Health benefits and human resources startup Zenefits has agreed to increase investor-owned stakes saying the investors initially overpaid for their stakes because the company's quick growth was based on false pretenses, reports The New York Times.
Stakes owned by investors from Zenefits' Series C funding round will increase from 11 percent to 25 percent, according to the report. That funding round, which closed in May 2015, garnered approximately $500 million for Zenefits.
Investors in earlier rounds will be offered the option to own more of the company in the future, according to the report.
Overall, the increased stakes will halve the company's valuation to approximately $2 billion, according to the report.
Former Zenefits CEO Parker Conrad was found to have created software that permitted sales representatives to dodge regulations. He stepped down from his position in February, and David Sacks, formerly COO of the startup, assumed chief executive duties.
Mr. Sacks has personally invested more than $12 million in Zenefits. Investors have applauded Mr. Sacks' leadership during this time.
"Over the last six months, in the face of very significant challenges, David Sacks has shown incredible leadership," Bill McGlashan, founder and managing partner of TPG Growth, one of the leading investors in the Series C funding round, told NYT. "He and the board have held the company accountable and done the right thing by customers, employees, regulators and investors."
Amid the turmoil, Zenefits announced two major layoffs: One in February, affecting 250 employees, and more recently in June, affecting another 106 employees.
The company is working on a "reboot" called Z2, essentially a rebirth of the company with new leadership and oversight, according to NYT. Given all the changes, Mr. Sacks offered employees a voluntary two-month severance package if they wanted to leave, but 90 percent reportedly chose to stay.
In an email to employees regarding the change in investor stakes, Mr. Sacks wrote, "We self-reported the issue to regulators, brought our licensing into compliance, changed our leadership and governance, instituted new company values and began to transform the culture.
"In many ways, this is a different company than the one they originally joined, but our employees have embraced our new values and our mission to make small-business ownership easier and more accessible to everyone."
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