No founder ever wants to be replaced, although statistics say that most who run successful companies will be. But how do you know when it’s time for you to go, how do you prepare in advance and when should it be clear you have overstayed your welcome? Here are important ideas that every founder should consider to ensure they are ready and able (even if not willing) to handle their exit.
Do this First!
Get an exit agreement. Why not? Prenuptial agreements are common when there is a lot of wealth at stake. Hopefully there is or will be significant wealth generated in your venture. There is no better time to plan for your exit than when none is in sight. If you are the majority stake holder and calling the shots, then this should be easy to put into place. If you are about to raise capital, then you likely will never again be in as good a negotiating posture than you are right now. And even if you’ve got an established Board and multiple tranches of investment, you are still probably in the driver’s seat. While not optimal, negotiation of an exit can even occur after your Board has told you they want you replaced. Offering to depart amicably is a valuable bargaining chip to ensure your soft landing. Even if you never use it, an ounce of preparation will always be better than a pound of scrambling for an after-the-fact cure.
Now start considering these questions.
Founders often are not sensitized to how their leadership style, which worked great during startup, now impacts their organization. Here are several telltale signs that things are not exactly how they appear.
Are your senior leadership team members of your friends? Whether they started out as friends or just became your friends along the way, this should be a concern. It’s hard to be objective when there is something personal that intercedes into a commercial relationship. If members of your team happen also to be members of your family, this concern becomes even more poignant. As you grow, not all team members will grow at an equal pace. Often the company’s needs and requirements grow faster than some team member’s ability. This is not necessarily a bad thing, just something that astute founders need to stay keenly aware of.
If personal relationships and loyalty start to trump individual capabilities, your ship may start to list. It is much harder to hire great people when they expect their future depends more upon a relationship than upon their ability. If your team members are your friends or family, it becomes that much harder to “make them available to the industry” should the need to replace them with someone more seasoned arise. For your organization to scale, your senior leadership team will need to molt. Just like a lobster that can’t grow until it sheds its shell, you will need to replace members of your team as your organization becomes more complex. It you don’t see this distinction or can’t bear to part with team members, start thinking about hiring someone who can.
Are you always the smartest one in the room? Most founders start out as the most knowledgeable member of their team. Whether it be product or technology knowledge, market expertise, sales or something else, that is why you are the founder! You have that special and unique knowledge. But as offerings mature they become more complex, as organizations grow they add layers of intricacies, and as you cross the chasm onto the main street, you will no doubt be hiring experts in areas that you might not have ever dreamed of. These experts come with a new perspective, deeper experience, and sharpened expertise that will exceed that of you and your team in their particular domains.
Founders who scale, hire people more expert than themselves as soon as they can afford to. Unfortunately, hubris sometimes gets the best of some founders who stick with their belief that they are better at doing the jobs of their senior executives than their execs themselves. Founders, in general, crave control. When decisions continue to centralize around the founder after you have grown to more than several dozen employees, beware. This behavior may retard your growth and may discourage capable executives from joining you. Even if you don’t see it, your senior leadership team and your Board will.
Do important customers call you on your cell phone? We’ve all been taught that customer service is next to sainthood. When you started your enterprise, you likely began by establishing close personal connections with your early adopters. This was important and may still be. But now that you have grown, it’s more important to ensure your customers (even your early adopters) have connections to your service desk and customer-facing professionals whose daily job is to service these accounts. Despite your intimate customer knowledge and relationship, there are other things that you will be doing, demands that will pull you in all sorts of new directions, with the risk that you won’t be available when that important customer needs some critical help.
Here’s an example that makes this real. The founder of a healthcare startup firm established this type of relationship with almost every early adopter customer. Customers appreciated the direct connection, cell phone speed dial, and willingness of the founder to respond (including fixing code himself) quickly. But after several years of growth, there were over a hundred customers. The founder was doing the things that a CEO of a growing companies does. One day one of his early adopter customers called and asked for help. The founder took the call, promised a quick remedy, and then forgot to follow-up due to his hectic schedule. Two months later the customer called the founder’s cell phone for the last time to tell him they were leaving for an alternative solution. Sad but true. Customer service organizations are built with processes to ensure “forgetting” doesn’t happen. Founders are not! Customers get over the newly established buffer between themselves and founders, albeit reluctantly. Without that change, growth will be impeded. Are you willing to hand off this relationship?
