The_largest_severance_package_ever
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai and in this short episode I want to talk about
00:00:04.320 | the largest severance package ever.
00:00:07.280 | It blows any severance package I have ever seen out of the water and I think it should
00:00:11.740 | help you believe, if you don't believe you can negotiate a severance package, that you
00:00:16.120 | can.
00:00:17.120 | So over the years, I've received some doubt from three types of people regarding the feasibility
00:00:22.440 | of negotiating a severance package.
00:00:24.740 | The first set of people I'll call the holier than thou people.
00:00:27.920 | They tell me that "they'd never do such a thing" to their employer as if their employer
00:00:33.220 | was a sacred cow.
00:00:35.460 | But what they don't seem to realize, probably due to having never experienced a recession,
00:00:40.140 | is that corporations won't hesitate to lay them off as soon as times get tough.
00:00:44.760 | It's globalization folks, competition is higher than ever.
00:00:48.960 | The second set of non-believers are those who don't know their worth.
00:00:52.740 | They're the type that let colleagues and bosses step all over them because they're too afraid
00:00:57.000 | to speak up.
00:00:58.000 | And I gotta tell you folks, bosses hope that employees don't speak up for a raise in promotion
00:01:04.000 | they deserve, so they can save the company money and get paid more.
00:01:08.440 | These type of non-believers also fear they do not provide enough value to warrant a severance.
00:01:14.080 | And it could be true, they are bad employees, but if you have a job, know that you only
00:01:20.880 | have a job because you provide more value than your compensation.
00:01:25.000 | Otherwise you would be fired already.
00:01:27.200 | Finally, the final set of non-believers are those who think they are God's gift to their
00:01:31.280 | employers.
00:01:32.280 | They think they provide so much value, they can't fathom an employer paying them to leave.
00:01:37.680 | But what they fail to realize is that it is precisely because they offer value that they
00:01:42.940 | have leverage to negotiate a severance to ensure continuity in the job.
00:01:47.280 | The last thing an employer wants is a value-added employee suddenly saying "see you later,
00:01:52.680 | I'm out of here in one or two weeks" while not finding a replacement.
00:01:57.600 | So this is something really important to know.
00:01:59.960 | Further, once you indicate you want to work something out, no employer will want you to
00:02:04.360 | stay long term no matter how valuable you are.
00:02:14.600 | So despite all the doubters, I believe with all my heart that trying to negotiate a severance
00:02:18.840 | package is the financially savviest move if you plan to retire early, take a break, go
00:02:25.020 | back to school, or change careers, or maybe even be a stay-at-home dad like I've been
00:02:30.200 | for the past 30 months.
00:02:32.320 | If you plan to leave anyway and if you negotiate the situation properly, there is no downside
00:02:36.960 | to having a conversation.
00:02:39.000 | And this is what really gets me is that so many people fear having a conversation, fear
00:02:45.600 | having confrontation as if it's something taboo.
00:02:50.360 | It's not scary if you approach the conversation and the severance negotiation properly.
00:02:54.840 | And that's why I wrote my book which is now on its third edition.
00:02:58.200 | And since I first published the book in 2012, I've heard back from hundreds of readers who've
00:03:02.640 | successfully negotiated between $10,000 to $700,000 severance packages.
00:03:08.440 | But in this episode, I want to highlight the one that takes it all, takes the cake, the
00:03:13.120 | largest severance package ever in the history of America and the world is the one given
00:03:18.320 | to Adam Neumann, founder of WeWork, who was able to negotiate a $1.7 billion severance
00:03:24.560 | package from SoftBank, operator of the Vision Fund, which is an owner and investor in WeWork,
00:03:30.440 | and it's the largest venture capital fund in the world at about $100 billion.
00:03:36.560 | Adam will get the ability to sell about $1 billion in stock back to SoftBank.
00:03:40.760 | He'll also receive a $500 million loan to repay a credit line.
00:03:45.480 | Further, he will get an estimated $185 million consulting fee.
00:03:50.640 | In exchange for the severance package, Adam will get to say bye bye to the board, but
00:03:55.360 | I think they still have some voting right power.
