Is it time to fire the founding CEO?

Considering what is best for customers, employees & shareholders

By Krista Morgan, Stage GP

Key Points:

  1. Investors must ask themselves, what does the company need right now to survive, and does the CEO have both the skillset and fortitude to do what it takes?
  2. The founding CEO is not always the right person to continue leading the company, the company will survive without them.
  3. As investors & board members, be upfront and communicative. There should be no surprises, especially if you’ve done a good job of setting expectations and holding the CEO accountable.
  4. Share your concerns and start a conversation. A good founding CEO will take that question to heart and engage in a real conversation

stage_kristaMorgan

There are tough times ahead for startups. Recession, inflation, and increasing cost of capital means founding CEOs are facing what Sequoia deems a “crucible moment”.

Tough times means investors are likely to become more assertive across the board, and the question of replacing founding CEOs is going to come up more often. Early-stage investors are usually reluctant to get involved, but as companies face difficulty raising cash, fiduciary responsibility becomes more important and board members will feel increasingly accountable to the other shareholders.

Being a founding CEO is more than a job. For most of us it’s our whole life, our identity. It’s also a very difficult, very lonely job and one that is 100x harder than it looks from the outside. That said, it is precisely because the job is so personal that founding CEOs are not always the right person to continue leading the company

One single white arrow pointing to the right

I have been on both sides. I’ve been a founding CEO who has (almost) been fired, and an investor advocating for replacing a founding CEO. We tend to judge CEOs by their results – good results equals good CEO, and vice versa.

This, in my opinion, is a mistake. It’s rarely clearcut, the decision ultimately comes down to two key questions:

  1. What does the company need right now to survive?
  2. Does the CEO have both the skillset and the fortitude to do what it takes?

good results does not equal good ceo

It’s not about likeability. It’s not about change for the sake of change. A good decision focuses on the company and what is best for customers, employees, and shareholders.

Fear shouldn’t come into play. Investors often worry that founding CEOs are instrumental, that the company will fall apart without them. Founding CEOs tend to believe the same and they use that leverage to hold on.

What we’ve seen time and time again at Stage is that no one person in a company is irreplaceable. I have seen both founders and investors make this process of determining the right go-forward leadership harder than it needs to be, hurting the company in the process.

Too often, this decision is left until the last minute. Too often, there has been no communication along the way. Communication between a board and their CEO should be akin to that of a lender. A lender has a lot of power over a company, but good lenders rarely wield it. The same should be true of boards.

two way street

If you, as part of a board, are planning to fire your founding CEO without them knowing, you’re doing it wrong (gross misconduct excepted). The board has likely not done a good job of setting expectations and holding the CEO accountable.

The CEO may need to go, but there is almost always a way to execute this as part of a mutually agreed transition. Founding CEOs are unique, they bring qualities a “professional” CEO will never have. This is more than just a job to them. And they deserve the respect of being part of the process to exit. At Stage, we evaluate whether we want the founding CEO to stay pre-acquisition and are clear upfront as to our perspective so there are no surprises.

Is it time to fire your founding CEO? Share your concerns and ask them. A good founding CEO will take that question to heart and engage in a real conversation.

Share This Post

More To Explore

stage_kristaMorgan
Top Picks

Adopting a Private Equity Approach to Venture Capital Investing

Stage GP Krista Morgan was a featured guest on The Private Equity Podcast hosted by Alex Rawlings. In this episode, Krista and Alex talked about:

– How PE firms take over companies and lead them to growth
– What it’s like to work in a female-led investment fund
– Why most start-ups fail
– The publicity and business that comes with winning awards

Featured

Is it time to fire the founding CEO?

Tough times means investors are likely to become more assertive across the board, and the question of replacing founding CEOs is going to come up more often. Early-stage investors are usually reluctant to get involved, but as companies face difficulty raising cash, fiduciary responsibility becomes more important and board members will feel increasingly accountable to the other shareholders.