Rising Startup Masterworks Beset by Internal Rifts, Alleged Recklessness, and Staff Cuts (2024)

Selling Shares of Paintings in the ‘Wild West’

Masterworks’ acquisitions team works with auction houses and private dealers to select “investment quality” works from the thousands offered up, the company’s head of art acquisitions, Masha Golvina, a former Christie’s exec, told ARTnews earlier this year. At times, the company has served as a financial backer for the major auction houses, which means taking on financial risk in deals for auctioned work that fail to attract bidders.

Once an artwork is purchased, the Masterworks team is put on a ticking clock. Before the money can go from the company’s escrow account to the seller of the artwork, all the painting’s fractional shares must be sold. If a painting’s shares don’t sell out, the sale gets stuck in limbo. That’s why, at times, Masterworks has secured payment times as long as six months. Managers used that timeline, reps said, to pressure their teams to sell out certain works. (Masterworks has denied that any sale has ever been “stuck in limbo,” arguing that it “can use its own funds to finance the purchase via an interest-free loan until fractional investing is complete.”)

In February 2022, the core sales team was generating an estimated $1 million per day on shares. But reaching that figure has required a series of tactics that some account executives viewed as out of step with norms that dictate legitimacy in the financial world.

For years, Masterworks operated under a broker-dealer model, a setup widely used by major investment banks like JP Morgan and Morgan Stanley. In the model, licensed brokers are brought in to sell securities to investors over calls. They’re incentivized with the promise of substantial commissions for the highest performers. Those brokers are regulated separately from the companies that host them as securities sellers. In this way, Masterworks’ sales team functions as something like a separate entity, even while taking orders from Lynn and his associates.

A broker-dealer model is a complicated arrangement and large investment firms have extensive compliance structures. These ensure brokers do not run afoul of FINRA regulations and incur major fines. Masterworks, however, has taken few measures to ensure compliance, despite its scale and significant funding, former employees told ARTnews. One ex-employee described what he observed as the firm’s “incompetence” for lacking the know-how to mitigate common risks that brokers face when peddling securities to small investors.

Despite Masterworks’ advertising, which has spanned mainstream outlets like NPR and the New York Times, the company doesn’t always go after the everyman consumer investor. Management, according to sources formerly on the sales team, directed brokers to prioritize high-net-worth clients from the rest. Those solicited for remote interviews tended to be wealthy men of a certain type: a 30-something corporate attorney in Chicago who keeps Picasso books on his coffee table, a cash-rich ex–Goldman Sachs collector based in South America, and a start-up veteran who also puts money in crypto, to name just a few.

To identify and net these whales, sales managers encouraged account executives to peer into prospective investors’ bank accounts during their calls through Plaid, a financial integration tool used to connect applications to user’s bank accounts, multiple employees told ARTnews. The highest balances were closely watched in the office. Managers urged account executives to reference the figures while on calls with clients in order to push them to buy more shares. Account executives recall dealing with clients who had between $300,000 and $20 million in their linked accounts.

“You were always incentivized to try and close them in the first 24 hours,” said another broker. “You’re basically telling them first come, first served. You were incentivized collectively to be aggressive.”

Under this model, the company used several practices that might give regulators pause. It widely used “heat maps” charting which employees were selling the most shares to stoke internal competition around quotas, according to internal documents reviewed by ARTnews. In addition to the maps, which were visible to the entire sales team, an internal Slack channel was dedicated to alerting the sales team when an account executive sold over $5,000, according to a former client advisor. FINRA and the SEC have rules restricting management-sanctioned sales contests. While such contests are not uncommon, regulators see them as contributing to an environment that disincentives brokers from fulfilling their obligation to act in retail investors’ best interest.

Former staffers described the sales team operating in little-explored territory, where compliance and suitability screenings weren’t enforced. With illiquid assets like paintings — where money is tied up for long stretches of time — risks are often higher. Being “freshly-licensed in a newly rising asset class,” as many brokers were, made doling out financial advice about artists’ markets more precarious.

“It was the wild west,” one former client advisor said of the sales culture. “We were learning on the fly,” another said.

Ex-employees emphasized that the sales team frequently waived investment minimums to low levels for prospective buyers to close deals. Some brokers describe the practice as not transparent.

