The Journey

How to Avoid Being Replaced as CEO by Your VCs

echojason@gmail.com'

Jason Lemkin

Worried about a bunch of VCs replacing you?  You should be a little worried, probably.

Just the other day, a CEO that I know fairly well was fired by a VC.  Strange thing was, the VC didn’t talk to the rest of the board.  Who didn’t agree.  So he got un-fired.

Awk. Ward.

CEOs getting replaced and fired in start-ups doesn’t happen every day.  But it does happen all the time.  Fairly often. Just not usually.

farrellA few high level things to think about.

  • First, if you really screw up, and couldn’t make it happen, and someone else could … shouldn’t you be replaced?
  • Second, if you don’t end up being a great CEO in the long-run, shouldn’t you be replaced when someone can do the next stage materially better than you can? This will make you more money as a shareholder, no?

OK you probably agree with both in theory. But you’re really worried about the grey area in the middle. You give it 110%. For years. The company does reasonably well, or at least, doesn’t fail. You don’t think anyone could have done any better, or will do any better. But a bunch of guys want to replace you anyway.

That doesn’t often happen. But it does happen regularly.

So … how do you protect yourself?

Six tips:

  • Don’t sell too much of the company. This is key tip #1. Roughly, you will give away control in proportion to the ownership stake you sell. If you only sell 20–30% of the company, because you don’t need that much capital … you’ll remain in de facto and legal control. If you sell 90%+, you won’t remain in control. Which is fair. It’s not your company anymore at that point.
  • Pick VCs on your board, especially early stage VCs, that you trust. This will go a long way. If you have options, if more than one VC wants to invest in you — do reference checks. For real. On the individual partner, not just the firm.
  • Look at the track record of the Series A-B-C VCs you bring in. How often do they replace CEOs? It’s not necessarily truly a negative if they replace many CEOs, just understand what you are getting yourself in for.
  • Be very transparent. Don’t hide stuff from your board. This >>spooks<< VCs. Every VC has lots of companies that unperform and even fail. But a surprise — that spooks people. Simple hack — send out a “flash report” the very first day of every month telling everyone how you did last month, the good and the less good.
  • Be better than anyone else. Even if the company struggles, if the board doesn’t believe anyone else could do a better job, they won’t replace the CEO, 9/10. Sometimes, it’s just a B+ idea and/or a B- market.
  • Don’t expect — or ask for — another check. This is key tip #2. The most common reason CEOs get fired is a third check. An unexpected check. VCs having to write another check into a company they don’t want to write another check into. This creates huge stress at the partnership level for VCs. They don’t want to write another check into their struggling companies. If you don’t ask for any more money — the CEO’s job is a lot safer.

Do those 6 things and your odds of ever being “fired” or replaced as CEO without your consent are very low.

More here: 5 Things To Be Wary of In VC Financings

Published on June 13, 2016
  • Matthew King

    Hi Jason – It seems to me that a control right term is often independent of ownership percentage in most term sheets. From my reading of term sheets, I’ve found that control rights depend on a myriad of factors including: the VC firm’s investing style, the funding environment, the experience of the founding team, the stage of investment, etc. If the founding CEO makes sure the investors are well aligned with the company then they shouldn’t fight to keep ownership in a certain range as long as the valuation is market-based (assumption: they actually need the capital). In the end, 15% of a billion dollars is better than 70% of zero! Thoughts?

  • Joseph Akande

    Well written article and outlined points.

    The Founder’s Dilemma does well to explain why VCs sometimes move to replace CEOs or founders of a business. An individual who decides to embark to starting a business should reconcile with himself whether he or she whats to remain ‘King’ and majority owner of his business, or ‘Rich’ at the expense of owning less equity when investor funding gets involved.

    Here is a link to the HBR article that covers this topic: https://hbr.org/2008/02/the-founders-dilemma

Share This