David Sacks walked intoDolores Park Café in San Francisco to talk to Lars Dalgaard, aventure capitalist, about what he should do with his life. Orrather, his money.

Sacks, who is 43 and has thick gray hair and blue, protrudingeyes, made his first fortune as an early executive at PayPal, thena second as the co-founder of Yammer, a social network forbusinesses, which he sold to Microsoft in 2012 for $1.2 billion. Heplayed in poker tournaments, produced the film Thank You forSmoking, and became an early investor in Uber and SpaceX. But bythe fall of 2014, he was sick of jumping from hobby to hobby. Hewanted in on a startup again.

Sacks and Dalgaard were business acquaintances—Dalgaard, ageneral partner at Andreessen Horowitz, had once tried to buyYammer for $300 million. After the requisite industry gossip, theygot down to business. Dalgaard urged Sacks to take a look atZenefits, a new company in which Andreessen Horowitz had recentlyinvested.

Zenefits makes online softwarethat automates health insurance, payroll, and other essentialoffice drudgery—kind of a human resources version of TurboTax. It’snot a sexy idea, but with 6 million small businesses in the U.S.,it’s enormously useful.

The company was founded in 2013 by Parker Conrad, who realizedhe could streamline small businesses’ managerial needs, saving themhundreds of hours of mind-numbing paperwork—not to mention the costof staffing an HR department—by putting everything online. Conradwas known to be a little frenzied and disorganized but fiercelyintelligent.

“From an investment philosophy … we look for the magnitude ofthe genius, as opposed to the lack of issues,” says Andreessen’sfounding partner Ben Horowitz. “And in a way, [Conrad] was like theprototype.” Conrad had no background in health insurance butquickly learned the intricacies of the business as well as anyveteran. “If you’re an insurance broker,” he said at the TechCrunchDisrupt conference in 2013, “we’re going to drink yourmilkshake.”

As Sacks saw it, the most compelling part of Zenefits was thatit gave its software away, making most of its money throughbrokerage commissions that insurance companies paid when a clientbought one of their plans. Those commissions recurred annually:Once a business signed up, Zenefits would profit for years to come.“It’s a glaring omission that no one had created [something likeZenefits] before,” Sacks says. He and Dalgaard talked at the cafefor three hours, stopping only when the waiters started puttingchairs on the tables. A few days later, Sacks met with Conrad. Hejoined the company in December 2014 as chief operating officer.

Zenefits was everything Silicon Valley loved wrapped up in onecompany. It had a visionary founder. It tackled a stodgy industryripe for disruption. The recurring commissions gave it a steadystream of revenue from the start. And Zenefits was the first in thehealth insurance software space, the Uber to its futurecompetitors’ Lyft.

The potential for greatness is what allowed Zenefits to expandfrom 15 employees to 1,600 in three years; raise $580 million inthree fundraising rounds; and become one of Andreessen Horowitz’sbiggest investments. Last year it was valued at $4.5 billion, whichmade it, in Valley parlance, a “unicorn” several times over.

“You’re looking for disruptive companies,” Conrad said in thatsame TechCrunch Disrupt speech. “We are going to mess stuffup.” He was right, although not in the way he meant.

Conrad is 36, with a round face, a hefty build, and closelycropped, reddish-blond hair usually accompanied by a day’s worth ofstubble. He grew up in New York City, the son of an environmentalactivist and a corporate lawyer. He went to, flunked out of,reenrolled in, and ultimately graduated from Harvard. People who’veworked with him say he’s prone to emotional highs and lows that areamplified under pressure. In 2011 he and a former college roommatelaunched the financial management company SigFig. Conrad’s partnerpushed him out after a year.

According to interviews and talks he gave duringhappier days, Conrad came up with the idea for Zenefits in 2012while trying to offer health insurance to SigFig’s few dozenemployees. He’d become familiar with the intricacies of the U.S.health-care system while battling testicular cancer during hisearly 20s, and he even found navigating SigFig’s health-careoptions cumbersome. “It was an area that was a real pain point forme personally,” he told TechCrunch last year.