The minimum is a threshold: a figure officially disclosed in SEC documents by securities sellers – a legal requirement for some financial products that gives investors an understanding of what they are buying into. For its main offerings aimed at retail investors, Masterworks’ public minimum is $15,000. But, internally, according to multiple former brokers, the company’s main base of investors were buying in closer to $500, and many even dropped as low as $100. Two former brokers estimated that among their clients the minimum was waived between 50 to 90 percent of the time. One described the public figure as “artificial.” (A representative for Masterworks maintains that the company has a right to waive minimums at their discretion.)

“There’s a way to convey urgency without walking all over people,” one former account executive told ARTnews of the company’s sales directives. “I think Masterworks really walked that line.”

Such tactics raise red flags with regulators, Jacob Frenkel, a Maryland-based attorney who specializes in SEC regulations, told ARTnews.

The volume of those waivers is one figure regulators look at, he said. If the publicly stated minimum is significantly inflated from what the firm’s base of investors are actually buying in on, it can paint a false impression of the type of financial product, lawyers argue. This invites risk, Frenkel says. Regulators typically scrutinize how companies present their investment products in disclosures versus how they are actually sold; a large discrepancy can be an indicator of fraud to the SEC. But private companies guard intimate financial details closely.

“If in fact, [the company is] not taking in the minimum investment and that number is on the face page and in the offering circular to, in essence, mislead investors into believing that they are the small investors — that they are the exception rather than the rule — that could be viewed as a materially false and misleading statement, subject to potential action due to anti-fraud provisions of federal securities laws,” Frenkel said.

(In a statement provided by Masterworks after publication, the company claimed that “securities laws allow Masterworks to waive the minimum-investment requirement as it sees fit” because it discloses to investors that it might do so. The company added that it waives minimums to allow investors to “diversify their holdings” adding it “has not violated any laws and has complied with its disclosures to inventors.”)

In the wake of the crypto, NFT, and meme-stock crazes over the last several years, regulatory agencies like the SEC have amped up their scrutiny of alternative assets platforms. Developing a Fintech startup in the currently austere regulatory climate brings major hurdles, Joshua Uhl, a New York-based Deloitte advisor who advises fintech companies told ARTnews. Such companies are expected by venture capitalists to scale rapidly, but doing so often means outpacing their own compliance structures. But Fintech companies play in a sector where watchdogs oversee “one of the most highly regulated parts of our economy,” Uhl said and shelling out a significant investment to stay in line with those rules can make it difficult to compete. But it appears the company may be veering into a period of reform as they face that landscape.

Still, the risks are real. A 2016 investigation into Wells Fargo revealed a problematic sales culture that pressured workers to create fake client accounts in order to meet quotas. That operation, which had beendescribed as a “boiler room” by former employees, led to monumental fines.

“The profile of [Masterworks] sales team structure is consistent with cold calling boiler room type of operations that often are of great concern to regulators,” Frenkel said. “There is plenty of fodder here for regulatory enforcement scrutiny at both the state and federal levels.”

A Pressure Cooker Culture, and a 'Madhouse' of Commission Models

Masterworks’ success depends on converting users—people who have registered on the platform — to investors who have bought shares in artworks.

By this past June, the company had seen eight months of registered account growth to 400,00-500,000 —“The peak just kept growing,” a former senior-level employee overseeing sales told ARTnews of user growth. But only about 5 percent of users, or around 25,000 have so far invested, according to a former employee with direct knowledge of user growth (in June, a Masterworks executive told the Art Law Podcast this figure was 40,000). Lynn’s ambitious goal for 2022 was to double that figure.

As the company set about reaching that goal this year, internal fault lines emerged, according to ex-employees across the sales and marketing teams.

Because Masterworks straddles different industries, its culture is, by necessity, a hybrid: art world experts privy to the auction industry; younger finance types with the stamina to spend full days cold calling potential investors; and startup veterans who’ve cut their teeth at rapidly pivoting Fintech enterprises. But this mix has created major disconnects between the sales, marketing, and art acquisitions departments, multiple former employees told ARTnews.

