The case study: When founders step aside

The story

In 2001, Lew Cirne, founder and chief executive of California-based Wily Technology, was on the brink of finalising Wily’s third round of financing. The software company had grown to 50 tightknit employees, reached or passed all milestones, convinced important customers to buy Wily’s flagship product, and raised two rounds of financing from top venture capitalists.

The new funding would enable the company to add key members to the team and roll out an advanced version of its core product.

The challenge

Mr Cirne was stunned when his venture capital backers then stipulated that he must move to chief technology officer to let someone else – not yet chosen – replace him as CEO. “Where have I messed up?” he remembers thinking. How could his main backer, until now so supportive, want him replaced?

Not only was Wily a success but Mr Cirne was emotionally attached to the start-up he referred to as his “baby.” Why should he yield to the VC-influenced board’s demand that he step down?

Behind the dilemma
Mr Cirne was at a classic “rich v king” inflection point: he could either hand the reins to a successor with the skills to build a more valuable company or fight to remain CEO.

Mr Cirne agreed to the board’s terms but only if he could veto candidates
he thought were “a bad cultural fit”, which allowed him to feel he retained an element of control.

His predicament was not unusual. At this stage of development, half of all founder-CEOs have been replaced as CEO, nearly three-quarters of them involuntarily. Paradoxically, they are often the successful ones who like Mr Cirne have led their start-ups through the completion of product development and raised outside financing from professional investors.

Achieving these two milestones increases the chances of the founder being replaced as CEO.
The first heralds a phase where new skills are needed as the focus moves beyond leading a project team through technical challenges. As for the second milestone, each round of financing steadily transfers control to investors.

The outcome

After a 13-month search, Richard Williams was hired as the new CEO. Mr Cirne became Wily’s technology strategist but he found the transition a long, difficult process of “having to find a new role within my own company”.

But in early 2006 Wily accepted a buyout offer from Computer Associates for $375m, which Mr Cirne admits is far more than he could have achieved. After giving up the CEO position, Mr Cirne was no longer king, but by yielding to a successor who could build a more valuable company, Mr Cirne became rich.

Loss of influence over the fate of one’s “baby” is hard. But founders who remain king tend to end up with stakes only 52 per cent as valuable as those held by founders who yield to successors.

Nevertheless, in his next start-up, Mr Cirne made decisions that would enable him to keep control for as long as he desired. For instance, he pursued a different sales strategy – software as a service – that was a better fit for his talents, and chose board members who would allow him to stay CEO for as long as he wanted.

Key lessons

Founders naturally idolise Sir Richard Branson and Bill Gates – prominent “rich and king” founders who built world-class companies while leading the company long into its life cycle. However, they are the exceptions.

The vast majority of founders face rich v king trade-offs at almost every stage of the start-up’s development – although they often do not realise it.

Founders can benefit from preparing themselves in two ways. First, to be aware of how their start-up’s challenges will change, requiring them to make hard choices. Second, they should be aware of their own motivations, strengths and weaknesses in order to understand their engagement with their own company.

- Financial Times, 22 Oct. 2012