00:03:58.400 | I'm not so sure, the story's developing.
00:04:00.720 | Okay, so let's say the severance package is only the $185 million consulting fee since
00:04:06.400 | Adam's stock had already vested and the $500 million was a loan that he has to eventually
00:04:11.320 | pay back.
00:04:12.320 | $185 million is still the largest severance package ever for torpedoing your company.
00:04:19.160 | And although the dollar amount truly is staggering, what is even more amazing is the fact that
00:04:24.640 | he got a severance package at all.
00:04:28.240 | Part of a severance package clause is that you actually do no wrong, there's no fault
00:04:32.960 | in what you've done, you didn't harass an employee, you didn't kick someone in the face,
00:04:36.960 | you didn't steal company secrets, and so forth.
00:04:40.120 | When I was working in investment banking, our bonuses had a clawback provision where
00:04:43.840 | if an individual, department, or the firm was found to have done something wrong, the
00:04:48.520 | firm could "claw back" the employee bonuses for the past three years.
00:04:54.080 | Our bonuses were already structured in a way that kept us handcuffed for years.
00:04:58.240 | For example, the most our bonus could be paid at immediate cash was between 10-30%.
00:05:03.760 | So if you got a $100,000 bonus, only $10,000-$30,000 was in cash.
00:05:08.360 | Still sounds like a good number, but again, you got a $100,000 bonus.
00:05:11.720 | The remainder of the bonus was paid out in cash, deferred cash and stock, over a three-year
00:05:15.960 | time period.
00:05:17.200 | So let's say the deferment was $90,000 out of the $100,000.
00:05:22.140 | You would get $30,000 in a year's time, another $30,000 after two years, and then the final
00:05:27.960 | $30,000 after three years.
00:05:30.160 | Therefore, if you quit before the three-year time period was over, you forfeited a portion
00:05:35.000 | of your bonus in a prorated amount.
00:05:37.920 | The only way you could be made whole was to negotiate a severance and capture all that
00:05:42.560 | deferred compensation as part of the package.
00:05:45.880 | So if you do something wrong, you're going to get a clawback.
00:05:48.640 | So although Adam and his management team were able to get private investors like SoftBank
00:05:53.320 | to invest in them at a $47 billion valuation before 2019, public investors balked at that
00:05:59.960 | valuation once the S-1 was filed for public review.
00:06:02.880 | The S-1 is just an official document where public investors get to review the information
00:06:09.980 | about the company before making an informed investment.
00:06:15.000 | Investors after reading the S-1 realized there were a lot of corporate governance issues
00:06:18.800 | going on between Adam and the company.
00:06:21.100 | For example, ahead of its IPO filing, WeWork reorganized and rebranded as the "We Company."
00:06:29.280 | To rebrand itself around the word "we," the company paid Adam $5.9 million for trademark
00:06:35.720 | rights that he owned.
00:06:38.840 | He went to buy that trademark with the plan to re-brand and then pay himself $5.9 million
00:06:47.960 | through the company.
00:06:58.720 | WeWork also disclosed details on some interesting rental arrangements with Adam.
00:07:03.000 | The company said Adam owned four properties that had WeWork as a tenant.
00:07:07.400 | For one building, the company entered a lease within a year of Newman acquiring his ownership
00:07:11.960 | stake.
00:07:12.960 | For the other three, it signed a lease on the same day the co-founder obtained his stakes.
00:07:18.640 | How did Adam get the money to buy buildings to lease back to WeWork?
00:07:24.200 | Probably from his WeWork stock that he sold and from the income he earned.
00:07:30.920 | This kind of double-dipping arrangement is really smart and probably goes on a lot in
00:07:35.720 | private companies where there's no corporate governance and you can do whatever you want.
00:07:39.960 | But again, as a public company, shareholders are going to balk at this double-dipping.
00:07:44.040 | The final corporate governance issue is Adam hiring a lot of friends and family off the
00:07:48.720 | WeWork payroll to do work.
00:07:51.280 | That's fine if you have a private company.