The company’s ivory tower is a group of staffers close to Lynn, who deal with purchasing artworks from dealers and collectors and are tasked with valuing the works. They can talk with ease about Joan Mitchell’s Paris years and Picasso’s muses, but this wellspring of art-speak, according to one source in the marketing department, is an “untapped” resource siloed from the company’s younger sales and marketing employees who, despite lacking art knowledge, are tasked with convincing regular people why they should buy in with disposable funds.

But it is many of those younger employees, who make up the sales team, that are the engine of Masterworks. In the last year, sales has been made up of between 30 to 50 employees — primarily white male twenty-to-thirty somethings with Series 7 licenses issued by FINRA that allow them to trade securities. Some newly licensed recent grads and others poached from finance jobs came to the company for its promise of high commissions. Their days were filled with constant cold calls to investors coming in through online contacts. Propelling account executives’ performances was the lure of big payouts and a collective testosterone typical of a college fraternity. According to multiple current and former employees on the team, the sales floor gained a reputation for vulgarity and often resembled raucous scenes from The Wolf of Wall Street.

(In response to descriptions of the sales team’s tactics, Masterworks emphasized that investors consent to calls in the sign-up process and says calls to investors are not unsolicited. It further noted that the company has conducted over 200,000 “investor onboarding calls” and received only four complaints, “all regarding a single employee who was subsequently terminated.” Internal sources cited to ARTnews two employees who received complaints from investors.)

A lack of human resources exacerbated tensions between various teams. When asked about the dynamics, one former senior sales staffer recalls of the company’s most junior staffers, known as sales development representatives, who were typically recent college graduates paid minimum wage: “We treated them like f*cking furniture.” Another former employee said that, by this September, Lynn had directed a payroll manager to take on human resources responsibilities in an unofficial capacity and conduct exit interviews with departing employees. In one exit interview reviewed by ARTnews, the former employee stated that they left the company due to its “de-emphasis on art” and its lack of a formal HR team.

Despite sales’ apparent success, management has continually adjusted how the team was compensated. Over the previous year, the company shifted brokers’ compensation monthly, reducing commissions gradually in a move that caused rifts on the sales team, employees said, and created confusion about who would be paid how much and when. Between 2020 and 2022, the commission structure went through several drops: from 5 percent to 3 percent to 2.5 and eventually 1 percent.

“Everyone was upset. It was a madhouse,” a former employee on the sales team said. “It just got lower and lower.”

Morale sunk to a new low in February 2022 when a manager overseeing the sales team, Gabriel Zinn, delivered news that commissions were being eliminated entirely. In a series of meetings, according to three former sales staffers, Zinn gave contradictory reasonings for the change, telling staff at first that it was necessary due to the pace of sales and advertising initiatives, before later suggesting that it was because they were adopting a new brokerage model that required them to act more like financial advisors. For some sales reps, the switch to purely salaried compensation meant their earnings were cut by as much as 30 percent and, by May, several top account executives left the company over the move, multiple employees told ARTnews. (A Masterworks representatives said that base salaries were increased to account for the move away from a commission-based model.)

“The metric just started changing pretty arbitrarily,” one said.

In October, Masterworks began hiring for a chief compliance officer to oversee a potential shift from a broker-dealer model to a registered investment advisor model “in the near future.” But the larger issue appears to be that brokers, in chasing commissions, were routinely outperforming their goals by focusing on household names like Basquiat, Picasso, and Warhol that were easier to sell, according to former account executives. Paintings under $1 million by such brand names would often sell out in as little as 15 minutes, former sales agents said. Paintings by those artists with less name recognition, however, were a struggle to sell. Eliminating commissions could eliminate the disincentive to selling those less popular works.

(In January, after the publication of this article, Masterworks said that the company had completed the transition from a broker-dealer model to a registered investment advisor model in December. The company disputes allegations that suitability screenings weren’t enforced and says each potential client is run through a standard know-your-customer check process and that its advisors adhere to “best interest” practices required by law.)

