Business Venture Blog
This is where we post about business ventures, law, and business venture law.
Anything interesting, really.
Anything interesting, really.
Business Venture Blog
WeWork: The Rise and Fall of the Real Estate Disruptor
Overview: Founders, Business Plan, Value Proposition, Strategy
To best understand the story of WeWork, it is easiest to start it its origin and founder. Adam Neumann (“Neumann”) appears to be the ‘classic’ entrepreneur. He was ambitious, charismatic, and overconfident. He was also a talented pitch artist, as it is no small feat to bring in over $12.8 billion in financing over his time at WeWork.
It wasn’t until his third venture, GreenDesk, that ultimately began Neumann’s path to start-up stardom. The idea was sustainable co-working space. The business proved to be profitable in its first year of operation, however, GreenDesk was sold as the two founders differed in opinion with their main investor on the company’s direction. The two founders then started WeWork, with the only change being a shift from a ‘sustainable’ to a ‘community’ concept.
The Founders identified an opportunity in the market following the economic crisis in 2008. Neumann stated, “During the economic crises, there were these empty buildings and these people freelancing or starting companies. I knew there was a way to match the two.” This was part of the Founder’s value proposition – individuals and start-ups renting office space without the need and cost of renting out a space larger than they needed. The business model entailed WeWork taking out a cut-rate lease on a floor or two of an office building, chopping it up into smaller parcels and then charges monthly memberships to start-ups and small companies that want to work close with each other. This ‘working close with each other’ was the second part of WeWork’s value proposition. It identified ‘community’ as the main product to sell to its members. The WeWork ‘community’ entailed: open floor plans, lounge amenities, social activities, and floor plan arrangements that were designed to promote entrepreneurs to utilize fellow members' skills and networks.
Setting ‘community’ aside, and looking at the fundamental business plan, it is apparent it could be easily replicated. When a business does not derive its value from any type of intellectual property or technology, it must put rapid growth and brand recognition at the forefront of its strategy. WeWork did this on an incredibly impressive scale. WeWork used a large amount of financing to expand at a rapid pace into over 110 cities across 29 countries.
Financings: (Information from: https://craft.co/wework/funding-rounds)
Over the span of 9 years, WeWork grew to an incredible $47 billion placing it as the highest valued private company in the United States in early 2019, ahead of the likes of Space X, Airbnb, JUUL, etc.
However, the company came crashing down to earth when WeWork filed for its IPO in August of this year. The prospectus faced harsh criticism from public markets as investors and analysts balked at the overinflated valuation and expressed major concerns about the company. This ultimately resulted in WeWork having to pull its’ IPO. Some of the major issues identified by the public market were the business model, profitability prospects, corporate governance and leadership.
a. Profitability and Business Model
The profitability of the company was put into question both short term and long term. WeWork had a net loss of $1.6 billion in 2018, and nearly $700 million in the first 6 months of 2019. It is not uncommon for start-ups to faces losses in their early years but you want to see net loss is shrinking as a percentage of revenue. Whereas, with WeWork the prospectus stated, "These expenditures will make it more difficult for us to achieve profitability, and we cannot predict whether we will achieve profitability for the foreseeable future.”
A major concern was if WeWork’s economics could survive the inevitable real estate slump. WeWork was charging high per-square-foot prices but was also locking itself into long-term leases at record rents. There was clearly the prospect of a tenant exodus amid a recession or to cheaper competition. As of 2019, WeWork had committed to $47.2 Billion in future payment obligations but had only received $4 Billion in committed revenue from memberships.
b. Leadership & Corporate Governance
The issues surrounding WeWork’s corporate governance were also a major issue. First and foremost, Neumann had an incredible amount of power in WeWork. His class ‘B’ and ‘C’ shares carried 20 votes to the 1 of the class ‘A’ shares. This allowed for him to still maintain control of the company, even after SoftBank had invested over $10 Billion. Neumann was also said to have engaged with some questionable conflicts of interest with WeWork. When the company undertook to trademark the ‘We’ name, it was then revealed Neumann and the other co-founder had already owned the ‘We’ trademark in a separate corporation and made the company purchase it for over $5.9 million. WeWork also leased properties that Neumann had an ownership stake in. Neumann also received extremely low interest rate loans from the Corporation in excess of $30 million. Neumann’s wife also received a senior management position with the company and was said to possess the power to appoint a new CEO if Neumann were to become incapacitated or die.
