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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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Talking To Fellow Directors About Replacing A CEO

Comments (9)

I recently posted about the signs that a board should consider replacing the CEO.  My partner Heidi Roizen came up with these as her answer to a question posed by Pascal Levensohn for a new paper that he is writing on the “Ten Signs That It’s Time to Make A CEO Change in A Venture Backed Company.” 

Pascal asked two questions in his interview request.  The first, which I addressed in the other post, was “What are the five most important signal indicators to you that it’s time to replace the CEO of one of your portfolio companies?” The second question was “When you have approached your fellow directors to tell them that you think the current CEO needs to be replaced, what has been the most difficult thing you have had to address in convincing them to support your position?”  As with the previous post, I’ve started with Heidi’s response and edited freely.

Before I dig in, recognize that none of this is easy stuff, for the VC, the CEO, or the board.  So – my comments below are from a VCs perspective and are not intended to be “balanced.”  Rather – I’m trying to give a feeling for what the underlying issues are, what is “good” vs. “bad” behavior, and to address one way to think about this.  I’ve been involved in many situations where a CEO had to be replaced – they fall into two categories “it ends happy” and “it ends unhappy” – I really haven’t had anything “in-between.” 

Interestingly, in many situations the other board members have arrived at the same conclusion that the CEO needs to be replaced.  However, individual directors tend to come to this conclusion on different time frames depending on their personalities, their level of engagement in the company, and their comfort level (or lack thereof) with CEO level confrontation.

The biggest point of resistance among directors is that there is never a “good” time to replace a CEO.  Startups are fragile things and CEO changes rattle customers, employees, VCs, VC’s partners, vendors, parents, children, and pets.  As a result there are often holdouts on the board who want to limp along and avoid dealing with the issue, particularly if there is a “transaction” looming such as a large customer opportunity, another financing, or an M&A deal.  My experience indicates that it is never a good idea to limp along.

Replacing a CEO can be the hardest work a board has to do.  Once the decision is made, you (you – in this case – refers generally to “the board”) have to start by dealing with the issue directly with the CEO.  You have to fire them and then figure out what the transition plan is going to look like (never fun after you’ve fired someone, especially if they don’t think they deserve to be fired, act irrationally, throw things at you, immediately call their lawyer, or simply walk away.)  You then have to articulate what you are looking for in a new CEO.  You have to figure out how to keep the company operational in the interim, both at an executive level as well as across the entire company. If you decide to use a recruiter, you have to find them, spend time bringing that person up to speed, go through interviews, reach consensus, then land someone, and deal with not only their comp but the repercussions on all the other comp and equity holdings among management.   Oh – and most capable new CEOs want to make sure the company has enough capital to insure that it is successful, which often means providing a new financing as part of bringing a new CEO on board.

Some VCs devolve into non-constructive behavior when faced with a CEO that is not performing.  Rather than addressing the issue directly, the VC becomes angry and hostile to the CEO, asks for irrelevant data / meetings / homework assignments from the CEO, and behaves in a surly, unproductive manner at the board meetings, bitching about the CEO in private to other directors, and generally being passive aggressive about the situation.

A wise and extremely successful VC (let’s call him Yoda) once said, “Every morning when you get up, think about your company’s CEO and decide whether you are going to support him or not.  If you are going to support him, do everything in your power to help him make your company successful.  If you are not going to support him, then replace him.”  By saying “help him make the company successful”, I don’t mean that the VC should be only a cheerleader, but that she should include lots of tough love type stuff that may not necessarily feel like support at the time. 

While this sounds simple, I often see VCs become “just another problem” for the CEO. This is a lousy situation.  I’ve personally evolved a very simplistic point of view, which I describe as “I support the CEO’s of my portfolio companies 100%, until the moment I don’t, at which point I act on it.”   With this lens on, I can spend all of my time “working for” the CEO, rather than having the CEO feel like he works for me.

  • http://vic.typepad.com/executivecomp/2005/09/replacing_a_ceo.html Executive Compensation

    Replacing A CEO

    Brad Feld has some interesting thoughts on replacing a CEO. It does not sound like an easy decision, even in the private company context.

  • http://southerncross.hotblog.com.au Daniel Nerezov

    I used to get upset when founder CEOs got fired and joined the entrepreneurial chorus to bitch about vulture capitalists and other assorted predators.

    Now, with the help of an extremely successful CEO, (let’s call him Yogi) I am seeing the truth and realizing that company founders often have little reason to assume that they will make successful CEO’s, lead to liquidity and further on. It seems the role of the founder and the role of a CEO are very distinct and different jobs, both of which are unlikely to be done well by one same person.

    I say, if you’re going to be a founder, concentrate on what you’re good at, show proof of concept, put a team together and hand the reigns over to a capable professional who is specifically trained for the role of a CEO.

    Get that out of the way, make a buck and go back to what you enjoy most. Leave managing the bureaucracy to people who are good at it, do another start up, put together plans, go around and pitch who’ll ever listen, get the thing off the ground and get back to having fun again. Besides, why over concentrate risk? Diversify your exposure to early stage private equity. Do startups quickly and move on.

    I say, replacing the founder CEO, is just a natural thing which is good for the company an is something which should be expected and even initiated by the founders themselves. Maybe it�s time entrepreneurs took a pointer from Fred Wilson, wrote an investment thesis and stayed away from doing things they�re not good at (meaning, not being the best, meaning, there are other guys who can do that particular thing better).

  • http://texasvc.weblogswork.com/?p=199 Texas Venture Capital Blog

    Getting fired is no fun!

    Brad Feld’s post yesterday "Talking To Fellow Directors About Replacing A CEO" provides an interesting perspective on the topic of firing the CEO of a venture backed company:
    "A wise and extremely successful VC (let’s call …

  • whenwego

    This is a classic VC failure. Clearly, as the owner of a large chunk of stock, the founder/CEO is as interested in “creating value” as the VC. The problem is, the two see the issue differently. Now, instead of listening to the other and signing on to that point of view, if either party goes off on their own tangent, that is a classic sign of failure. And guess which party does this almost all the time? The VC. Why? EGO. And who suffers? Shareholders. It has always amazed me that VCs are so unwilling to engage the founders in this dialog, but would rather shoot first. Must be their lack of commitment to value and overcommitment to EGO!

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    Now, with the help of an extremely successful CEO, (let's call him Yogi) I am seeing the truth and realizing that company founders often have little reason to assume that they will make successful CEO's, lead to liquidity and further on.

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    I don’t mean that the VC should be only a cheerleader, but that she should include lots of tough love type stuff that may not necessarily feel like support at the time.

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    Now, with the help of an extremely successful CEO, (let's call him Yogi) I am seeing the truth and realizing that company founders often have little reason to assume that they will make successful CEO's, lead to liquidity and further on. It seems the role of the founder and the role of a CEO are very distinct and different jobs, both of which are unlikely to be done well by one same person.

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