Zenefits CEO resigns amid compliance problems

Zenefits CEO Parker Conrad also resigned from the board. Zenefits CEO Parker Conrad also resigned from the board. Photo: Liz Hafalia, The Chronicle Photo: Liz Hafalia, The Chronicle Image 1 of / 1 Caption Close Zenefits CEO resigns amid compliance problems 1 / 1 Back to Gallery

Fast-growing San Francisco software startup Zenefits said that Parker Conrad has resigned as chief executive officer, citing “inadequate” processes and regulatory compliance.

Chief Operating Officer David Sacks, whose startup Yammer was bought by Microsoft Corp., will take over as CEO of the human-resources software maker. Sacks was also an early PayPal executive.

Zenefits hired an accounting firm in December to conduct a review of the company’s licensing procedures, Sacks wrote in a memo to employees. Josh Stein, a former federal prosecutor and vice president of legal, will oversee the review as chief compliance officer. He will coordinate with state insurance regulators and put into place the recommendations from the outside audit of its policies.

“The fact is that many of our internal processes, controls, and actions around compliance have been inadequate, and some decisions have just been plain wrong,” Sacks wrote. “In order for us to move forward as a company, we cannot seek to hide or downplay the problem.”

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Conrad, a co-founder of the company, has also resigned from the board of directors of the company that attempted to shake up the health insurance brokerage industry.

Conrad’s recent tenure was rocked by lapses in complying with health insurance regulations in several of Zenefits’ markets. The company makes software that is intended to streamline the way small businesses buy health insurance for their employees.

In a $500 million funding round last year, the company was valued at $4.5 billion, according to online reports. Its investors have called Zenefits one of the fastest-growing business software companies in history.

But in the last few months, a series of reports by BuzzFeed News found that the company was cutting corners. According to BuzzFeed, Zenefits employed unlicensed brokers to sell insurance to customers, resulting in scrutiny from regulators and the undoing of many of its sales. The site said that more than 80 percent of Zenefits policies in force in Washington state as of August had been sold by unlicensed employees.

Established brokers in many states complained to state regulatory bodies, according to tech news site ReCode. One such regulator in Utah even sought to ban Zenefits from operating in the state, until it fought back in court.

In an unusual move in Silicon Valley, where a break-anything culture is revered, Sacks called on Zenefits to straighten up its image.

“We must admit that the problem goes much deeper than just process,” he wrote. “Our culture and tone have been inappropriate for a highly regulated company.”

Zenefits also appointed three new members to its board of directors: Peter Thiel, a co-founder of PayPal who is now an investor at Founders Fund, Antonio Gracias of the investment firm Valor Equity Partners and William McGlashan Jr. of TPG Growth.

Though its current investors say they remain enthusiastic about Zenefits’ prospects, the resignation represents a second disappointment for Conrad, who was pushed out of SigFig, a start-up he was a co-founder of in 2007. In an interview in 2014, Conrad was frank about his fear of reprising that failure at Zenefits, which he described as the plausible danger in a company growing so quickly.

“Even when we think things are going well, it always feels like the wheels are ready to come off the cart,” he said.

Conrad, who co-founded Zenefits in 2012, didn’t immediately respond to a request for comment on the moves.

The controversy and abrupt change in leadership are a blow to the fast-growing startup. Fidelity Investments has written down the value of its shares in Zenefits by as much as 22 percent. Technology companies are facing more scrutiny as investment into Silicon Valley begins to cool.