00:07:52.880 | In fact, that's one of the biggest benefits of owning a private company and staying private,
00:07:58.160 | being able to hire whoever you choose to take care of them.
00:08:02.680 | As a dad now, my hope is that my son and my kids will be their own people and be independent
00:08:10.120 | after they graduate high school.
00:08:12.600 | Now there's a chance that they might not be and maybe old man is going to have to hire
00:08:18.160 | them back to do some work.
00:08:20.280 | Who knows?
00:08:21.280 | But it's nice to have that insurance mechanism, that flexibility if you own your private company
00:08:25.280 | and that's something everybody should think about on why they should start their own company.
00:08:29.880 | But again, if you're going to go public with public shareholders and people to account
00:08:33.480 | for, it's probably not going to be looked upon favorably.
00:08:38.640 | But the biggest reason for the decline in WeWork's valuation is the sustainability
00:08:44.000 | of its business model.
00:08:45.800 | WeWork takes out long-term leases.
00:08:48.480 | They estimated to have $43 billion worth of long-term leases and an average duration of
00:08:53.040 | 15 years.
00:08:54.760 | And then they collect short-term rents after remodeling a space.
00:08:58.000 | So you get in there and you say you want to rent a room or a conference room for $700
00:09:03.360 | a month, done and you don't have any long-term obligation at all.
00:09:07.520 | And this is where investors kind of fear the business model is not going to work because
00:09:12.000 | in a recession, are you really going to spend money to go to a WeWork and pay $700 a month?
00:09:19.760 | Probably not.
00:09:20.760 | You're probably just going to work from home or you're going to work at a free coffee shop.
00:09:23.760 | So WeWork lost $1.6 billion on $1.8 billion in revenue in 2018.
00:09:28.640 | And it's really hard to see profitability improving without massive restructuring and
00:09:33.160 | downsizing.
00:09:34.360 | It clearly needed the money it was going to raise from its IPO.
00:09:38.360 | So if it didn't have a savior, it was probably, I would say the years were numbered without
00:09:43.920 | any capital infusion.
00:09:45.780 | So that's where SoftBank comes in.
00:09:47.880 | In a face-saving move, SoftBank decided to bail out WeWork with $5 billion in further
00:09:52.920 | funding after already investing like $10 billion, something.
00:09:57.440 | And then they already have $1.5 billion of which had already been pledged for the future.
00:10:02.040 | Plus they had an additional $3 billion tender offer for existing shareholders outside SoftBank.
00:10:07.980 | So that is the move where Adam was able to take advantage and get his $1.7 billion severance
00:10:14.080 | package because now SoftBank owns about 80% of the company, it seems.
00:10:19.080 | The media is making WeWork's collapse to be all Adam's fault, and I think that's
00:10:23.520 | totally unfair to him given there's a board of directors and other top management and
00:10:27.520 | founders involved in making company level decisions.
00:10:31.380 | But let's say the $32 billion valuation collapse was 10% due to Adam's fault.
00:10:36.480 | That's still a $3.2 billion hit.
00:10:39.920 | And in every single severance negotiation I've ever been a part of or have witnessed,
00:10:44.720 | if you materially hurt the company, you'll not only not get a severance, you'll get
00:10:49.080 | fired and be forced to forfeit all stock and deferred compensation.
00:10:56.120 | You may also be fined or sued depending on what you do for causing harm.
00:11:01.400 | And the sad thing is, look, the valuation is a huge collapse, 70-80%.
00:11:07.880 | The 12,000 employees who are all hoping to get rich and liquid are not getting rich and
00:11:12.960 | liquid.
00:11:13.960 | It's also estimated that 1/3 of the global employee count is going to get fired, and
00:11:18.640 | that probably has to happen given the valuation collapse.
00:11:22.280 | It's unclear whether these employees will get severance packages, but if they do, you
00:11:26.680 | can bet they won't be very good.
00:11:29.000 | And that $3 billion tender from SoftBank is probably at valuation 70% lower than $47 billion.
00:11:37.160 | So really, some employees are going to get something, but it's probably not very good
00:11:41.960 | at all for the large majority of them.
