In ‘Strategic Refocus,’ Troubled Zenefits Lets 250 Employees Go

David Sacks, CEO, Zenefits
David Paul Morris | Bloomberg | Getty Images
David Sacks, CEO, Zenefits

Zenefits, the troubled benefits software company that three weeks ago fired its founding CEO, said today that it has laid off 250 employees, mostly in its sales recruiting organization.

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In a memo to employees, CEO David Sacks said the move signals an intention to "rebuild in line with our new company values." Zenefits, which sells employee health insurance plans alongside free software to administer those plans, was been rocked by disclosures that many of its employees are not properly licensed to sell insurance.

The job cuts amount to about 17 percent of the Zenefits workforce. The company has until recently been considered a Silicon Valley high-flyer, having raised $500 million from investors at a valuation of $4.5 billion.

Sacks, who first joined Zenefits as COO in 2014. He didn't need the work. He's a member of the so-called PayPal Mafia, and was the payment company's COO until its sale to eBay. He then founded Yammer, a workplace collaboration tool similar to Slack, which he sold to Microsoft in 2012.

Here's the memo:

From: David Sacks
Date: Fri, Feb 26, 2016 at 6:19 AM
Subject: Company Update
All —
When I became CEO of Zenefits, I promised on Day 1 to reset our culture, refocus our strategy on serving small businesses, and create a new beginning for success in the future. Today I have to make a very difficult set of decisions about how we do that. In fact, this is the most difficult decision I've had to make in my career, but it is necessary for Zenefits to move forward successfully.

We are reducing our headcount by roughly 250 employees, or about 17 percent of total employees. These changes are almost entirely in the Sales organization, with about a dozen employees in Recruiting. Within the Sales organization, we are eliminating the Enterprise team (although some members will be offered other roles). We are also making a large reduction in Sales Development Representatives (SDR), the organization that prospected for the largest accounts.

I want to make clear that this is a reduction in force (RIF), meaning that we are not cutting these jobs for performance reasons. We are letting go of many great people today, and it is not their fault. It is no secret that Zenefits grew too fast, stretching both our culture and our controls. This reduction enables us to refocus our strategy, rebuild in line with our new company values, and grow in a controlled way that will be strategic for our business and beneficial for our customers.

One of our core company values is to make Zenefits a great place for employees. To honor that value, we need to proceed in a way that respects our friends and colleagues. That is why we will be offering affected employees three months of severance (at their full OTE, which includes 100% of their incentive compensation), six months of COBRA, and transition assistance to help them find and move on to their next job.

We also want to make those who stay at Zenefits as successful as possible. Our sales leaders will be meeting with the team this afternoon to roll out new sales plans and quotas. By expanding the size of territories and concentrating lead flow, the sales reps who stay will be in a great position to succeed.

I believe they will be successful, and let me tell you why. Zenefits is a product that every small business needs. We have an important mission in the world, which is to make entrepreneurship easier and more accessible to everyone. We solve a universal problem for small businesses, which is to help them hire and manage their employees — onboard them, add them to payroll, enroll them in benefits, and provide their employees with health insurance coverage.

This is why Zenefits more than tripled its Annually Recurring Revenue (ARR) last year, growing from $20 million to over $60 million. As one angel investor ironically noted, he wished all of his investments could "fail" that badly. The reality is that very few start-ups have ever gotten to our position of market leadership and market opportunity. It would be an incredible waste if we did not seize it and make the most of it.

During my years in Silicon Valley, I've seen a number of attempted tech turn-arounds. Frankly, they don't have a very good track record. But that's because those companies had become obsolete technologies; they had lost their product-market fit. That is not Zenefits. Zenefits has made mistakes but it never lost its product-market fit.

I believe that the measures we are taking — self-reporting our issues to regulators, fully cooperating with their investigation, instituting new controls that bring us into compliance, naming a new exec team and Board, introducing new company values — put us on the path to fixing these problems.

I have confidence that we will turn a corner and deliver on our promise, because I know how much pride all of you have in this company. I know how much you care about what we're building, how hard you have fought for our customers' success, how special you believe this company is, and how great it can be.

That pride may be a little bruised lately by what has been written in the press. But I promise you this: if we move forward and rebuild, that will not be the last word written about this company. It will not be the last chapter. Zenefits will turn the page. And the story of Zenefits will make everyone proud.

David

Arik Hesseldahl, Re/code.net.

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