Do you quote prices and delivery dates to customers (without knowing whether your teams can back those dates up)? In the early days, you won over customers by delivering better and faster than your larger competitors. Back then, your small team had few processes, the code was easier to manage, and your organization would do whatever it took to succeed. As you get bigger this task gets more difficult. Processes are instituted to enable you to scale. With more customers, mistakes get more costly. Teams now do jobs that individuals (probably who reported directly to you) used to do. It is hard to change direction quickly. It is hard to change priorities constantly. In the past when you made these kinds of promises and cut individual deals to capture a customer, you got positive feedback. These actions became habits. If you still do them today, you will be driving your organization crazy. Since your team respects you as the founder, despite their complaints they will bear with the imposition and try to deliver. But ultimately, these fire drills will conflict with their priorities and they will fail. Behind your back, there will be grumbling in the ranks. These quick changes in priorities will pose distractions that make it harder to meet promised to delivery schedules. Salespeople will feel undermined by the one-off deals you cut. But since you are the founder, they are likely not going to tell you. You will not hear the truth! The results will be insidious. Are you willing to give up that practice?
Has anyone heard you say, that’s not the way we do it around here? No one ever admits they are closed minded. But success breeds confidence and confidence encourages us to believe that we might know more than we do. Thinking we know better makes us less eager to listen and accept others’ ideas. Founders who always seeking better answers, who mine others for ideas and who are life-long learners have an increased shot at sticking around than those who are closed minded.
Just ask the management team at Blockbuster, or Digital Equipment, or Kodak, each of which believed that they knew better and stopped listening to what others were offering as an alternative reality. Blockbuster’s CEO demurred at the idea of partnering (or buying) Netflix leading ultimately to Blockbuster’s demise and Netflix’s almost $170 Billion market value. Digital Equipment’s founder believed the personal computer would fall flat on its face, only considering joining the PC revolution too late. Kodak never considered that its empire was at risk from digital photography, even though some of its engineers were digital photography pioneers.
Founders who have built successful empires begin to build moats around their idea generation. When they fail to consider new ideas, their tenure (as well as that of their enterprise) tends to shorten. “That’s not the way we do it here,” is code for: begin to consider your exit plans.
Are your Board meetings quieter than usual, less confrontational than in the past and your Board members being especially cordial to you, particularly in the face of less than stellar quarterly performance numbers? Founders are usually the last to know. Boards never make the decision to replace a founder casually or quickly. They would prefer to not ever replace a founder if they have a viable alternative. Assuming they are considering replacing you, you can bet they have talked about this long and hard. But rather than tell you that you are now on a short leash or that there are issues associated with your tenure, they likely lean the other way and become nicer and more complimentary. Consider the founder who the evening before a Board meeting was complimented roundly by one of his Board members but who in the meeting the next day was summarily let go. It happens.
Material degradation of financial performance (missing your numbers) is often a leading indicator that you should be mindful. Poor performance coupled with less than direct Board communication is another. Seldomly does a founder get replaced when things are going swimmingly well. No matter how ill-suited the founder is for the CEO role, good performance gives the Board an excuse to delay.
Boards don’t like their CEO to be checked out. So, no matter what they are thinking, they won’t share this momentous decision until it’s absolutely time. Do you hear crickets?
What should I do?
Being mindful of the behaviors and warning signs that your tenure may be at risk is a way for a founder to be more prepared.
Be introspective. Consider the questions posed and try to be objective about your answers. Remember Boards always prefer to keep their founders around, so long as it is not hurting the business. Ask your team to answer the questions posed for you. Chose members of your team who are most critical of you to pay special attention to.
Buy some insurance. It is never too early to begin to identify someone who has the potential to fill your role if you are not around. Everyone knows how very difficult it is to hire senior level executives. It’s even harder to hire CEO successors. Before you consider replacing yourself, hire a potential successor, give them a long runway, and watch them operate. This will give you a chance to really see them in action rather than relying upon embellished resumes, ineffective interviews and staged references. You will never really know how that person will fare until you see them in action. Look for someone who is not like you or at least has complementary skills. The last thing you need is a “yes” person who just does what you ask. Hire someone willing to make difficult decisions, who is curious, respectful and driven. Maybe someone with more experience than you, but not necessarily in the same industry.
Return to the beginning of this article. Get an exit agreement. No matter whether you or someone on your Board decides that it is time to transition your role to someone else, be sure that the path for your exit is one that is fair and one that will enable you to a new and exciting direction.