50% of Founders get Fired
You might be surprised to learn that 50% of venture backed startups fire their ceo/founder within the first year. Of course, if you happen to be a ceo/founder of a venture backed startup you won’t be surprised.
When I received my first term sheet (from Austin Ventures) the signature block included the title, “Interim CEO”. The good news? They were upfront, I was out the door as soon as they could find a worthy replacement. I kept looking until I found a venture capital firm that would back ME and not my 50 page business plan.
Peter Ireland has an interesting post title, “The Dreaded Lunch Invite from Your Venture Capitalist” about this topic. Peter quotes Barnaby Federer of the Wall Street Journal:
“If you ask a VC what value they add, and you get them after a few drinks, they’ll say, ‘We replace the CEO’ “, he said. And that, he indicated, does not vary with the economic climate.
He goes on to explain how the process (of firing the CEO) starts:
t usually occurs in this manner. The venture capitalist invites the founder out for a friendly lunch. During the meal the venture capitalist brings up a new person who would benefit the company greatly through his connections or industry experience. The venture capitalist explains that although this person is not available to serve on the management team, he could probably find the time to serve as a director. Yes, it would mean making the board larger than originally agreed to by everyone but this guy is a “star”. The founder wishing to please his venture capitalist reluctantly agrees to the change in board size. The new face turns out to be the extra vote the venture capitalist needed to make wholesale management changes. Within a week the board has fired the founding team and replaced them with friends of the venture capitalist. Oftentimes the new board member assumes the CEO role.
His advice is to stick to your guns. Hopefully your lawyers helped you negotiate a deal whereby you had a balanced board ~ fight tooth and nail to keep that balance. NEVER GIVE IN! Peter offers this advice:
The best tactic to employ when faced with this offer is tell the venture capitalist that you 1) can’t recommend someone for a board seat until you are satisfied that they can make an actual contribution, and 2) that since the board is working well it would be preferable to compensate this person–once they have made a tangible contribution–with consulting fees instead of a board position. Finally, if you sense a strong negative reaction from the venture capitalist you can be assured that there’s trouble brewing in River City and it’s spelled with a capital “T”. He will always have a Plan B for pink-slipping you and it won’t be pleasant. Call your lawyer immediately, and I mean your lawyer not the company’s.
Finally, it might make some sense to think about your title. Does your business card say Chairman, CEO, President and Founder? Why not add ‘master of your domain’ while you are at it. Really? Ask your self, do I need all of those titles? I really doubt it, especially if you are involved in a startup. Here at Big in Japan we decided to allow employees to pick their own title (i.e. as long as it wasn’t traditional). For example, my title is Social Ninja and our lead developer is Bento Boxer. The point was, in a startup (especially early on) titles can get in the way of the fact that everyone needs to be able and willing to do anything. Just because you have a C or V in your title doesn’t mean you don’t have to take the trash out or haul boxes.
Titles can be an even trickier subject when you are trying to raise money. Rick Segal reminded me of the secret language/code venture capital folks use in his post titled, “VC Hot Questions“. Rick is running the Blackberry Partners Fund and as a result he and his partner VCs are hearing more than their share of pitches from entrepreneurs. Rick shared a few of the ‘third rail’ questions his partners have been asking entrepreneurs and I thought it might be helpful to post them here:
“Help me understand how the current management team gets the company to 50MM a year in revenue?”
“Do you think you and your team are strong enough to get it over the finish line?”
“What’s the track record of your management team with respect to successful exits?”
Do you know what the REAL question that was asked? Venture capital folks ask it in a hundred different ways, but there is only one answer they are looking for. The question is, less subtly, “are you willing to step down as CEO at some point?” Ricks suggest avoiding the problem by simply using the title “founder” and if you are asked “who is the CEO” to simply say, “Look, I’m the founder and we’re running a million miles an hour towards being successful as you can see here… The objective is to find a financial partner and a solid board to help me, as the founder, grow the management team and knock this baby out of the park.” I advise, as does Rick, only to say this if you believe the statement. The truth is even Bill Gates, Steve Jobs and Michael Dell were replaced as CEO… (of course you never know, Jobs and Dell got their jobs back - maybe you will too).