TOUGH BREAK

A scandal-ridden tech startup is slashing its valuation in half to start over

Zenefits, a once high-flying startup that has become emblematic of deception and excess in Silicon Valley, is chopping its valuation by more than 50%.

The human-resources software startup shot to a $4.5 billion valuation in just two years by brokering health-insurance benefits and automating traditional HR tasks such as payroll and compliance. The company was a darling of Silicon Valley until last fall, when it came out that Zenefits had allowed salespeople in at least seven states to act as insurance brokers without the proper licensing.

Those troubles compounded in February, when it was revealed that Zenefits founder and then-CEO Parker Conrad had created a secret software program, known as a macro, that let its health-insurance brokers in California fake the completion of a mandatory online training course. Conrad resigned that month.

Now, in an effort to move past those scandals, Zenefits has proposed a settlement with investors that reprices its existing stock at a $2 billion valuation and grants them additional shares in exchange for releasing the company of potential legal claims.

“Since shortly after becoming CEO, I have been in discussions with a number of our major investors about how we can reset our relationship in light of the fact that they (like I) were never informed about the Macro before investing in the company,” Zenefits CEO David Sacks wrote in a memo on Thursday (June 30).

The deal increases the ownership stake of Zenefits’ series C investors to about 25%, from 11%, according to the memo. Previous investors will be given “small adjustments to offset their dilution.” The company’s common stock will be diluted by about 20%. Zenefits is boosting the stake of current employees by offering them a “special stock grant” worth 25% of their existing number of shares, which will vest over the next 12 months.

Investors who participate in the agreement must sign a release of claims against Zenefits. Fidelity, investment management firm TPG, and venture-capital firms Insight Venture Partners, and Andreessen Horowitz have already approved the deal.

“This is a unique situation. We’ve never seen it before and we don’t expect to see it again,” a spokesperson for Andreessen Horowitz told Fortune.

Even so, Zenefits’ dramatic devaluation could cast fresh doubt on the soaring figures that investors have awarded to many other startups over the last year and a half. Between the fourth quarter of 2015 and the first of 2016, T. Rowe Price marked down the value of its stakes in many private tech companies by north of 15%.

In late February, Fidelity disclosed similar write-downs for many of the startups in its mutual funds, including a 14.2% cut for Zenefits. Fidelity valued Zenefits at $3.8 billion in its most recent monthly report, which goes through May 31.

Worldwide, there are 169 private tech companies valued at $1 billion or more—in Silicon Valley parlance, also called “unicorns”—according to VC research firm CB Insights. Uber is the most valuable, followed by Chinese consumer electronics company Xiaomi and Chinese taxi- and ride-hailing giant Didi Chuxing. At its old valuation, Zenefits was roughly on par with startups such as Lyft (valued at $5.5 billion) and virtual-reality company Magic Leap ($4.5 billion).

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