Before a company in the U.S. offers health insurance to itsemployees, it has to comb through thousands of plans offered byhundreds of insurers, and then select the two or three options thatbest suit its employees, based on age, marital status, andlocation. The smaller the business, the less likely it is to havesomeone with enough time to sort all that out. “We have 10employees. We’re not big enough to have an HR department,” saysScott Yates, founder and chief executive officer of BlogMutt, acontent service startup based in Boulder, Colo. “We can’t do thison our own.”

Enter the health insurance broker, who helps companies figureout what they need. Brokers are paid by insurance companies eachtime they sell an insurer’s plan. Sometimes they’re paid a flatrate, sometimes a cut of the plan’s premium. BlogMutt once used abroker. “We had an actual living, breathing human come talk to us,and it was great,” Yates says. “But he wasn’t always available. Thepromise of Zenefits has a lot of allure for a company like us.”BlogMutt signed up a year and a half ago.

Zenefits launched in April 2013 through startup incubator YCombinator. Conrad had recruited one of SigFig’s top engineers,Laks Srini, to be his co-founder, and he expanded Zenefits’ scopeto include payroll, 401(k)s, Cobra, offer letters, and otherHR-related chores. Within eight months the startup was on track tomake about $1 million in recurring annual revenue and had landedthe investment from Andreessen Horowitz. (Srini declined tocomment. Bloomberg LP, which owns Bloomberg Businessweek, isan investor in Andreessen Horowitz.)

That gave Zenefits—and Conrad—legitimacy. Andreessen Horowitz isone of the top VC firms in Silicon Valley, the big checkbook behinddozens of success stories, from Airbnb to Skype. Conrad was thetype of person the firm was looking for. He could deliver a lectureon the inner workings of the insurance industry as easily as hecould tell you what type of company Zenefits could become.

“I’m excited about meeting incredible human beings that changethe world that we walk on, literally, and how we walk on it,”Dalgaard says. “I don’t think I’ve ever seen anyone—and I’ve seen alot of people—think as comprehensively as [Conrad] did about themarket he was going after and how to build his product.”

Andreessen Horowitz led two fundraising rounds totaling $82million for Zenefits in 2014. Dalgaard joined the newly formedboard. His job was to help Conrad develop Zenefits into a maturecorporation. When Conrad set the company’s 2014 recurring revenuegoal at $10 million, Dalgaard doubled it. “Lars sat there in hisvery Lars fashion and was like, ‘Why are you guys so f---ing bushleague?” Conrad said at a software conference last year. Then, inConrad’s telling at that conference, Dalgaard told him to add atleast 100 sales reps to make it happen.

Zenefits started growing. It moved into a highrise in SanFrancisco’s SoMa district and expanded from fewer than 20 people toroughly 500, many on the sales side. As far as Silicon Valley perksgo, Zenefits was pretty sparse—no personal chef, nomeeting-room-cum-ball-pit. Conrad had the offices painted gray andorange and named each conference room after a characterfrom Star Wars. By the end of 2014, Zenefits hit Dalgaard’s$20 million recurring revenue goal and was making good on itspromises to shake up the brokerage business.

According to former employees, Conrad oscillated between aconviction that Zenefits was conquering the world—at the time,about 2,000 businesses used its services—and a near-constant fearthat it would never make its numbers and he’d be fired. Employeeswere afraid that any mistake would stop the company’s growth. At atalk last year organized by Khosla Ventures, Conrad said, “There’sa low-level panic that suffuses the organization, a constantpressure to keep moving faster and faster and faster.”

Soon, Zenefits ran into snags. The Utah Insurance Departmentbanned it from operating in the state because the agency consideredthe free HR software to be in violation of a law against offeringrebates to customers. Zenefits was also finding that some insurancecompanies weren’t technologically advanced enough to integrate withits system.

