A striking revelation by Don Valentine of Sequoia Capital sheds light on a less-discussed yet prevalent issue in the startup world: nearly half of the founding CEOs are terminated within 18 months of their Series A funding. This alarming statistic points to what can be seen as an epidemic among startups, where founders are often fired from the companies they’ve started.
This trend isn't limited to lesser-known startups; it's evident in the stories of some of the most recognized names in the industry. Elon Musk, for instance, was ousted from his CEO role at Paypal, a company he played a pivotal role in shaping. Jack Dorsey, despite being the brainchild behind Twitter, faced a similar fate when he was fired from his own company. Travis Kalanik's departure from Uber, a company he co-founded and led to massive growth, further illustrates this pattern. The list goes on and on. These high-profile examples signify a hard truth in the venture capital and startup ecosystem: securing funding is just one part of the journey, and maintaining control and steering the direction of your company post-funding presents a whole different set of challenges.
For founders, this reality underscores the need for a strategic approach to not just securing funding but also navigating the complex dynamics that come into play afterwards. Understanding investor expectations, aligning visions for the company's future, and establishing strong governance practices become crucial. The ability to maintain control and influence over your company's trajectory is a delicate balance of strategic foresight, effective communication, and sometimes, tough decision-making.
The High Stakes of Board Composition:
In the lifecycle of a startup, especially after receiving venture capital investment, the composition of the board of directors becomes a determining of company’s future path. Initially, founders often enjoy complete autonomy over their board, shaping decisions that directly align with their vision and strategy. However, the introduction of venture capital funding brings about a seismic shift in this dynamic.
As part of the funding process, institutional investors frequently condition their investment on securing seats on the board of directors. This shift in board composition can significantly dilute a founder’s control and influence. Many founders, caught up in the excitement of securing funding and scaling their business, don't fully grasp the underlying implications of accumulating board members, particularly the primary role of the board – to hire and fire the CEO.
The board's power to make or break a CEO's tenure is a stark reality that many founders just plain overlook. While initially, the board's role might seem like a mere formality or a strategic partnership, it quickly evolves into a body that holds decisive power over the company's leadership. This includes the authority to remove the founding CEO if they believe it’s in the best interest of the company's growth and success.
This evolution from a founder-controlled board to one that includes outside investors marks a critical transition point. It requires founders to be not just vigilant but also strategic in their approach to board relations. Founders must navigate this transition with eyes wide open, acknowledging the potential for reduced control and preparing for the realities of accountability to a board that now includes voices beyond their founding team. This understanding is crucial in ensuring that they do not find themselves unexpectedly sidelined in their own venture.
Preallocating Board Seats: A Strategic Move for Long-Term Leverage
When incorporating, preallocate common board seats. By allocating additional common seats early on, you create a buffer that can be crucial in maintaining a degree of founder influence as investor-appointed members join the board.
For instance, imagine a startup initially setting up a board with three common seats and one seat each for two different investors. If disputes arise or if investors push for directions contrary to the founder's vision, the extra common seats become instrumental. They allow the founder to bring in trusted allies or experienced mentors who align more closely with the startup’s original mission and strategy, thereby reinforcing the founder’s stance.
Conversely, neglecting to preallocate these common seats can put founders at a significant disadvantage. Consider a scenario where a founder retains just one seat for themselves, and the rest are quickly filled by investors after funding rounds. In such a setup, if strategic disagreements or performance issues arise, the founder may find themselves outnumbered and overruled, or in extreme cases, even ousted from their position. The lack of additional common board seats means there's little room to maneuver or introduce voices that might advocate for the founder's perspective.
Preventing the Loss of Control:
To mitigate the risk of being ousted from your own company, consider these additional strategies:
- Vet Board Members Rigorously: Choosing board members is as critical as selecting your team. Interview potential board members with diligence, setting clear expectations from the outset.
- Limit Board Seats per Financing Round: A good rule of thumb is to appoint 1 board member per financing round. Be cautious about giving up multiple board seats during a single round of financing. Typically, the lead investor, who takes the most risk, should be allocated a seat. If others demand inclusion, offer them observer status instead.
- Make Founder Seats Irrevocable: Ensure that founder seats on the board are irrevocable. This ensures that founders remain integral to the company's governance, regardless of their operational roles.
- Set Term Limits for Independent Seats: Implement term limits for independent board members. One year serves as a practical guideline - if they work out well, you can renew the term - if they are terrorists or not aligned with you, you can fire them and find someone better to serve you. This allows for the removal of directors who may not align with the company's core values or mission over time.
- Commit to a Code of Ethics: Establish a code of ethics for all team members, including the board. This formal commitment underscores the dedication to your company's mission and customers.
- Choose Impact-Driven Funds: Raising capital from funds with a social impact focus can safeguard your business’s ethos. These investors are often more aligned with long-term goals beyond mere financial returns.
Understanding Board Dynamics:
The reality is that once your company’s board has more than one member, your absolute control is diminished. In most states, employment laws are at-will, meaning that if you're outnumbered on the board, you can be legally removed from your position. It's a situation that can unfold rapidly, underscoring the importance of strategic board composition from the start.
Conclusion:
Securing venture capital is an achievement, but it's just the beginning of a new chapter in your company's story. As a founder, it's imperative to approach board composition and investor relationships with a strategic mindset, ensuring that you retain influence over your company’s direction. Remember, the ultimate goal is not just to secure funding but to maintain the vision and integrity of the venture you’ve worked so hard to build.
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