00:11:45.160 | And so, due to all this carnage, I think Adam shouldn't get a severance package, let alone
00:11:50.240 | one that's valued at over a billion dollars.
00:11:53.440 | Because you forget, he already cashed out on $700 million in stock in late 2017.
00:12:00.640 | So let's review six things, six lessons we should all learn from this amazing, amazing
00:12:06.000 | situation.
00:12:07.000 | 1.
00:12:08.000 | To get rich, you must own equity.
00:12:10.640 | About $1 billion of Adam's severance package comes from SoftBank buying out Adam's stock
00:12:15.280 | at roughly a $9-10 billion valuation.
00:12:19.200 | It's very hard to get rich off salary alone because salaries get turned off once you lose
00:12:23.160 | your job.
00:12:24.160 | Further, salaries are also valued at a 1 to 1 ratio, whereas equity is valued at a multiple
00:12:29.480 | of earnings.
00:12:30.840 | You want to earn both on your road to financial freedom.
00:12:34.760 | 2.
00:12:35.760 | To get rich, you must learn how to sell.
00:12:38.800 | Adam was able to sell his vision extremely well to very smart investors such as SoftBank.
00:12:44.840 | 3.
00:12:45.840 | Benchmark.
00:12:46.840 | Benchmark is a big name that has had huge home runs in the past.
00:12:49.800 | JP Morgan, Goldman Sachs, T. Rowe Price, Wellington, Harvard Corp, and the former CEO of Boston
00:12:54.040 | Properties.
00:12:55.440 | He was able to convince them that we work as a technology company that deserved a higher
00:13:00.040 | valuation multiple, despite it really only being a poorly capitalized REIT.
00:13:05.480 | 3.
00:13:06.600 | To get rich, you've always got to go fishing.
00:13:08.720 | What are you fishing for?
00:13:10.640 | You're fishing for fish.
00:13:12.040 | You're fishing for suckers out there.
00:13:13.640 | There's a fun saying that goes at the poker table, "If you don't know who the sucker
00:13:17.440 | is in the room, it's you."
00:13:19.900 | So try not to be the sucker.
00:13:21.720 | There's always a sucker out there though that you can take advantage of because they either
00:13:25.800 | have these empire-building ego tendencies, or they have too much money, or they found
00:13:31.960 | other suckers to invest in their fund, or simply they just don't understand what's
00:13:36.000 | going on.
00:13:37.000 | It's sad.
00:13:38.000 | It's sad to take advantage of some suckers if they're just not well-off suckers, but
00:13:43.120 | if they're very, very wealthy suckers, I don't know.
00:13:46.320 | It's like, "Here, let's distribute the wealth here."
00:13:49.360 | Although it seems like SoftBank's $100 billion Vision Fund is the sucker, it's kind of not
00:13:55.440 | really the sucker because it was able to convince Saudi Arabia's Foreign Wealth Fund to invest
00:14:01.960 | $45 billion into the fund and Abu Dhabi's National Wealth Fund to invest $15 billion
00:14:07.000 | into the fund.
00:14:08.520 | So 60% of the fund is made up of two sovereign wealth funds and SoftBank's founders and
00:14:15.960 | employees get to earn carried interest and management fees off those billions.
00:14:22.600 | So it's always awesome to get rich off other people's money without having the corresponding
00:14:26.880 | downside risk.
00:14:27.880 | Because look, if SoftBank loses $50 billion, it's like, "Well, it's not their money.
00:14:32.960 | It's the client's money."
00:14:33.960 | And as a startup, you hope SoftBank launches its Vision Fund 2 as it's touting so you can
00:14:39.680 | raise even more money or cash out to SoftBank Vision Fund 2.
00:14:44.080 | And look, only time will tell if SoftBank's takeover of WeWork turns out to be an incredible
00:14:47.720 | move or not.
00:14:48.720 | I mean, right now it looks like a face-saving move, but in the future, you can say, "Hey,
00:14:52.560 | you know what?
00:14:53.560 | The time to buy is when there's blood on the streets."
00:14:55.920 | And clearly there's blood on the streets with WeWork and the time to buy was back in 2009
00:15:00.160 | and 2010, right?