“Most of these insurance transactions are still done on paper orwith e-mailed PDFs,” says Sabrina Corlette, a research professor atGeorgetown University’s Health Policy Institute. This increased theodds of errors—and Zenefits’ employees were often moving too fastto catch mistakes. “My dentist said they couldn’t run my insuranceclaim through, and it took three months to get someone at Zenefitsto fix it,” says Brittany Keppel, a former office manager inBrooklyn who also had trouble getting Zenefits to sign her up forCobra when she was let go from her job in January 2015. BlogMutt’sYates says he deals with Zenefits problems every few weeks: “Namesappear in records incorrectly. Dates are wrong. I don’t know wherethe breakdown is, but the biggest problem is there’s no qualitycheck.”

Zenefits spokeswoman Jessica Hoffman responds: “Our focus onremediation over the last three months has included a qualityinitiative that has dramatically reduced error rates.”

This was the mess Sacks encountered when he joined Zenefits inDecember 2014. He showed up on his first day to find that he didn’thave a desk or a computer. Head count was approaching 500employees, but the office management company didn’t have an officemanager. There wasn’t even an IT person to fix the printers.

Conrad hadn’t forgotten to fill these positions. The way he sawit, Zenefits was full of gifted engineers; if their computersweren’t working, they should be able to fix them. Of course, timespent futzing with the Wi-Fi was time not spent building theproduct or dealing with customers. To Conrad, that just meant theengineers needed to work harder. “I guess the way I saw the chaosat that point was that it was undesirable,” Sacks says, “but ifthere was none of this, then there wouldn’t be a need for me to beat the company.”

Sacks says one of his earliest battles with Conrad was over theidea of hiring a receptionist. Sacks won—a friendly young woman nowgreets visitors from behind a sleek, white desk—but lost a battleto get Conrad to quit micromanaging the company’s HR decisions.Zenefits uses its own product to manage its employees, and Conradcontrolled the account, which meant he personally approved everybenefits change or vacation request for hundreds of (later, morethan 1,000) employees. “We have people in HR now, but they actuallydon’t have access to the HR system,” Conrad said in an interview atTechCrunch Disrupt last year. “I do all of it myself. I’m a littlecrazy.”

The problems were much deeper than a disorganized office.Insurance brokers must pass a state licensing exam before they canlegally sell or advise people on insurance. Each state has adifferent exam and training requirements. In California, brokershad to spend at least 52 hours on an online training course.Zenefits says Conrad created a Google Chrome browser extension thatallowed people to bypass the 52-hour rule by making it appear as ifthey were working on the course when they weren’t. The extentionwas called “the macro.” (Conrad declined to comment on the Chromeextension.)

Every state has a different brokerage exam. A person licensedonly in California can’t legally sell insurance to a company inKentucky unless he applies for a reciprocal license. Zenefits soldits product all over the country, and its managerial chaos seems tohave kept it from properly tracking who passed their state exams orgot reciprocal licenses.

Conrad worked closely with Sam Blond, Zenefits’ trim, tannedvice president for sales, who liked to party. When their teamclosed a big account, Blond and Conrad poured shots for everyone inthe office. Zenefits had kegs in its office. In an onstageinterview at a tech conference in 2015, Blond told a story abouthow he and Conrad once got so drunk at a San Francisco steakhousethat they wrestled each other on the restaurant floor.

“Half an hour ago we were in the greenroom, and we saw twobottles of unopened drinks,” Blond said at the same tech conferencewhile sitting onstage with Conrad. He smiled. “They’re no longerunopened.” (Blond declined to comment for this article.)

Last year the management company that runs Zenefits’ officespace complained about cups of beer and used condoms found in thestairwells. “Do not use the stairwells to smoke, drink, eat, orhave sex,” Emily Agin, Zenefits’ director of real estate andworkplace services, reminded employees in a companywide memo.

