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Parker Conrad, CEO and co-founder of once high-flying Zenefits, has resigned amid a scandal involving allegations that employees sold insurance without holding proper licenses to do so.
COO David Sacks will take over as chief executive, according to an email distributed to employees at the San Francisco-based digital health startup, which zoomed to a $4.5 billion valuation last spring before running into legal, regulatory and growth roadblocks.
The company also disclosed the news late Monday afternoon in a press release that said Conrad "has agreed to step down as CEO and a director of the company."
The state of Washington is investigating allegations that Zenefits' employees acted as insurance brokers without holding proper credentials. More than 80 percent of insurance policies sold in Washington state through August of last year were sold by Zenefits staffers who didn't have brokers' licenses in the state, BuzzFeed reported Friday, citing data obtained through a public records request.
In the email to employees, Sacks acknowledged serious mistakes.
"We sell insurance in a highly regulated industry," he wrote. "In order to do that, we must be properly licensed. For us, compliance is like oxygen. Without it, we die."
Sacks, who was previously Yammer's founder and CEO, added that many internal controls and processes related to compliance "have been inadequate, and some decisions have just been plain wrong. As a result, Parker has resigned."
Sacks also said the company is appointing Joshua Stein, who had been vice president of legal, as its first chief compliance officer. In that role, Sacks said, Stein "is charged with ensuring that Zenefits is in compliance with all rules and regulations."
Stein, who Sacks identified as a former federal prosecutor, will also "continue to oversee" a review that Zenefits began in December with an unnamed Big Four accounting and consulting firm to assess the company's operations, processes and policies relating to complying with broker licensing regulations, the company said. As part of that review, it is in "regular communication" with departments of insurance in all 50 states.
Sacks also indirectly acknowledged that the company's culture had lost its way, stating bluntly that "the problem goes much deeper than just process," and calling Zenefits'culture and tone "inappropriate for a highly regulated company."
In a separate statement Monday afternoon, Zenefits said it's added three new investors to its board of directors: Peter Thiel, co-founder of PayPal and Founders Fund; Antonio Gracias, Valor Equity Partners' founder and managing partner, and Bill McGlashan, founder and managing partner of TPG Growth.
Other board members now include Sacks; Laks Srini, Zenefits' co-founder and chief technology officer, and Lars Dalgaard, general partner at Andreessen Horowitz.
The allegations in many respects mirror complaints by other insurance brokers and Zenefits' competitors in the online insurance brokerage and HR marketplace, who have complained since its meteoric rise in 2014 and early 2015 that it was bending or ignoring rules they were expected to follow.
Conrad, 35, called Zenefits the fastest-growing Silicon Valley startup, and until last summer, he seemed to back up his boasts with results. But in the second half of 2015, growth stalled and questions about Zenefits' approach grew, with Washington state insurance commissioner Mike Kreidler's office confirming in mid-November that Zenefits was being investigated for possibly selling insurance without proper licenses.
The company's rapid rise and equally dramatic fall from grace earned Conrad the San Francisco Business Times' Executive of the Year designation last year.
Like Time Magazine's Person of the Year, the executive of the year is the person who had the biggest impact, regardless of what type of impact that might be.
Sacks' memo to employees appears to chart a very different approach, one that he described as focusing intensely on integrity and meeting customers' needs, rather than focusing on growth for growth's sake.