“Should I Stay or Should I Go?”-CEO Successions

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“Should I Stay or Should I Go?” from The Clash, reverberated through my brain as I thought about all that is involved for a founder as their company grows and becomes successful. Those lyrics made me wonder when is it the right time for the founder to step down, resign, seek a new CEO and or perhaps a new role for them self within the organization. Most likely the founder has held the position of CEO because it was their idea, they brought the technical expertise for the product or service and invested their own capital. Clearly without them there would be no company.  As we have learned, it will work for a while, but as the business continues to grow, attracting customers, increasing sales– we must ask will the founder be able to meet the expectations of the investors?

According to Noah Wasserman in The Founder’s Dilemma the answer is no.  By the third round of financing, 48 % of the CEO’s are the founder and 35% of the CEO’s are non-founding.  For 17% of the companies, they are on the third non-founding CEO by the third round of financing. (Wasserman)

Let’s take a look at why this happens.  Voluntary succession, board initiated for poor performance or replacing high performing founders are the three triggers for change in a startup as suggested by Wasserman. (Wasserman) There are a variety of reasons why a founder may voluntarily step down and bring in another CEO.  The founder may be exhausted from all the time and energy put in to getting the company up and running; they may have a family situation requiring less hours at work; they may realize that once the company takes off they are in over their heads.  This type of succession is the rarest one but can happen if the founder is more wealth motivated than control motivated.  The wealth motivated founding CEO will realize that change is necessary to bring in the skills he or she is missing to continue the growth of the company.  When the founder is willing to step aside, they may also maintain another role within the company and be involved in the succession process.  Unlike the control motivated founder, who will most likely not step aside but wait for the board.

Bad idea- which leads us right into why boards will fire the CEO.  If financial expectations are not being met, then the CEO could be fired.  What if there are no sales? How can someone be fired?  There are other benchmarks that the board may use to determine the effectiveness of the CEO.  For example, hiring for a specific position by a specific date or completing part of a project by a certain date. (Wasserman)

The last trigger for change which is replacing high performing founders sounded like an oxymoron to me when I first read it.  Now I understand it, let me explain.  There are different stages in a startup and with the different stages come the needs for different skill sets.  At the beginning of the startup, the skills needed are more technical and creative.  They revolve around developing a product or service so it can be brought to the market and sold.  As the startup grows and becomes more successful there are going to be more employees needed in a variety of positions: marketing, sales, customer service to name a few.  The organizational chart may have been loose at the beginning and at this point more structure is needed.  The founder was the technical and creative idea behind it all, but they may lack the experience to lead, direct, and manage other areas as the company grows.  In addition to lacking the abilities to grow the company, a founder may not see the need to change the direction of the product or service missing market opportunity.  Does that make more sense now?

Here’s another interesting point from Wasserman, the faster the product or service is developed the better chance the CEO has to being replaced. (Wasserman)   Sounds like a founder can’t win.  Wait there is more.  The source of capital that we’ve previously discussed can also help get a founding CEO replaced. What?  Remember when a founder brings in outside capital they are giving up equity.  The more equity that is given to investors equals less decision making control for the founder.  I know it sounded good to take that five million dollars, but now the board owns you and is “voluntelling you to step down”.  Remember investors with that amount of capital are looking for returns and building value. If the board deems the founder not capable of building value they can force the issue.  This is when the CEO may have The Clash’s lyrics “Should I Stay or Should I Go” reverberating through his or her head.

There are reasons to stay and reasons to go.  If you stay and help with the succession of the CEO position it can be beneficial for continuity within the startup.  Don’t forget all the people that work for you and have helped get the company into the situation it is currently in. There is a need for a strong leader that has more experience moving a company from 10 million in sales to 100 million in sales.  It will be challenging enough for employees to accept a new CEO and all the change that comes with that shift.   If they see that the founder has a vested interest in finding the right person, they (hopefully) will be vested in helping that person to succeed.  As Wasserman states, finding a CEO that is dissimilar in the skill sets from the founder will make it easier for the founder to accept him or her into the company. (Wasserman)

The founder may even have an opportunity to learn from the CEO if they stay and assume another role which would most likely happen if they start the succession process.  If the board starts the process, it might mean merely a seat on the board with no role in the day to day operations.   That is the tricky part having a new CEO and keeping the founder in an executive position.  Sujay Jadhav says “If you’re an incoming CEO, have a game plan for the incumbent CEO (if applicable), evangelizing your vision and employee communications.”  Wasserman suggests that if the founder stays on in an executive position then keep them involved in targeted decisions and out of tasks they no longer need to be involved in.  (Wasserman)

Not everyone will want to stay. Even founders that help with the succession may find it too difficult to be in a place where they used to be in charge.  Sometimes these founders can sell their stake in the company and go do something else, maybe even create another start up.  Not so easy for control motivated founders.  Will they really be able to give up their input on decisions being made? Will they be helpful to the new CEO (doubtful) or create dissention among the other employees (probably)?   Remember the 17% on the third CEO in the third financing round, possibly because the founder just can’t let go when they should.

I will leave you with this question for your entrepreneurial venture “Will you Know When to Stay or Will you Know when to Go?”

 

Resources and Links:

Wasserman, Noam The Founder’s Dilemmas. New Jersey: Princeton UP, 2012.

“Why Founding CEOs Pick Lousy Successors.” Steve Tobak, Foxbusiness.com, 2015

Web 13 Apr. 2015

http://www.foxbusiness.com/features/2015/04/13/why-founding-ceos-pick-lousy-successors.html

“Why Founders Get Fired.” Eric Markowitz, Inc.com, 2011.

Web 8 Sep. 2011

http://www.inc.com/articles/201109/why-founders-get-fired.html

“Overseeing A Successful Founder-CEO Succession.” Sujay Jadhav, Techcrunch.com, 2015

Web 7 Dec. 2015.

https://techcrunch.com/2015/12/07/overseeing-a-successful-founder-ceo-succession/

“The Do’s and Don’ts of CEO Succession Planning.” Wsj.com, 2014

Web.  28 Apr. 2014.

http://www.wsj.com/articles/SB10001424052702303987004579479680859042214

 

2 thoughts on ““Should I Stay or Should I Go?”-CEO Successions

  1. Hi Cece!

    Wow, once again, you just blew me away with the depth and detail of your post. Very well done. I especially liked when you mentioned “If they [employees] see that the founder has a vested interest in finding the right person, they (hopefully) will be vested in helping that person to succeed.” I’ve been thinking about that topic, actually, and how the rest of the employees would react. I know that in some businesses, employees have a great deal of loyalty to their bosses and may end up leaving their job if the boss does, too. So making sure the founder participates in the succession would definitely be a wise move.

    Austin

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