Because of the failed attempt at an IPO, which now appears actually necessary for funding and not just an exit for investors, WeWork was in need of money quickly. SoftBank, which was already its largest investor, came to the rescue with a package of $5 billion. However, that package was not without scrutiny and further showcases the failures of the board. Specifically, criticism surrounding the package that Neumann received, which included: $198 million consulting position, $970 million for his stock, and a $500 million credit faculty. It is no surprise to hear of criticism considering reports stated that WeWork had delayed layoffs because it couldn't afford to pay severance.
There are plenty of learning lessons for the start-up community and investors resulting from WeWork’s fall. Start-ups can mitigate many of these by ensuring proper safeguards developed in their initial startup process. Legal counsel acting for the company needs to ‘founder proof’ the organization, and prepare for the inevitable transition from the initial founder and management team to a more experienced and suitable one, likely endorsed by the major investors of the company.
In WeWork’s case, it faced major financial difficulties removing power from Neumann. This could have been avoided had there been tighter board governance and attention placed on the voting power within the organization. It should have been apparent to the board from the ill-advised spending and poor media attention Neumann was getting for the company that they needed to move on to a better management team. However, the power structure of WeWork made this extremely difficult and extremely expensive. WeWork was not ‘founder-proofed’.
Another oversight was that WeWork had no employment agreement with Neumann. For someone to be as important to a company as they touted, it was irresponsible of the board to not have an employment agreement with him. He could have just walked away at any point and this was even identified as a risk in the IPO disclosing. Ultimately, Neumann’s exit was needed, but this could have been a disastrous oversight.
As noted above, rapid expansion made sense for WeWork, but it must be undertaken at a responsible rate and direction. WeWork began venturing into areas that were not core to its business which required a lot of capital that was not producing income. Those new ventures coupled with its massive debt laden growth in real estate, became too costly for the company to become profitable. This profitability was quickly identified once the IPO disclosures became absorbed in the public market.
Another issue was the extremely optimistic $47 Billion valuation, which clearly wasn’t reality. This can hurt the company two-fold. First, a more realistic valuation would have not received as much push back from the public markets. Secondly, your investors will not be happy when their investment becomes much less valuable when the more realistic valuation is placed on the company.
Lastly, the corporate governance practices remain of vital importance. History shows that start-ups fail more often than succeed, so to reduce those chances of failure, planning and execution of these must be done at the outset of any venture. Ensure your start-up has the proper agreements and bylaws in place.
Ty Buhler is a member of the BLG Business Venture Clinic and is a third-year law student at the Faculty of Law, University of Calgary.
 Jason Sheftell, “WeWork gives alternative to working at home with swanky buildings across NYC” (22 July 2011), online: New York Daily News <https://www.nydailynews.com/life-style/real-estate/wework-alternative-working-home-swanky-buildings-nyc-article-1.1044412>
 Allana Akhtar, “Adam Neumann built a global coworking empire. These are the cities with the most WeWork offices, and how much they cost.” (22 October 2019), online: Business Insider <https://www.businessinsider.com/global-cities-with-the-most-wework-offices>
 Jon Banister and Ethan Rothstein, “Here’s everything you need to know from WeWork’s landmark IPO Prospectus” (14 August 2019), online: Bisnow <https://www.bisnow.com/national/news/coworking/heres-what-you-need-to-know-from-weworks-ipo-prospectus-100361>
 Alex Konrod, “Inside the Phenomenal Rise of WeWork” (5 November 2014), online: Forbes <https://www.forbes.com/sites/alexkonrad/2014/11/05/the-rise-of-wework/#26eaf94a6f8b>
 Supra at note 3.
 Kevin Dowd, “10 big thing: WeWork’s IPO in peril” (8 September, 2019), online: PitchBook <https://pitchbook.com/news/articles/10-big-things-weworks-ipo-is-in-peril>
 Supra at note 3.