Sacks wasn’t averse to a little debauchery. A few years ago,according to multiple news reports, he hired Snoop Dogg to performat his Marie Antoinette-themed 40th birthday party. Instead ofinvitations, Sacks sent little cakes. He showed up in period dress.But at Zenefits, he was different. Employees say he didn’tsocialize. He stared at his phone in meetings. He sometimes evenescaped to an office in a nearby building for alone time.

Most of Zenefits’ problems remained internal. Investors couldn’tsee them. Those they could see seemed fixable—as demonstrated whenSacks flew to Salt Lake City and stood behind the Utah governorwhile he signed a law allowing Zenefits to operate in the state. InMay 2015, six months after Sacks joined the company, it raised $500million in a third fundraising round, at a valuation of $4.5billion.

Zenefits also said it would quintuple annual recurring revenue,to $100 million, by the end of 2015. “They used to say they werethe No. 1 supplier to Anthem for small-group business [companieswith 50 or fewer employees]. It wasn’t true,” says Darrel Ng, aspokesman for Anthem Blue Cross. Zenefits says it regrets anyfactual exaggerations that occurred under prior leadership.

Still, Zenefits kept growing. By the middle of 2015 it wasserving 14,000 businesses and in the process of hiring more than1,000 additional employees. “They told me that they were expandingso fast that once a month had gone by, I was guaranteed to moveup,” says Aaron Semaan, 28, who joined as an entry-level sales repin April 2015, making $35,000 a year.

The headquarters became a hodgepodge of disconnected officespace sprawled over two, then three, then four floors of thehighrise. Zenefits also opened a satellite office in Arizona thatit packed with low-level sales reps who cold-called prospects. Onemanager in Arizona says he interviewed and hired people so quicklythat when they showed up for work, he’d often forgotten who theywere.

Semaan was one of the few who came to Zenefits already licensedas an insurance broker. And yet, for some reason—he still doesn’tknow why—he wasn’t allowed to sell insurance. He was a coldcaller:When he found an interested company, he passed it off to the brokerassigned to close the deal. But, as the company has publiclyacknowledged, not all Zenefits brokers had passed their tests.

“I was giving [clients] to people who didn’t have theirinsurance license,” Semaan says. “They were selling insuranceillegally. Like, it was really illegal.” He says that one womanworked at Zenefits as an account executive for four months withoutpassing her exam. “I had multiple talks with my boss about it. Iwould tell him, ‘I don’t think it’s fair or right for me to besetting people up to make these sales when they don’t even havelicenses.’ ” His boss didn’t respond to interview requests.

“The company culture of pressuring and bullying employees to cutcorners and do the wrong thing is over,” says Sacks.

Zenefits began courting what it calls enterprise companies—thosewith more than 100 employees. Unlike small businesses, biggercompanies have entire HR departments that enjoy long-standingrelationships with insurance brokers. Sacks says he thought it wasunrealistic for Zenefits to pursue them and that Conrad disagreed.When sales started to flatline, Sacks says he pushed for a hiringfreeze and that Conrad thought such a move was unnecessary.

By the fall of 2015, it was clear Zenefits would miss its $100 million recurringrevenue goal (the reality wound up being closer to $63 million).Some salaries were cut; Semaan says his dropped to $30,000. Conradinstituted a vacation ban, but Sacks ignored it and headed to theCaribbean. He also talked to Dalgaard about wanting to leave thecompany.

Dalgaard played intermediary between Conrad and Sacks. “I wastrying to help wherever I could,” he says. “I spent more time thanis normal just hoping that [Conrad] would change, because thiscould be one of the biggest companies we’ve ever heard of inSilicon Valley. And I still think it can.”

