Insights · Founders · 6 min read
Rich or king? The trade-off every founder faces
Success brings its own surprises. The first is that the founder may not be the one who leads the company to the finish line. The time to decide how you feel about that is before your next raise, not when the board asks.
By Andrew Hayes · Adapted from chapter 23 of The Founder's Journey
52%
of founder-CEOs who raised outside capital had been replaced as CEO by their company's third round of financing
~3 in 4
of those changes were driven by the board rather than the founder
Noam Wasserman, The Founder's Dilemmas (2012), a study of thousands of US startups.
The founder's dilemma
Harvard researcher Noam Wasserman argues that founders face a trade-off between two goals:
Rich
Maximise the value of the company. That usually means bringing in investors, experienced executives and independent board members, and giving up some control.
King
Keep control of the company and its direction. That often means raising less, growing more slowly and building a smaller, less valuable business.
His research suggests founders who give up more control tend to build more valuable companies, and that founders who try to keep both control and maximum value often end up with neither.
Founders who lost the crown
| Founder | What happened |
|---|---|
| Steve Jobs | Removed from his operating role at Apple in 1985 after a boardroom struggle with the chief executive he had recruited, and left. He returned in 1997, when Apple bought NeXT, and became chief executive again. |
| Travis Kalanick | Resigned as chief executive of Uber in 2017 under pressure from major investors, after a series of controversies about the company's culture and conduct. |
| Adam Neumann | Stepped down as chief executive of WeWork in 2019 after a failed attempt to list the company, amid investor concerns about governance and his control. |
Why it happens
- The job changes. The skills that start a company (vision, speed, improvisation) differ from those that run a large one (systems, delegation, governance).
- Investors have their own obligations. Venture capitalists are raising money too, and must return it to their own investors. They will act if they believe a founder is destroying value. (See Your VC is raising money too.)
- Governance catches up. Behaviour tolerated in a small company becomes unacceptable in a large one, especially around culture, conduct or conflicts of interest.
Jobs, again
Jobs later described his 1985 removal as one of the best things that could have happened to him, because it freed him to start again. Being replaced isn't always a tragedy. Being surprised by it usually is.
How control is lost, and kept
| Mechanism | How it shifts control |
|---|---|
| Board composition | Each round may add investor directors; once founders are outnumbered, they can be outvoted, including on who the chief executive is |
| Protective provisions | Investor consent rights over new raises, sales, budgets or senior hires |
| Dilution | Founders' voting power falls with each round |
| Vesting and leaver terms | A founder who leaves, or is removed, may lose unvested shares or have to sell at a discount |
| Dual-class shares | Some founders keep extra voting rights through special share classes; common in large US technology listings, rarer and more limited in Australia |
If you want to stay king
- Raise less, later, from investors who share your view of control.
- Negotiate board composition carefully in every round, with independent directors you trust.
- Build a leadership team strong enough that investors see no need to bring in their own.
- Be honest and early with bad news. Boards replace founders they don't trust.
If you'd rather be rich
- Plan your own succession: identify and develop a future CEO.
- Negotiate the role you want afterwards: chair, product lead, or a clean exit.
- Use secondary sales to take some money off the table at each stage.
Worked example: two co-founders choose
In the book, co-founders Sam and Alex talk the question through before their Series A. Sam, driven mostly by the mission, would accept an experienced CEO if it meant the business served more customers: closer to rich, with mission protections. Alex, driven mostly by freedom, values technical authority more than the size of the outcome: closer to king, at least over engineering. What they agreed:
| Issue | Agreement |
|---|---|
| Board | No more than one new investor director at Series A; one independent director chosen by the founders |
| CEO succession | Sam to identify a potential successor within two years; any change to be planned, not imposed |
| Technical role | Alex keeps final say over the technical roadmap through any change of CEO |
| Mission | A statement of purpose in the constitution, and a commitment to the core market |
| Liquidity | Each founder may sell up to 10% of their holding in secondary sales at Series A |
Decide whether you'd rather be rich or king before the term sheet arrives. Then negotiate the board, the provisions and your own role to match.