00:15:01.680 | So maybe SoftBank will turn out to be a great move.
00:15:05.200 | All right, the fourth lesson, you should always diversify your wins.
00:15:09.280 | You can never lose if you lock in a win.
00:15:11.080 | I know we all think we're brilliant geniuses in this 10-plus year bull market, but bad
00:15:16.120 | things still do happen.
00:15:18.360 | First look at WeWork, look at Uber, look at Lyft.
00:15:23.400 | Adam brilliantly sold $700 million of stock before IPO at a huge, huge valuation, despite
00:15:28.640 | trying to convince the public and its employees to buy part of his company and work for him.
00:15:33.320 | I mean, it's not good optics to sell out that big of a chunk of your holdings before
00:15:39.040 | IPO.
00:15:40.720 | Even if he didn't get the $1.7 billion in sovereignty package, he would be set for life.
00:15:45.100 | So when things are going splendidly well, that is when you should have your spidey senses
00:15:49.220 | turned on to the max.
00:15:51.400 | Five, you probably shouldn't work for a startup.
00:15:54.480 | Look, the media loves to talk about big winners and big hits.
00:15:58.880 | It's sexy.
00:15:59.920 | But if 90% of startups fail, then by definition, 90% of employees will not get richer than
00:16:05.240 | if they had worked at a traditional firm for a higher salary.
00:16:09.320 | Startup employees make less salary, make less cash compensation for the hopes of the lottery
00:16:15.220 | ticket winnings.
00:16:16.220 | But that lottery ticket generally doesn't pan out.
00:16:20.140 | Just look at Uber and Lyft again.
00:16:22.300 | Anybody who joined after about 2015 is probably just treading water or below water, frankly,
00:16:29.180 | because they took a lower salary.
00:16:31.540 | So I would say work at a startup if you don't need the money or you really, really believe
00:16:36.780 | in the mission or you just want to gain a lot of experience quickly so that you can
00:16:41.740 | start your own startup one day.
00:16:43.620 | That's what a lot of startup funders do.
00:16:45.300 | But don't trick yourself into believing that you are going to win the lottery because most
00:16:49.540 | people don't win the lottery.
00:16:51.540 | Finally, obviously negotiate a severance package.
00:16:54.500 | For goodness sake, if Adam can negotiate a 1.7 billion severance package despite helping
00:16:59.620 | torpedo his company into the ground, you too should be able to negotiate a severance if
00:17:04.540 | you work with your employer to provide a smooth transition.
00:17:09.180 | Find out what the employer wants.
00:17:11.940 | Find out how you can provide value to allow for that transition to be smooth and for there
00:17:17.460 | to be minimal, minimal disruption.
00:17:19.980 | If you do, you will get that severance package or you'll get something better than nothing,
00:17:24.780 | which is what most people get when they quit.
00:17:27.500 | There is so much money out there for the taking, folks.
00:17:30.620 | It's up to you to develop awareness and your selling and negotiation skills.
00:17:36.740 | Awareness comes with knowledge.
00:17:38.220 | So please read up as much as you can, understand various scenarios and case studies and go
00:17:44.980 | get that money.
00:17:46.020 | Go get that money that you deserve.
00:17:48.060 | You are or were a valuable employee, otherwise you wouldn't have had the job.
00:17:52.340 | You would have been fired a long time ago and that is why you have leverage to be able
00:17:56.580 | to negotiate a severance.
00:17:58.420 | Once you realize how much money is out there for the taking, you'll come to realize how
00:18:02.220 | much money is always being left on the table every single day by people who don't know
00:18:06.300 | better.
00:18:07.300 | I hope this was an eye-opening episode because it was an eye-opening episode for me.
00:18:12.220 | The bar has been raised for severance negotiations to an amazing, amazing amount.
00:18:17.620 | If you want to read the book, go check it out from my homepage and use the code "SAVE10"
00:18:23.820 | to save $10.
00:18:24.820 | Thanks so much, everyone.
00:18:25.820 | If you enjoyed this episode, please leave a positive review and share it around.