Shares in some paintings were harder to sell than in others. In 2021, Masterworks jointly acquired Joan Mitchell’s 1960 canvas 12 Hawks at 3 O’Clock – a painting that made headlines when it sold for $14 million at Christie’s in 2018. On calls, brokers mimicked the marketing of auction houses that had recently pushed feminist reassessments of long-marginalized women artists to drive up their market value. But, according to two former employees, sales representatives had trouble translating this reappraisal, Mitchell’s institutional value, or the painting’s heralded provenance (it was at one time in the lauded collection of Barney Ebsworth) to prospective investors. The painting languished on the platform from July 2021 to this past February.

“You don’t tell a client when you hop on the phone that you’re having trouble selling this painting,” one ex sales rep said.

When paintings took months to “close,” as with the Mitchell painting and another by Gerhard Richter, according to two ex-employees on the sales team, brokers were left in flux, as commissions weren’t paid until the paintings were fully “subscribed.” Management framed the shift in compensation to base salaries as a remedy to the issue.

To mitigate sales’ issues selling lesser-known artists, Masterworks sometimes purchased paintings with a 25 percent deposit and then secured six-month contracts that allowed them to pay sellers in tranches (and therefore to have more time to sell shares to investors). Another solution was a new product introduced late last year: a diversified art portfolio targeted at accredited investors with a higher net worth. By buying in at $100,000, investors could have stakes in a range of paintings that the company owned. Management viewed the product as a way to “close out” artworks, like the Mitchell and other less commercial works like ones by Yosh*tomo Nara, that brokers were struggling to sell out, former sales reps said.

Under FINRA’s system, brokers are required to act in an investor’s best interest. At Masterworks, multiple ex-sales reps said that management’s continuous push for them to sell shares in select paintings that were seeing little interest from its base of users introduced risk. Brokers said that stance often placed the company’s prerogatives above those of investors, describing it as an apparent violation of their fiduciary duties. Management similarly viewed approaches to international clients as a loophole to sales’ more aggressive goals, citing to staffers that dealings with foreign clients fell outside of the purview of U.S. financial regulations, according to two former sales representatives.

“You were always encouraged to fill an order. It wasn’t really what was best for the client,” said one.

This past spring, it was becoming increasingly clear that a focus on institutional investors was “where the business is going,” according to a former client advisor. Lynn surrounded himself with his finance team and spearheaded pitches to banks and wealth managers. Meanwhile, a sales-wide push around the diversified product — promising to serve as a kind of catch-all of the contemporary art market —was heightening.

And yet, several months into the product launch, a group of salespeople dedicated to selling the new product still hadn’t been paid their commission, one ex-employee on the sales team said.

Marketing’s 'Incredibly Reckless Growth Spend'

Running alongside issues in the sales team were those in the marketing department. Like most consumer-facing startups, gaining new users is Masterworks’ primary obstacle. The platform needs to reel in a high volume of in-bound leads — people already determined to be prospective customers — to hit its sales goals. Lynn’s primary solution so far has been digital marketing.

Since formally establishing its marketing team a year ago, the company’s focus has been on acquiring “the right affluent user,” according to a former senior level marketing employee with knowledge of the fintech space. But the target user the company was after means that it is in a “hypercompetitive space” with Coinbase, Robinhood, and other major investment platforms, the senior marketing employee said. Further complicating the strategy, the company resisted advertising to audiences or publishers directly in the art space.

“That affluent individual investor is not a cheap audience to buy,” the senior marketing employee said.

Last year, Masterworks’ monthly marketing budget was around $3-5 million, according to two ex-senior employees close to the marketing team. By the early months of 2022, it had spiked to $7-9 million, one said.

This past spring, as the company’s media channels were underperforming, and the team was struggling to mitigate a drought in new leads, according to multiple former marketing staffers, the marketing department became Lynn’s focus. He began directing the team to spend as much as $1 million per day on advertising channels like YouTube, The New York Times and Spotify, in what another former senior marketing staffer described as “incredibly reckless growth spend.” Employees viewed the sum as an arbitrary figure set by Lynn, rather than one tied to any concrete performance metric. Though staffers grew the marketing budget, they never matched Lynn’s outsized directive. Media buyers saw the pace of marketing spending outweighing a healthy ratio of purchases made on the platform. (Masterworks disputed that company executives directed marketing to spend $1 million per day, describing the assertion as “flat out false.”)