Startup Pitfalls in Employment Law
Hiring your first employees is a major step for a young business, one that comes with a new set of new legal challenges and risks. This blog will discuss some of the major legal pitfalls in hiring. Note that this post doesn’t discuss the contractor/employee distinction (which is also very important) because that was covered in a previous post by Sunny Uppal on April 21, 2019.
Don’t Try This at Home
Employment law did not develop with small startups in mind. It emerged at a time when low-paid industrial workers needed protection from massive industrial employers, and it shows. Employment law generally assumes that employers have the upper hand in bargaining power and fairly deep pockets.
For startups, this means that you should always obtain legal information or advice before proceeding with your first hiring. Attempting to draft your own employment agreements (or not using written agreements at all) is walking blindfolded into a minefield of legal issues. Even lawyers have difficulty drafting some provisions to be enforceable, but they can at least assess risks and steer away from the more dangerous areas.
Get it in Writing from Day One
Handshake deals are common in the business world, and while lawyers are generally wary of unwritten agreements that is doubly true in the employment context. The problem is, absent a written agreement, a contract is “deemed” to arise regardless of the parties’ intentions and the terms of that contract will be decided by statute or by the courts. As an employer, these deemed contracts will rarely be preferable to a written agreement and can create uncertainty and risk.
The other issue with these unwritten agreements is that any later written arrangement is treated not as a new contract, but as a modification of the existing contract that arose when the relationship began. This creates a problem of consideration: the legal concept that if a contract is to be enforced in court, it must be an exchange of meaningful value between parties. The problem in this case is that the later agreement can be treated as a modification of the old contract, so if nothing new is being offered then the court will use to the old contract instead. Consider the following example: Jessica hires her friend Dave to do some bookkeeping for her without a written agreement. As the business grows, Jessica begins to look for financing but investors want to see papered employment agreements, so she asks Dave to formalize their relationship in writing at the same pay, hours, benefits, etc. In this scenario, the second contract is likely void for lack of consideration since Dave is providing a benefit to Jessica (a written contract for her investors) but receiving nothing in return except for the benefits he already receives under the old contract. This means their relationship is still governed by the unwritten contract, including the terms that arise by operation of statute or common law. It is important to get employment agreements in writing from the start, to avoid unwanted terms.
All That is Written is not Gold
While it is important to get employment agreements in writing, doing so doesn’t provide complete assurance that the written terms will be enforced. A major area of concern for startups is the possibility that an employee will start a competing business: startups often have low barriers to competition, so it is important to set up proper protections that will be enforceable.
A common tool to this in is the non-competition clause, or “restrictive covenant”. The idea is to prevent a former employee from becoming a competitor by setting up a competing business or going to work for a rival, using the experience they gained as an employee against the employer. While common, non-competition clauses are a tricky area of law. The Supreme Court has been reluctant to enforce such clauses on the grounds that they make it difficult for employees to find work in their area of expertise, which imposes a burden on their ability to earn a living. This means that non-competition clauses require careful drafting, and even then it is wise not to rely on them entirely.
Another way to protect yourself from competing against a former employee is to include strong intellectual property provisions into the employment contract that prevent the employee from wielding the knowledge they gained during their employment against you. Either way, seeking the proper legal assistance is critical.
Kevin Lee is a member of the BLG Business Venture Clinic and is a second-year law student at the Faculty of Law, University of Calgary.
 Employment Standards Code, RSA 2000, c E-9; Kent v Bell, (1949) 4 DLR 561.
 Greater Fredericton Airport Authority v NAV Canada, 2008 NBCA 28.
 J.G. Collins Insurance Agencies v Elsley, (1978) 2 SCR 916.
CALGARY's START-UP COMMUNITY: AN OUTLINE OF SERVICES AND SUPPORT
Calgary has many resources and opportunities to support entrepreneurs at all stages in their ventures’ development. Community supports exists for all the hurdles that growing ventures must overcome, whether your business is at the conceptual stage and you need help getting it off the ground, or your venture is growing fast and you need advice or support with bringing employees onboard, marketing your product or service, or finding the right investors. This blog post provides a non-exhaustive rundown of places and services in Calgary that can support entrepreneurs on their journey..
