Zenefits is effectively cutting the value of its most recentfunding round to $2 billion from $4.5 billion so the reeling SanFrancisco-based startup can give some investors a larger ownershipshare of the company, after laying off hundreds of employees.

Related: Zenefits was the perfect startup. Then itself-disrupted

"I want to thank our investors for reaffirming their confidencein us. We take our commitment to you seriously to build value forall shareholders," Zenefits Chief Executive Officer David Sacks said in astatement Thursday.

Common shareholders, mostly employees and the company’sfounders, will see their shares diluted by 20 percent, whileprivate-equity firm TPG and mutual fund giant Fidelity Investmentswill see their stakes increase, Sacks said in astatement.

Employees will get a special stock grant equal to 25 percent oftheir current shares, to make up for the dilution. Executives willreceive extra grants, too. Sacks’ own $12.5 million investment inthe company will be diluted by about 20 percent, and he said heoffered not to take the new executive equity award.

Investors and employees who agree to the changes also have tosign away their rights to sue Zenefits, its founders andmanagement. "This is important for the company to move forward andput the past behind us," Sacks said in the memo.

The lower valuation may make it easier for Zenefits to somedayraise money again. "It’s a really smart move by David. Everybodytakes a little bit of dilution and it resets expectations to areasonable level," said Ben Ling, a partner at venture capital firmKhosla Ventures, a Zenefits backer. "Employees will be moremotivated because when their valuation is realistic they can feellike they’re building for something realistic."

Not all investors are pleased. Zenefits is one of AndreessenHorowitz’s largest investments in the seven-year history of thatventure capital firm, and it was not a champion of this deal,a person familiar with the matter said. Andreessen’s stake inZenefits will go down after the adjustment, but it voted for thetransaction anyway, the person said.

"This is a unique situation, we’ve never seen it before and wedon’t expect to see it again," a spokeswoman for AndreessenHorowitz wrote in an e-mail. "We continue to believe in ourinvestment in Zenefits."

Related: Parker Conrad reportedly sold $10 million in stockbefore resignation

In 2015, Zenefits sought new funding and TPG indicated it wouldpass on the deal. However, Parker Conrad, then chief executiveofficer, and Andreessen Horowitz partner Lars Dalgaard -- anadviser to TPG and a Zenefits director -- persuaded theprivate-equity firm to invest, people familiar with the mattersaid. In the end, TPG and Fidelity invested $500 million inZenefits in May 2015 at a $4.5 billion valuation including the newcash, an eye-popping number even compared to other hot startups’valuations.

In the months that followed the round, Zenefits missed itsfinancial targets. Then the company got embroiled in scandal afterit was revealed that some employees were using software thatlet them avoid taking the required training for a license to sellhealth insurance. Conrad, CEO at the time, built the tool.

Conrad resigned in February under pressure from the board, andSacks, the company’s chief operating officer at the time, took theCEO role. Some employees with licensing problems had reported up toSacks.

When Sacks took the CEO job, he declared a restart. He addedventure capitalist Peter Thiel, TPG’s Bill McGlashan and Teslaboard member Antonio Gracias to the board. Sacks, who worked atZenefits for more than a year before Conrad’s ouster, has tried todistance himself from the company’s past problems.

Earlier this month, Zenefits cut 106 jobs, and Sacks invited employees whono longer wished to work at the company to leave, offering themfour months severance and health benefits. The startup is down toabout 900 employees, after at one point having more than 1,600.

During the May 2015 fundraising round, Conrad sold $10 millionof his stock, Sacks said in his memo.

Bloomberg LP, the parent company of Bloomberg News, is aninvestor in Andreessen Horowitz.

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