50% of Founders get Fired
You might be surprised to learn that 50% of venture backed startups fire their ceo/founder within the first year. Of course, if you happen to be a ceo/founder of a venture backed startup you won’t be surprised.
When I received my first term sheet (from Austin Ventures) the signature block included the title, “Interim CEO”. The good news? They were upfront, I was out the door as soon as they could find a worthy replacement. I kept looking until I found a venture capital firm that would back ME and not my 50 page business plan.
Peter Ireland has an interesting post title, “The Dreaded Lunch Invite from Your Venture Capitalist” about this topic. Peter quotes Barnaby Federer of the Wall Street Journal:
“If you ask a VC what value they add, and you get them after a few drinks, they’ll say, ‘We replace the CEO’ “, he said. And that, he indicated, does not vary with the economic climate.
He goes on to explain how the process (of firing the CEO) starts:
t usually occurs in this manner. The venture capitalist invites the founder out for a friendly lunch. During the meal the venture capitalist brings up a new person who would benefit the company greatly through his connections or industry experience. The venture capitalist explains that although this person is not available to serve on the management team, he could probably find the time to serve as a director. Yes, it would mean making the board larger than originally agreed to by everyone but this guy is a “star”. The founder wishing to please his venture capitalist reluctantly agrees to the change in board size. The new face turns out to be the extra vote the venture capitalist needed to make wholesale management changes. Within a week the board has fired the founding team and replaced them with friends of the venture capitalist. Oftentimes the new board member assumes the CEO role.
His advice is to stick to your guns. Hopefully your lawyers helped you negotiate a deal whereby you had a balanced board ~ fight tooth and nail to keep that balance. NEVER GIVE IN! Peter offers this advice:
The best tactic to employ when faced with this offer is tell the venture capitalist that you 1) can’t recommend someone for a board seat until you are satisfied that they can make an actual contribution, and 2) that since the board is working well it would be preferable to compensate this person–once they have made a tangible contribution–with consulting fees instead of a board position. Finally, if you sense a strong negative reaction from the venture capitalist you can be assured that there’s trouble brewing in River City and it’s spelled with a capital “T”. He will always have a Plan B for pink-slipping you and it won’t be pleasant. Call your lawyer immediately, and I mean your lawyer not the company’s.