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Why Founder CEOs often want to be replaced

Sponsored by Egan Nelson LLP

Executive succession, particularly involving the Founder CEO, can be a tense time in the history of a startup.  But not always. In fact, in my experience working with VC-backed startups across Texas and elsewhere, there are many instances in which founder CEOs want to be removed from their positions. If that confuses you, let’s start with some background.

In Rich v. King: The (Core) Founder’s Dilemma, I wrote about a few terms that I first learned from the blog of Jeff Bussgang, a VC in Boston: the jungle, the dirt road, and the highway.

The Jungle, the Dirt Road, and the Highway

In the very early days of a startup, you’re in the jungle. Complete lack of structure and enormous amounts of unpredictability. The Founder CEO is deep-diving every day into core strategic issues of the business, and constantly iterating on the cutting edge of the startup’s product. Entrepreneurs are, psychologically, often built for the jungle; certainly more so than anyone else. It’s their ability to navigate this messy, risky, chaotic environment that distinguishes them from the many other personalities in the business world.

Fast forward a few years, and add maybe a Series A or Series B round, and now you’re on the dirt road. Still rough and bumpy, and too uncomfortable for most people, but some of the worst chaos has been contained. There’s a more predictable budget, a more refined product and customer base, and some people to manage and delegate tasks to. As companies mature, roles become increasingly specialized, including those of the CEO.  Tasks that the CEO may have enjoyed doing in the early days are now the responsibility of other people, with more specialized titles.

Move forward in time even further — say Series D or some other kind of growth round — and now you’ve got hundreds of employees, a large board of directors and broad stockholder base, and far more structure around the business than you had in the early days. The word “committee” starts to show up regularly in discussions. And those committees need policies, and policies for their policies. And those policies need to be reviewed by the CEO; how exciting! There are probably multiple layers of people now between the CEO and anything remotely resembling what she was doing in the early days of the startup. Welcome to the highway.

Trust and Transparency; Not Control

Now that we’ve covered the above, it should be clearer why, as companies mature and become full enterprises resembling nothing like what the founder CEO managed in the early days, founders often want new management to take over, so that they can focus on tasks they are a better fit for. But for the entire process to go smoothly, and for everyone to be aligned, a few key conditions need to be in place:

  • A healthy, transparent relationship needs to have developed between the founder team and the lead investors sitting on their Board. See: VCs and Founder CEOs:  Coaching v. Undermining. When founders trust their Board and their investors, they’re more willing to cede control to help the business scale.
  •  The recruiting process for new management needs to be balanced and transparent, including the involvement of the founder team. See: Replacing the Founder CEO.  Running an open process in selecting the new executives will give the founders confidence that the new team will look out for everyone’s interests. Unfortunately, I’ve also seen instances in which certain Board members try to simply dictate to everyone else who the new executive(s) will be. That can end badly.
  • Trustworthy advisors, including counsel, should help ensure that the founder team feels well-advised throughout the entire process, and has appropriate protections in place (like employment agreements) for themselves. See: How to avoid “captive” company counsel.

The keywords here are trust and transparency. When a founder CEO clings to control well past the point where his role no longer matches his skillset, it’s often an indication that he doesn’t trust the other decision-makers at the table; and sometimes for good reason. However, when founders know that stepping into new roles doesn’t mean losing visibility or influence over the core drivers of the business, they are usually far more willing to accept when bringing in new talent will help take the startup to the next level.

Decisions made in the very early days of the company, including what advisors you bring on, and whom you accept money from, will determine whether the right conditions are in place later on for healthy executive succession. Take those decisions seriously.

Contributor: Jose Ancer, Technology & Venture Capital Partner, Egan Nelson LLP