“Your spend has to convert. Your spend has to drive business,” a former senior level marketing employee said.

Around the same time, Lynn directed marketing staff to renege on contracts with publishers about the size of their ad spend, said two former employees in the department. Once staffers had negotiated lower bulk rates for ad placements with publishers, they were advised to drastically cut the promised spend, a move some former employees characterized as “unethical.” One senior marketing staffer, who was uncomfortable with what they saw as an “aggressive” tactic, said that they advised Lynn that it was damaging long-held business relationships and then left the company.

“The younger guys didn’t know any better,” the staffer who raised the issue told ARTnews. “So they did it.”

On a technical level, Lynn was outdated, according to multiple ex-staffers: he was fixated on tracking a user’s last hit on a display ad, whereas most digital marketers have long since moved onto tracking a user’s entire path across multiple virtual channels. The result of Lynn’s strategy, according to one ex-staffer, was that media channels often appeared to be consistently underperforming.

But the wider issue was the team’s lack of experience, ex-employees said. The marketing team was primarily composed of junior staffers, many of whom were recent grads promoted from entry level roles. Many lacked experience marketing financial products; those with more experience tended to come from e-commerce. But succeeding in fintech requires massive ad spends to establish brand recognition, according to the former senior-level marketing employee, and many marketers on the team had “never played in the space.”

The company is still wrestling with the search for that niche. In an internal Slack message reviewed by ARTnews, Lynn told marketing staffers that its social media ad campaigns should exclude women and younger users as a means of honing in on its target demographic of affluent men over 35. The directive jarred one marketing employee, who found it antithetical to the firm’s democratic concept.

“It wasn’t like Robinhood — going after anyone and everyone to trade stocks,” a former senior-level marketing employee said.

Lynn’s single-minded marketing strategy had consequences. In the spring, when the marketing department was failing to meet its lead acquisition goals, management routed tech-focused staff into marketing initiatives far from their purview, one former senior-level employee with knowledge of the marketing department said. The move, the former employee said, pulled resources from development on the platform, which hosts information on the firm’s art assets.

“There is no focus on long-term strategy for the platform,” the source added.

Despite warnings from senior marketing employees, Lynn continued to push for a massive spend on advertising as the number of daily users signing up for the platform fell. It was a major issue—the rate had slowed compared to 2021. By the rules of tech investors, who often measure success through the growth in daily active users, the platform was ailing.

Elsewhere, Lynn had been experimenting with another strategy some saw as unlikely to be effective: reaching potential investors through museums. A slide-deck used to pitch US museums on a Masterworks corporate sponsorship contained text about deaccessioning artworks as a service the company could provide. Employees saw mention of deaccessioning—a fraught topic in the museum world—as an indication that management didn’t understand who they were pitching. Some advised that the pitch would not be received well by institutional development officers.

“You don’t go to a museum and start talking about deaccessioning paintings,” said a former marketing employee. “That’s rule number one.”

Management was eyeing museum donors, hoping to reach moneyed art types directly, former employees with knowledge of the initiative said. The company was only able to coax a few museums into considering donations. Management proposed matching donations by museum donors in exchange for their marketing copy to be distributed to museum communications lists. But amid staff changes and budget cuts to the marketing department, the deals with the Metropolitan Museum of Art and the Jewish Museum for $100,000 and $10,000 respectively fell through. A former marketing staffer described the initiative as an awkward attempt for the company to “Trojan horse sponcon” into museum partnerships.

“They pretty much exhausted the entire finance bro subset of people to advertise to,” the former marketing employee said.

(Spokespersons for the Met and Jewish Museum confirmed the discussions were dropped due to the company’s staff turnover.)

A Company, and a CEO, Falling Out of Step

Over the last several months, it has become increasingly apparent that the tech industry — and likely the global economy at large — is entering a recession. The rise in interest rates has squelched the easy money that venture capitalists ploughed into startups, valuations and market caps have dropped precipitously, and over 73,000 workers in the U.S. tech sector have been laid off this year, according to a Crunchbase analysis published in November. These economic headwinds, nevermind the crypto crash and the collapse of digital currency exchange FTX, present a kind of existential crisis for Masterworks, a company predicated on the idea that upper-middle class and wealthy investors have disposable income to dump into a speculative investment market.

