. People want to meet the man who created a $60 million company in just three years and made good on his promise to shake up the insurance industry. Dalgaard says he’s been getting e-mails from people eager to work with Conrad since the day his resignation went public. Zenefits might also survive for the one reason that made its product so appealing to business owners in the first place: Shopping for health insurance remains really frustrating. The company says it now has 20,000 accounts. “As long as their problems don’t affect our company, we’ll stay,” says Todd Harmond, vice president for finance and operations of the e-book service Scribd, which uses Zenefits to offer Kaiser Permanente and Anthem health insurance plans to its 85 employees.
“Unless something else goes really wrong with Zenefits, we’ll stick with them for a while,” says Blogmutt’s Yates. “It’s too much of a hassle to switch.” <BW>