Monday, February 12, 2007

Founder CEOs - A Good Thing

It's been quiet here, and a quick peek through the blogosphere tells me why - my Ricky is on vacation. It's hard to provide counterpoint when your pointman is on a beach somewhere, with margaritas the only liquidity event on his mind.

Luckily, before departing Rick left a thoughtful post chastising founders who resist being replaced as owner-operators. Rick's view is that founders should "stop treating the title of CEO and President as a goal in itself".

I would like to offer a different view on the subject.

Before I do, however, I want to specify that offering a different perspective is NOT the same as actually disagreeing with Rick, who is American. Apparently, anyone who disagrees with Americans is currently considered to be emboldening the terrorists. Not me.

So, with that qualification out of the way, let's get to the matter at hand: is it short-sighted for founders to insist on the CEO title, or simply a very good defense tactic?

When you agree to receive venture capital, you agree to give up control over your business and its strategic direction in order gain funds for the execution of your business plan. You also agree to allow the company to buy back some (or all) of your shares, should you depart. Your continued role in the company therefore becomes a function of two variables: (a) your ongoing performance and (b) how much it costs to replace you. The higher the position, the more significant the termination pay.

A founder never know how well he will work with his VCs, or how long they will share the same strategic view of the market. It is therefore a valid strategy to make sure that the cost of terminating or demoting a founder CEO is significant enough to incent investors to replace only when there is a compelling business reason to do so. In my experience, there is almost never consensus on when (or how) to replace a founder CEO. So why make it easier for a vocal investor to sway the others?

My two cents.

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