Founder-CEO Needs To Know When It’s Time To Go

Published in the San Diego Union-Tribune, January 4, 2016

Look in the mirror – you’re fired.

And thus we have the question of how to know when to transition leadership from the founding chief executive to someone else, “who can take us to the next level.”

(Note: Or run the thing into the ground.)

Suren Dutia, a senior fellow with the Kauffman Foundation, has some thoughts on that subject. He says startup founders “are heavily invested in the dream of leading the company.”

I know he is correct, and as an investor, I am inclined to touch this third rail earlier than not. This is the whole “rich vs. king” syndrome, and I explore this area deeply before funding.

When I was CEO and took investor money, I often joked (but with tongue tied behind my back) that I would write my resignation at funding and give it to the board, so they would be able to fire me without any ugliness or hanging on.

(Note: I have been CEO seven times and was fired twice. The first time I was deeply unhappy and was sure they were making a big mistake – and that one sold for more than $80 million).

Dutia cites data from Noam Wasserman, Harvard Business School professor, that “less than half of founding CEOs retain their title after three years.” And less than 25 percent of the CEOs who had a successful exit resulting from an IPO were founder-CEOs. In other words, hanging around too long might be detrimental to your wealth.

Wasserman goes on to say, “When a founder-CEO stepped down, the value of the company equity increased.”

So the real question is why – why is it so hard for the founder to let go? Why is the mirror so clouded?

Dutia says, “almost 80 percent of founder-CEOs are reluctant to give up control.” They confuse their passion with their skills.

I am a consultant to a struggling telecom company and the major investor has come to me for advice – and after reviewing the issues, my rather immediate advice was to fire the CEO.

And the interesting thing is that the investor himself had been thinking about doing this for 18 months, but was afraid to pull the trigger. He wanted someone else to validate his perception. This is the classic “I waited too long” syndrome.

I see this issue regularly in early-stage investing. Angels talk about someone being “mentorable,” but I think what they are really trying to say is “will he know when to step down – and without a fight – so I don’t have to litigate any craziness.”

My own solution of late has been to actively assume the role of executive chairman. This is a term of art that carves out a role more than chairman of the board and less than CEO. There are few main areas of focus – dealing with external funding. Often, the CEO (which is the case in a biotech I am involved in) is brilliant at science and only moderately skilled in finance. Let people do what they do best.

Another main area for an executive chairman is merger/acquisition/joint ventures and deals. I am funding another company where the CEO is a former Marine sniper (this is one time where severe disagreements could be adverse to my long-term health) – but to his credit, he is totally willing to restructure the corporation, the stock, the compensation, the vesting, etc. – because the product is brilliant. I know enough not to touch the product.

My partner and I have a company where the CEO is really the COO, but he is so good at operations and execution that we want him to keep the CEO title. My partner simply “bolsters” him, but stays in the wings. This is an important job – being coach without trying to run on the field and throw the pass. The fact that you can touch something does not mean you should touch it. Part of the executive chairman role is to provide a plan for “CEO success and if needed, succession.”

Finally, both Dutia and Wasserman say that if you are going to make a change in the CEO, here are some recommendations – “Don’t settle in the hiring process, don’t undermine what has been done under the previous administration and don’t dawdle – no more than five to six months from start to finish in the hiring and transition.”

Executive chairman can be a useful role.

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