RESOURCES FOR STUDENTS
School provides a unique opportunity to learn theory and develop skills across a variety of disciplines, and to network and collaborate with like-minded people, in and out of the classroom. While these opportunities can help students come up with novel and creative business ideas, often a little more help is needed to take an idea from concept to reality. Many post secondary institutions in Calgary provide resources to help students get their ideas off the ground.
In addition to providing a means to keep overhead costs down and maintain flexibility in the early stages of a company’s growth, coworking spaces allow entrepreneurs to connect with one another, sharing skills, costs, connections and ideas. There are many coworking spaces across the city, forming a diverse range of entrepreneurial communities.
FOR THE LADIES
Nothing in this post quite right for you? Don’t worry, there’s more. Click here and here for more extensive lists of resources, events, spaces, meetup groups, and accelerator programs Getting to know the community is the best way to identify which spaces and programs can provide the advice, support, people or partnerships to elevate your business.
Lastly, please remember that the BLG Business Venture Clinic is always happy to help. Fill out a request form here and we will get in touch to find out how we can help.
Melanie Bowman is a member of the BLG Business Venture Clinic, and is a 2rd year student at the Faculty of Law, University of Calgary.
Contractor or Employee?
In a start-up, it is often necessary to hire workers. To avoid legal obligations to employees, entrepreneurs will often characterize these workers as independent contractors. However, defining a worker as an independent contractor does not automatically make that worker an independent contractor. Rather, whether a worker is an independent contractor or employee is determined by examining the substance of the relationship between the worker and employer. There are various common-law tests available to examine the substance of this relationship. Importantly, no particular common-law tests is determinative about the legal status of the worker. Regardless, this blog will provide a brief overview of the primary common-law test used by courts, the fourfold test.
In Montreal v Montreal Locomotive Works Ltd et al, (“Montreal Locomotive”), the House of Lords articulated the fourfold test. In summary, the fourfold test requires examining whether (1) the alleged employer is exerting control, or has the power to exert control, over the worker, (2) whether the worker owns the tools of his trade, (3) whether the worker has the chance of profit, and (4) whether the employer has the risk of loss.
Control is the right to give orders to a worker regarding where, when and how work is performed. Workers required to follow such orders are more likely to be employees. Independent contractors typically determine the hours, place and method of work for themselves.
Examples of control include the employer’s right to:
Ownership of Tools
A worker who owns and supplies the tools, materials, licenses and contacts required to perform agreed work is more likely to be conducting his own business and be considered an independent contractor. A worker who is supplied with these things by an employer is more likely to be part of the employer’s business and considered an employee.
”Tools” is a catchall term used to describe a wide variety of items and resources required to perform work, including:
Chance of Profit and Risk of Loss
Exposure to profit or loss on a work contract is indicative of an independent contractor. As a business owner, an independent contractor makes expenditures on equipment, workers, advertising, licenses, or other resources. Having contracted for a particular volume or quality of work, his return is affected by how efficiently he can meet that volume or quality.
In contrast, employees typically invest only their time in performing work. They are usually paid wages or salary and do not run a risk of loss if work is not performed efficiently. Likewise, they are typically not entitled to share in increased profits resulting from their work.
In conclusion, entrepreneurs must be careful whenever retaining a worker. Although the entrepreneur may be under the impression, they are retaining the services of an independent contractor, they may in fact have hired a new employee.
Sunny Uppal is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary.
 Kaszuba v. Salvation Army Sheltered Workshop (1983), 83 C.L.L.C. 14,032 (Ont. Div. Ct.)
 671122 Onatrio Ltd v Sagaz Industries Canada Inc, 2001 SCC 59 at para 46 [Sagaz Industries].
  1 DLR 161.
 Montreal (City) v Montreal Locomotive Works Ltd (1946),  1 DLR 161 at p 169 [Montreal Locomotive].
Mobile Food Vending: A Beginner’s Guide
Have you ever thought about operating a food truck? In the U.S. at least, the food truck industry is now generating $2 billion-plus in estimated revenue with the industry’s overall revenue having grown 300% over the last three years.