Beyond the apparent precarity of Masterworks’ business model, employee discord appears to be an issue. At least six senior employees left the company voluntarily in the early months of 2022 amid dysfunction on the sales and marketing teams. And in June, as Masterworks executives descended on Switzerland for Art Basel, the start-up quietly cut around 10 percent of its staff — or somewhere between two dozen and 38 employees across the sales, marketing, and art acquisitions teams. The reason for the terminations is yet unclear.

Some departing employees were told they were being terminated due to “macro-economic factors;” others that it was a layoff. A few weeks later, according to multiple sources, Lynn sent out an email to staffers acknowledging that the cuts had sunk morale, while mandating employees ramp up their efforts working nights and weekends to keep their jobs. Numerous new hires brought on at the beginning of the year were among those let go, employees said, the company is not ailing financially, and is still publicly hiring.

(A representative for Masterworks denied that layoffs occurred and attributed any cuts to “underperformance.” Further, in a statement provided after publication, the company said it saw major growth in 2022. Last year, the company said, it more than doubled its assets under management, purchasing 114 paintings with values between $1 million and $30 million and grew its headcount by 40 percent. The company added it is projecting profits and oversees “large cash reserves.”)

In interviews with ARTnews, former employees repeatedly raised certain issues: the failure to retain diverse staff members, a seeming lack of promotions for women and people of color, and, perhaps most damning, routine misogynist behavior by male employees to their female counterparts that went ignored by management. Multiple employees described members of the sales team rating female employees on their appearance, while others said one manager made repeated comments that potential investors preferred hearing a woman’s voice on a phone call. Another former employee described sales account executives’ behavior towards women as “barbaric.”

“[Lynn] definitely just viewed us as expenses,” said one former sales account executive. “We used to joke and say that if he could lobotomize us and have us work for him for free, he would.”

It is not Lynn’s first brush with employee discontent. Between 2000 and 2012 while gaining steam as a marketer, Lynn was the subject of two legal quarrels. At his first company, he agreed to pay overtime wages to eight employees after the U.S. Department of Labor intervened. Years later, a former accounting executive alleged that Lynn forced her out of her position over an investor dispute and accused the company of gender discrimination. The case was eventually dismissed.

Even if Masterworks’ personnel issues resolve as the company matures, the new economic environment appears likely to exacerbate its core business problem. By May, according to three former sales staffers, Masterworks had sold only three works of the 118 artworks in its half-billion-dollar war chest in its nearly 5 years of operation. In December, the company reported that number had risen to 11 and that it has realized returns on those paintings between 10.4 and 39.3 percent, after fees. However, the company noted in an SEC disclosure that month that it sells “opportunistically” and that those returns “are not indicative of the investment performance” of Masterworks’ assets that have not yet sold.

“The number one problem that this company has and will continue to face is not buying art,” said one former client advisor. “It’s not talent. It’s not marketing. It’s how are we going to eventually sell this art and sell it at a profit.”

To place artworks with new private collectors — the company’s primary hurdle — it needs leverage with auction houses, dealers, and other commercial art gatekeepers. Amid the staff cuts, the company made two high profile hires on its acquisitions team aimed at solidifying those relationships: former Bank of America global art services executive Evan Beard and former Sotheby’s vice president Katherine Reid whose LinkedIn mentions the role’s focus on the company’s “deaccession strategy.”

Nevertheless, issues with access to art’s gatekeepers persist. One former business consultant, who worked on a contractual basis for the company, told ARTnews that Lynn pushed them and others to call guarded high net-worth collectors with whom they had relationships to purchase little-seen trophy works directly for the platform. The cold-pitch approach was out-of-step with a stringent code-of-conduct to which art market veterans adhere. It appears more akin to Masterworks’s hardball approach to everyman retail investors. The tactic, according to former staffers, exemplified Lynn’s failure to understand the dynamics of the art trade.

“Most of [the collectors] were very resistant and sort of offended,” the former business consultant said.

[Editor’s Note, March 7, 2023: This article has been updated to include a statement and responses from Masterworks, as well updated sales and returns figures.]