A tale of two emails
This morning I received an email announcing the closing of Spacious. A “no frills” co-working space that took advantage of the low daytime usage of high end restaurants and vacant retail spaces by converting them to co-working offices.
I’ve been a member of Spacious for a number of months and thought their offering was extremely innovative, so I’m sad to see them close their doors.
Just over three months ago I received a very different email from the CEO of Spacious though. The email announced “exciting news” and that Spacious was joining the WeWork family. The company had been acquired.
The email went on to talk about the strategic fit and potential that Spacious and WeWork presented:
In WeWork, we have found much natural alignment across our visions for the integration of work, technology, and physical space. We’re thrilled for the opportunity to continue to serve our members at Spacious today as part of the greater WeWork community.
Spacious’s service delivers a distributed network of walk-in, on-demand workspaces, wrapped in an experience of stylish hospitality. By joining WeWork, we’re taking the next step in providing easy access to on-demand workspaces across the world.
The rest as they say is history. Spacious is no more as WeWork grapples to slow down its cash bleed and justify its astronomical valuation.
The two emails that I received don’t talk about deal terms and what happened behind the scenes, but if I was to predict, I’d say it went a little something like this (note this is entirely speculative):
Spacious was seen as a good acquisition target for WeWork to get access to the “low-end” co-working rental market.
WeWork seemed like a solid partner to have to rapidly expand Spacious footprint by giving them greater bargaining power and access to the worlds landlords.
The deal was mostly structured in WeWork stock.
The Spacious founders were locked in to a management contract and earn out over 1 to 3 years based on the performance of Spacious.
The founders now had to report into a Spacious executive or business unit manager who is driven by their internal KPIs.
Control of the company and its future now sits with that executive or business unit.
WeWork’s IPO filing was a cluster fuck. The board decides to refocus the company to its “core” offering.
Spacious is not core.
In a little more than 3 months.. The decision is to shut down Spacious. The founders kick and scream. It makes no difference.
They can now choose to stay working for WeWork (the company that killed their startup) or leave and forfeit a majority portion of their stock options.
I wish I could say the above story was the exception in startup land but more often than not, it’s the norm. Large acquiring companies sell founders on the dream and often fail to deliver on their “strategic value”. At the same time, the founders end up being constrained in their ability to drive the performance of the company as they no longer own 100% of the decision, they have to adapt to new cultural practices and reporting structures and a layer of bureaucracy that previously didn’t exist. They’ve ultimately traded their ownership for a future promise that they have very little control and influence over.
Coincidentally, today I had a call with the founder of one of our portfolio companies that is evaluating an acquisition offer on his company. The offer is in 50% in cash and 50% in stock of the acquiring company. He and the CEO will need to sign long term management agreements and a portion of both the cash and stock is based on their performance and an earn out.
He’s excited about the acquiring company and what the potential of his startup and the acquirer could mean for both companies but he wanted to talk through what could potentially go wrong, what terms he should maybe push back on and what some of the risks in doing the deal could be.
As we talked through the deal terms, I shared with him the tale of the two emails.
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