Though the food truck craze likely peaked a few years ago, mobile food vending may still provide budding entrepreneurs exciting opportunities to get their feet wet. Some carts and concession stands can be purchased at an attractive price point, and even food trucks, which will likely require a larger investment upfront, can be run with modest operating costs. There is also something appealing (at least to the author of this blog post) about parking your colourful truck next to the sidewalk, playing your favourite music, and dishing out your choice of delicacy to a lineup (one would hope) of eager patrons. You may also like the idea of being part of the festival scene, which largely depends on mobile food vending to keep the good people of Calgary happy and fed. If meals on wheels speaks to you like ones and zeroes probably spoke to Bill Gates, listen up; you’ll need to clear some red tape before you can get started.
Food Handling Permits
If your mobile food vending operation is going to require you or your staff to handle food, you will need a food handling permit. Alberta Health Services classifies mobile food vending units according to the type of food that will be handled, the manner in which said food will be handled, and the extent to which such handling presents a risk to the public. Depending on how your mobile unit is classified (types A-F), you will need to meet certain requirements, such as a minimum number of sinks or a minimum amount of fresh water that you have to have available for use at all times. Additionally, if you are not planning on preparing food in the mobile food vending unit itself, you will likely need to set up a “Base of Operations,” which would entail designating a space for food storage and preparation and then receiving approval from Alberta Health Services.
Next, you’ll need some business permits from the folks at the City of Calgary. First and foremost, anyone offering mobile food services will need to obtain a municipal business licence. The next step will depend on what kind of vending unit you plan on operating and where, exactly, you plan on parking it. If you want to operate from city streets, you’ll need to licence your mobile unit as a “full service food vehicle.” This type of licence requires a safety code inspection, which is coordinated in conjunction with a business licence fire inspection and can be scheduled by calling 311. You will also need to have a commercial vehicle licence and an insurance policy with at least $2 million of coverage in place before a full service food vehicle permit will be issued. Those wanting to park their full service food vehicle at a special event will also need an additional special event inspection (also scheduled by calling 311).
If you plan on operating only from private property, or if you want to operate a pushcart outside of the downtown core, you can instead apply for a “food service – no premises” licence type. This licence will not require the building safety and fire inspections that a full service food vehicle would, although you will still need an insurance policy with at least $2 million of coverage in place before a permit will be issued. Note that this type of licence allows individuals to operate downtown between the hours of 7 am and 3 am. Some examples of food service – no premises mobile vending units include: food trucks that only operate at festivals or only sell pre-prepared foods, pushcarts outside of downtown, bicycle vendors operating on roadways that do not meet the definition of pushcart, ice cream trucks, and catering trucks. It is also important to note that operating your business on private property (regardless of how you’ve licenced your mobile vending unit) will require the property owner’s written consent.
Regardless of which licence type you ultimately decide on, there will, of course, be fees (see the City of Calgary link provided below). You will also need to ensure that you dispose of any grey water (waste water from cleaning dishes and the like) at an approved location. Those who want to operate on Stephen Avenue Mall, Barclay Mall or Eau Claire Market will also need approval from the Downtown Association. Given that your business may feature sharp objects and open flames, you may also want to think about liability and how you will structure your business (i.e. whether to incorporate).
So there you have it, the basic steps you need to get your mobile vending unit business up and running. Ultimately, one of the great things about food trucks and mobile vending units is that the municipal and provincial governments have put resources towards streamlining the licencing process. If you’re a first-time entrepreneur, that means less red tape and more time to dial in your menu, your branding, and your food trucks awesome paint job.
For more information on Food Handling Permits, visit: https://www.albertahealthservices.ca/assets/wf/eph/wf-eh-mobile-food-vending-units.pdf
For more information on mobile food vending in the City of Calgary, please visit: http://www.calgary.ca/PDA/pd/Pages/Business-licenses/Mobile-Food-Vendors.aspx
To view the City’s fee list, visit: http://www.calgary.ca/PDA/pd/Documents/fees/business-licence-fee-schedule.pdf
Aleksandar Kukolj is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary.
 Sam Milbrath, “12 Impressive Facts on the Food Truck Industry” (May 17, 2018) online: https://www.food.ee/blog/12-impressive-facts-on-the-food-truck-industry/.
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.