Zenefits was fined $62,500 by Tennessee, the first state to announce a settlement

Zenefits CEO David Sacks has entered one of the most critical stages of his efforts to turn his troubled startup around: settling the fines from states who want to penalize the company for selling insurance without a license.

On Monday, Zenefits announced its first settlement with the Tennessee Department of Commerce in which Zenefits agreed to pay a fine of $62,500.

With that, Zenefits will be allowed to continue to do business in the state.

A $62,500 fine is pocket change for Zenefits, a startup that has raised more than $580 million from investors and says it has annual recurring revenue of over $60 million.

Even Zenefits notes that it got off easy. It views this as a positive sign for how other states will behave.

In an email announcing the settlement, Sacks says that Zenefits did not face "more severe fines or penalties" because Zenefits had taken a lot of action to correct its licensing problems earlier this year. This included forcing Zenefits cofounder and CEO Parker Conrad to resign in February. David Sacks, who was an investor and the COO, took over as CEO at that time.

The company also self-reported its licensing and compliance problems to all 50 states. It put in new IT systems and controls to make sure its sales people are properly licensed and says they everyone has been properly licensed since March. It also made its sales folks do a bunch of other training including 12 hours of ethics training, it says. The company hired a compliance officer and overhauled its board of directors.

More settlements in progress

This is the first of what will likely be more settlement agreements. In fact, three states had officially announced investigations into Zenefits and its compliance problems and Tennessee was not one of them. Those states are California, Washington and Massachusetts.

A source close to the company tells Business Insider that Zenefits is still in talks with other states.

The settlement with California will perhaps be the most critical because Zenefits has admitted that when it was training salespeople to sell insurance in California under the previous CEO Parker Conrad, it may have been skirting the law. Conrad wrote a program, known as "the macro" that allowed salespeople to fake the number of hours they spent on a training program, Zenefits has said.

But executives inside Zenefits are viewing this first settlement with Tennessee as good news, not just because the fines were low, but because the state praised Zenefits for its efforts to clean up its problems.

"If you want a contrast, look down the street at Theranos where they locked the doors and banned the CEO. That could have happened to Zenefits. If we did not make these changes, regulators could be padlocking our doors. Instead they are praising what we've done," this person said.

In the meantime, Sacks has begun to start talking about life beyond the cleanup of its regulatory mess. He says that Zenefits will be launching a new product called Z2.

We understand that the product will launch in October when Zenefits holds its first-ever customers conference.

Here's the full email Sacks sent to the troops.

Subject: First Regulatory Settlement

All-

I'm pleased to announce that Zenefits has entered into its first regulatory settlement concerning its past licensing practices. As you know, we brought our licensing into compliance several months ago, but the issue of the company's historical violations still needed to be resolved.

We have now done that with the Tennessee Department of Commerce and Insurance (TDCI). In an agreement announced today, Zenefits will pay a fine of $62,500. However, TDCI will take no action to restrict our ability to do business in the state. The State explained that more severe fines or penalties were not warranted because Zenefits self-reported its violations and took extensive remediation measures. As Commissioner Julie Mix McPeak recognized, "new company leadership has demonstrated a dedication to righting the ship."

Among Zenefits' remediation efforts cited in the State's Consent Order [link] were: implementing new administrative and technical licensing controls; mandating that all brokers complete 52 hours of continuing education courses from the National Association of Health Underwriters (NAHU), including 12 hours of ethics training; changing top leadership and reconstituting our Board of Directors; and creating the position of Chief Compliance Officer and establishing a compliance team.

I want to thank the Tennessee Department of Commerce and Insurance for reaching a ruling that was tough but fair. It is a testament to Tennessee's welcoming environment for small business and tech companies that it struck this balance. This is a great state for entrepreneurs and small business owners, and we look forward to serving them with a Zenefits product that makes it easier to run and grow their businesses.

I also want to thank our employees for doing the hard work of remediation. You have changed our company's culture and values at a fundamental level. Because of your efforts, Zenefits has reached a watershed moment: not only does this agreement pave the way for us to continue operating in the great state of Tennessee, it also recognizes that Zenefits is a new company that has moved past its historical issues. We look forward to reaching resolution with other states soon.

As a result of the measures we've taken over the past 6 months, Zenefits has become a much stronger and more mature company. Today's news is validation of that. We look forward to more exciting announcements in the coming months when we launch Z2, the game-changing set of new products and enhancements to Zenefits' platform that will help small businesses succeed. David