Sacks knew there was a problem as soon as he walked into theJessika Pava room, named after an X-wing pilot who fought againstthe First Order in the battle of Starkiller Base. Five lawyers,including a few he’d never met, sat grimly in orange swivel chairs.It was late afternoon on Jan. 25, and they’d come to Zenefits topresent the results of a two-month investigation the company hadinitiated. Sacks knew it doesn’t take five lawyers to deliver goodnews.

Zenefits had hired Cooley, a law firm, along with consultingfirm PwC, after BuzzFeed published a series of articles aboutZenefits’ use of unlicensed brokers. Washington state’s insurancecommissioner had already opened a formal investigation into thecompany; according to BuzzFeed, 83 percent of all Zenefitssales in the state were made by unlicensed brokers. The companycould be fined as much as $20,000 for each violation. If this weretrue in other states, Zenefits was looking at millions of dollarsin fines.

The lawyers laid out a more damning situation. In California,they found, some of the sales team used Conrad’s macro tosystematically cheat on the state’s training course, which includeda section on ethics. “As far as a company doing what Zenefits hasdone, I don’t know that we have seen this before,” says NancyKincaid, press secretary for the California Department ofInsurance, which has also opened an investigation. In March,Massachusetts’ division of insurance opened a third. Zenefitsconfirms that other states have since followed but won’t say whichones or even how many.

Sacks says he knew of the macro but didn’t know its significanceor about Conrad’s involvement until the lawyers explained it to himin January. Cooley confirms Sacks’s account in a memo obtainedby Bloomberg Businessweek. The memo also says that during itsinvestigation, “Mr. Conrad acknowledged that he had authored themacro.” Meanwhile, a person close to Conrad claims he had told oneof Zenefits’ lawyers about the macro more than a year earlier. Someof the Zenefits employees who weren’t properly licensed worked asbenefits advisers, not salespeople. They reported up the chain toSacks. Sacks says he wasn’t aware of their licensing problems untileverything else came to light.

On Feb. 1, Zenefits held an emergency board meeting. Thelicensing problems and the macro were discussed. Dalgaard suggestedto Conrad that, as the person who created the program, he needed toleave. Conrad resigned from Zenefits on Feb. 8; sincethen he’s spent part of his time at home binge-watching StarWars: The Clone Wars, according to a friend. A person close toConrad says he regrets resigning and is already working on a newcompany.

Sacks became CEO and is guiding Zenefits through its crisis cleanup. He has bannedalcohol at the office and changed the company motto from “Ready.Fire. Aim.” to “Operate With Integrity.” In February thecompany laid off 250 employees, including theenterprise team. Sales Vice President Blond, Semaan’s boss, and anyexecutive or manager known to have helped disseminate the macro arealso gone. Zenefits says it has self-reported the findings of itsinternal investigation to all 50 states and is working with thosethat have opened formal inquiries.

Fidelity Investments, which owns a stake, has slashed itsvaluation of Zenefits from $4.5 billion to less than $2 billion.There are rows of empty desks at the San Francisco office; thecompany plans to downsize from four floors to three. The StarWars-themed conference rooms will soon be renamed afterinspirational entrepreneurs. Kegs have been replaced with cold-brewcoffee. The stairwells are condom-free.

And yet, despite his downfall, Conrad is still a coveted name inSilicon Valley. People want to meet the man who created a $60million company in just three years and made good on his promise toshake up the insurance industry. Dalgaard says he’s been gettinge-mails from people eager to work with Conrad since the day hisresignation went public.

Zenefits might also survive for the one reason that made itsproduct so appealing to business owners in the first place:Shopping for health insurance remains really frustrating. Thecompany says it now has 20,000 accounts. “As long as their problemsdon’t affect our company, we’ll stay,” says Todd Harmond, vicepresident for finance and operations of the e-book service Scribd,which uses Zenefits to offer Kaiser Permanente and Anthem healthinsurance plans to its 85 employees.

“Unless something else goes really wrong with Zenefits, we’llstick with them for a while,” says BlogMutt’s Yates. “It’s too muchof a hassle to switch.”

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