A warning shot: What startups can learn from the Zenefits debacle

The quietly "unsexy" tech startup Zenefits has roared into the public eye thanks to two visible and widely covered scandals that were made public this month.

From the release of an old memo telling employees not to have sex in the stairwells to the ongoing broker compliance errors that lead to the resignation of original CEO, Parker Conrad, the embattled HR tech provider and benefits broker may become a "cautionary tale," the New York Times' Farhad Manjoo wrote.

"The situation looks bad, and is likely to get worse," Manjoo added. "It's bad in ways specific to this start-up, but also in larger ways — ways that highlight how last year's enormous funding rounds and their attendant overinflated expectations may wreak havoc on Silicon Valley for years to come."

Culture and compliance may seem disparate to growth – but ignore one, and all three will suffer. In highly regulated industries like HR and health insurance brokerage, such errors could lead to disaster, as Zenefits is experiencing first hand.

HR Dive spoke to Rob Butler, the CEO of Maestro Health, and Marta Moakley, a legal editor at XpertHR, to discuss what went wrong – and what other companies can do to prevent a similar breakdown.

The danger of massive growth

In 2013, the year Zenefits was founded, it made $1 million in annual recurring revenue. By 2015, the company was projected to make over $100 million by the end of the year, Manjoo reported. Such massive growth lead to humongous funding ($500 million last year alone), which lead to crushingly high expectations of further growth. In turn, Conrad "promised the moon" to investors.

But such massive growth can lead to serious consequences for an unprepared company, Moakley told HR Dive. Compliance, training and even customer service can all fall by the wayside when a company values growth above all else. The real, purported values of a company – community service, integrity, etc. – can fade into the background upon such demands.

Marta Moakley, Legal Editor, XpertHR

"Leaders must make sure that those values are considered important, or else the company starts to become a company that says 'do as I say, not as I do,' which does not play well with regulators on every level," Moakley said.

Particularly for younger companies, money tends to go toward growth, Butler said. Most companies at that stage don't spend much money or attention on compliance, as it doesn't explicitly add to margins right away.

"As companies start getting momentum, it gets more alluring to cut corners," Butler said. This is especially true in highly regulated industries like healthcare benefit brokering, where hiring and training people may take more time than the company wishes to spend. It's become a necessity for companies in those industries to put compliance as a top priority, even during growth periods, Butler added.

The proper formula involves investing in compliance and regulation alongside growth initiatives. Doing so will make any occurring issues simpler to deal with and prevent some from arising at all.

Paying attention to documentation

The primary issue here is the nature of a corporation, Moakley said. All entities need to understand compliance operations, especially in highly regulated industries – and between different states.

Zenefits was expanding from California (one of the most regulated states in the country) to other states. Any company following a similar growth path must sit down and assess their internal policies and handbooks to make sure the expansion is also covered in internal governance documents. Multistate concerns should be present in those documents, including wages, hour regulations, vacation time, and other such personnel matters that differ between each state.

"I wouldn't put all emphasis on growth," Moakley said. "It's really important to ensure that not only what is written on paper is in compliance, but also the spirit of the law and ethics are in place."

Some important questions companies should ask during expansion and compliance overview:

  • How are policies implemented throughout the org?
  • Do you have remote teams that don’t get the same communications that the main office does?
  • What do you have on paper and what are you actually communicating?
  • What are we communicating externally?

Why culture management matters

Company culture is hard to scale, especially companies that start small and take off running. The Silicon Valley "culture of laxity" is not applicable to all workplaces – not many other startups have beer kegs in their offices, like Zenefits reportedly did – but culture is a key part of managing expectations and keeping true company values, like integrity, alive.

Rob Butler, CEO, Maestro Health
Maestro Health

"You have to manage your growth. There's nothing more exciting or sexy than high growth," Butler said. "But you need to set the right expectation with the right balance of growth. You can't outgrow your current customers because then service dips."

Managing culture is priority today, Butler said, and that becomes even harder as a company opens disparate locations. To create the type of culture that stabilizes a company, organizations must encourage transparency.

"We have town hall meetings. We have a playbook," he said. "Everyone talks about transparency, but few have the courage to do it. We celebrate the victories and publicly acknowledge we don't always win."

Companies must handle external and internal messaging, especially with unexpected growth or any deviations from the original business plan, Moakley said, and ask: Do we have the capacity to do this? And are we hiring the best people?

Above all, companies must build trust – especially for when the storms blow in. Build trust with employees, and that trust will spread to external audiences as well. According to Manjoo's New York Times report, "there were celebrations and tears of relief" when Zenefits announced the departure of Conrad. Stability and culture do matter.

"To your employees, your investors and your customers, you have to underpromise and overdeliver," Butler said. "You build credibility and trust and it makes life easy. If people trust you, they know you will not always be perfect, but they will trust that you will fix it."


Stay informed.
Subscribe to HR Dive to get the latest news in HR delivered straight to your inbox.

Follow on Twitter

Filed Under: HR Management Legal