Founders don’t often voluntarily replace themselves. It’s usually not their decision to step aside to let someone else take over the leadership of their company. Ultimately most founders will be replaced. Usually by the C round of capital raise. And when this happens, unfortunately the founder usually sticks around in some capacity — often as a board member, even as Chairman, in an operational role on the executive team reporting to the CEO or sometimes as a partner to the new CEO.
Each of these roles, short of the founder leaving the company completely and entirely, is bullshit. So why does this happen so often. Here are the reasons that you’ll likely hear.
1. Founder has institutional knowledge that company does not want to lose
After all, the founder was the thought leader who started this thing. The product or service is usually his or her brainchild. She knows more about the market, the technology, the product, the competition, and just about everything else. She usually does! How could we possibly jettison that knowledge? Besides that, everyone holds the founder in high esteem as the cultural leader. Which brings us to the next reason.
2. Founder is the cultural leader of the company
This is almost always true. Founder-led companies often have a familial feel. Loyalty amongst the team abounds. Removing the founder from the leadership role will no doubt break those bonds that hold the company together. This is a substantial risk.
3. Founder owns sufficient voting power that enables him or her to force this decision
Shame on any outside investor who allows this to force their hand. Certainly, the popular trend of issuing dual-class stock (stock that has superior voting rights for the founding team) has reinforced this notion. Founders who can force their status on their investors may have their way until the company is in such bad shape that the shareholders revolt or the founder just gives up. Usually in either case it’s too late. If this is the case, you probably shouldn’t have invested.
4. Board doesn’t have the guts to cut ties with the person in which they originally invested
Those testosterone-laden VC’s turn into lambs when it comes time to oust a founder. Despite their braggadocio at board meetings, Board members know that severing the founder relationship is a risky strategy. They also know that creating a history of pissing off founders will inhibit their ability to attract the next great deal. By keeping the founder around they feel that they are softening the blow — usually at the expense of future performance.
5. Board hopes the new CEO works out and if not, the founder is still there to pick up the pieces.
This is the portfolio approach to strategy. It’s just like the company picking two strategies to pursue at the same time in the event one fails. This failure of decisiveness is a losing strategy. As Confucius said: “He who chases two rabbits catches neither.”
Rationalizing why to keep the founder around is pure bullshit. It doesn’t help and won’t work!
No one fires a founder unless it needs to happen. Every self-respecting VC and board member is aware of how much disruption changing out the founder/CEO can cause. This never happens frivolously. Usually, Boards wait too long. It’s easier to wait and hope than it is to take the bad tasting medicine that will make the company well.
The new CEO who comes in to replace the founder needs to institute important, often substantial, change. This does not mean the founder was bad. In fact, it is often the success of the founder that accelerates his or her demise. What is required is change to adapt to changing circumstances — often caused by fast growth and increasing scale.
The board didn’t put the new CEO in place to simply perpetuate the strategy of the former CEO/founder. They want change. The organization needs change. The former CEO prefers the status quo.
It’s really hard to believe that a demoted founder is rooting for the new CEO to succeed. (Did Tony Romo root for Dak Prescott to succeed?) It’s hard to watch as your former strategy is dismantled piece by piece, especially if your successor does succeed. What we find is the founder cringing in the shadows, putting on a happy face, hoping that the impending failure of the CEO will vindicate the founder’s original role.
Worse, a founder staying on the Board of Directors or perhaps even in the chairman’s role, means he now is the boss of the CEO. What results is a structure where the new CEO’s boss is having to objectively assess how well all the things he hoped would never happen are going. When this includes his successor replacing members of the executive team that were the best friends of the founder, it may be too much for the founder to handle.
Most change brought by a competent replacement CEO initially causes worse performance. Change has a way of requiring a gestation period for a reset of positive momentum. If results were good prior to the founder/CEO’s replacement, they probably will slow down before they improve.
If things were going poorly prior to the succession, they will likely get worse before they get better. Every downward tick gives the former CEO more ammunition to prove his successor wrong. When poor financial performance continues it may be sufficient to cause the Board to get cold feet. With the founder sitting nearby, it’s too easy to get prematurely seduced to give up on a new replacement CEO paving the way for the founder to rebound. Better to return to the devil you know?
It’s not fun for the founder either. Having a front row seat to witness the adopting parent renaming his child and setting new ground rules for behavior for his child, is not the easiest thing to handle. Its emotional and hard to keep your hands folded on your lap as this evolves. Especially if these changes take time to settle in, the founder’s patience will likely thin faster than the duration required for any positive changes to take hold. The better the company does the worse the founder feels.
Founders who remain in place naturally engage in subterfuge even without even intending to interfere. Back channel conversations between the founder and trusted team members do nothing to help the new regime. Just the physical presence of a founder may be enough to detract from the new CEO’s direction. Even when things are going well, there will always be staff members who long for the good old days when the founder presided. When Michael Bloomberg returned to his namesake company after his decade-plus-long sabbatical as mayor of New York City, his arrival in the office was enough to detract from the role and authority of his handpicked successor. “To the people in this company Mike is a God,” stated Daniel Doctoroff - Bloomberg, LP’s CEO for the prior twelve years, as he abruptly resigned.
Not every successor will be right for the role. Venture Capitalists joke about doing an executive search for two successors at the same time, so they have someone to fill the role when the first fails. But keeping the founder around after his or her successor is in place won’t help. They will amount to nothing more than a sea anchor slowing the company’s progression.