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Entrepreneur Bill of Rights – Article 5: The right of the founder to remain CEO February 1, 2010

Posted by Lawrence Lenihan in Uncategorized.
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I am sure that there are entrepreneurs who will read this article and think “of course I have the right to remain the CEO – I’m the damned founder!!!”.  You’re right – you do.  As long as you own 100% of the company.  But once you take a round of funding with VC investors, that right is not so obvious and clear as you originally thought.

This issue is the source of some of the fiercest battles between Entrepreneurs and VCs.  If you don’t solve it before you agree to funding, there will be many problems ahead.

During the due diligence process, “The Question” is always asked by the VC: “Do you see yourself as the long-term CEO of your company?”  I know that someone must have written a secret handbook that is given to entrepreneurs taking money from VCs.  In it, the handbook must advise every entrepreneur that, when asked The Question, you must give “The Answer”: “I am only interested in building the company and generating shareholder returns.  If we can find someone better than I am, I would gladly step aside” (often said in a robotic monotone as you try to remember the exact words the secret handbook told you to say).  I am sure there are entrepreneurs who truly believe The Answer (and we have backed some), but others, while answering truthfully, also believe that the only person better than they are and to whom they might hand over the reins over would be Steve Jobs, and only if the entrepreneur could keep the Chairman title!

VC’s understand this, and in our secret handbook, we are told to ask The Question, knowing that The Answer will come, thereby laying the framework for replacing the CEO with a guy or gal who has “been there and done it” – we have to take you on your word that you will step aside if we find somebody better, right?

So, the danger here is very apparent.  And unless the topic is established in a candid and explicit manner early in the funding discussions, there are going to be problems later.

After 13 years of being a venture capitalist, the conclusion that we at FirstMark Capital have generally come to on this point is that if we don’t think the captain steering the ship can sail the ship to the point of destination, we should go find a new boat!  Replacing any CEO is difficult, but replacing the founder/entrepreneur CEO is akin to performing heart, brain and soul replacement surgery.  Yes, there are several high profile examples where the entrepreneur/CEO is replaced successfully.  For instance, Meg Whitman did a marvelous job at Ebay, professionalizing that business and growing the organization once the business model was established and the leadership requirements of company changed from discovery, growth and innovation to organization and management.  But, frankly, when Ebay needed to innovate and change, they struggled and they lost market share.  Contrast this story to Amazon which has innovated more than any other company out there in many ways (yes, more than Apple!).  Imagine Amazon attempting all it has accomplished without its brain, heart and soul, Jeff Bezos.  In addition, Apple is a great example as well.  Steve Jobs was fired in the mid 80’s after clashes with CEO John Sculley, a CEO “rockstar” (ooh, do I hate that phrase) who was brought in to “professionalize” the business.  Apple succeeded at first and then became lost as its innovative edge was lost.  The board burned through several other CEO’s. When Steve Jobs returned in 1997, the heart, brain and soul returned and, as they say, the rest is history. (P.S. The one of the first thing he did when he returned was to fire the board – how great that must have felt!).

The first step to this discussion needs to be taken by the entrepreneur.  If the CEO/entrepreneur wants to be CEO, he should say so and be clear about it – he has the right anyway.  After all, he is the largest shareholder (or at least should be according the Article One)!

At the same time, a clear and candid discussion needs to take place to establish the framework on which the CEO/entrepreneur’s performance is to be evaluated.  This framework needs to be objective and measurable, yet flexible enough to enable the CEO/entrepreneur to run her business in the manner she believes best and to enable the CEO/entrepreneur to seize unplanned opportunities as they present themselves.

Even as the founder and largest shareholder, the CEO/entrepreneur must be accountable to specific performance expectations.  If you don’t agree with this statement as the CEO/entrepreneur, don’t take an investment from a venture capitalist.  Furthermore, if you as the CEO/entrepreneur are the largest shareholder, it is in your best interest as well to evaluate your performance – if someone else can do the job more successfully, nobody benefits more than you do!

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