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SoftBank has a lot to worry about if it strikes this deal with WeWork

Here are some of the hazards that could trip up either side over the next few weeks.

A WeWork office interior
A WeWork office interior

The deal brewing between SoftBank and WeWork tells us more than any move prior about the way they view the finance and real estate industries they are challenging.

SoftBank’s Vision Fund sees the opportunity to spend more money than it ever has before and in a way that is uniquely SoftBank — a quick-strike deal that would certainly invite some snickers from rivals but would allow them to obtain what every one of those Silicon Valley investors lusts for: Big ownership in the next big thing.

WeWork’s leadership apparently sees enough value in SoftBank’s backing that it could give up what no CEO ever wants to surrender — control — in exchange for a massive valuation that would solidify the real-estate giant as a legitimate tech company that can fetch a tech-like valuation when it goes public. Sources familiar with the deal disagree as to whether a control investment still remains on the table as of today.

It’s very possible that the talks for SoftBank Vision Fund to invest up to $20 billion into WeWork will fail, Recode was told. Here are some of the hazards that could trip up either side over the next few weeks.

  • The Vision Fund’s single biggest outside investor, the Saudi government, which holds a 45 percent stake, is under increasing political scrutiny after allegations it is behind the disappearance of U.S.-based Washington Post journalist, Jamal Khashoggi.

Backing from foreign governments has always loomed as a major liability for venture capital investors. The SoftBank-Saudi ties are not new. But the Khashoggi revelations make it particularly bad timing for a deal, as WeWork could face reputational risk for taking money from a government that’s embroiled in such a high-profile human rights case.

“If all that’s alleged is true, WeWork will be in bed with a regime that has expressed brazen disregard for virtually any norm of international politics,” said Chris Meserole, a foreign policy fellow at The Brookings Institution. “They should tread carefully before accepting a majority stake from a fund that’s in effect a Saudi investment vehicle.”

  • SoftBank, which previously owned about 20 percent of the company, is now heavily, heavily dependent on WeWork’s success — a business whose valuation rides as much on its product as its millennial-friendly rebranding of office space. Despite its best efforts to position itself as a tech company, WeWork mainly sells access to a place to work — not software — and thus faces slimmer margins than a true tech company. While WeWork is growing its revenue at a phenomenal pace, it’s accumulating losses just as quickly, raising doubts about its ability to withstand a potential economic downturn.

Financial terms of the deal still being negotiated have been described as tense. But if SoftBank were to sink as much as $20 billion more into the company at a valuation of around $40 billion, then there has to be a belief that public market investors could envision WeWork as worth a multiple of that. Is WeWork a $100 billion company?

As much of a quarter of the Vision Fund’s assets would be tied to that fate.

  • The deal would raise questions about what exactly the Vision Fund is (not that SoftBank seems to care much about how people think of it). While the $100 billion vehicle is allowed to invest in public companies and has taken some pretty hefty stakes in startups like Wag and Brandless, its bread and butter has been out of the traditional Silicon Valley playbook: Minority stakes in private tech companies, just with a few more zeroes at the end of the checks.

Would SoftBank — which is planning to raise a second investment vehicle that is at least as big as its current one — repeat this move and start trying to gain control investments in order to spend more money more quickly? That’s likely to scare off the elite founders who are naturally skittish about yielding too much control to any investors, never mind one single one. But there is a limited number of private companies around the world that can accept SoftBank’s big checks, and so control investments are a natural area for the Vision Fund to dabble in.

  • It will also raise questions about what exactly WeWork is (not that WeWork seems to care either) and what is its financial future. WeWork is one of the most anticipated IPOs on Wall Street; one would think there would be limited pressure from minority shareholders to head public if the majority shareholder is a Japanese-based telecom giant that talks about 300-year business plans.

Would SoftBank Corp. have any desire to buy the whole thing? The company is transitioning from the world of telecom to the world of high finance, so you’d think not.

And a more fundamental question: Will WeWork fare better with SoftBank at the helm or with its founders at the helm?

This article originally appeared on Recode.net.