Letting Go of a Founder

We’ve all read of horror stories of VCs forcing actions leading founders to leave their companies. But are there reasons for a founder to leave voluntarily or being asked to leave by other founders or the management team? Many a times, the answer is yes.

When people set out to start a business, a few jump in with little planning. Most though, do so after much forethought. Even when a good deal of planning has gone into starting a company, it is the rare entrepreneur who has actually thought about a scenario in which the founder leaves.

I realise that the very thought may sound nihilistic to some readers — can there be a start-up without the founder or can start-ups that survive without the founder do well or at the very least exist meaningfully?

The answer to both questions fortunately is yes. Apple is probably the best illustration of this, with Steve Wozniak leaving to pursue other interests and Steve Jobs being ousted by John Sculley – so not one, but both founders left (or had to leave). Of course Jobs’ return and subsequent success is a matter for another article altogether.

So what should a founder or founding team consider about the possibility of one or more founders leaving, voluntarily or otherwise, the company they founded? Is this inevitable? Can this be avoided? Or should this be planned for and if so how?

Before we examine these questions, it’s worth reflecting that few companies — Microsoft under Bill Gates or Dell Computer under Michael Dell being the exceptions — survive, grow and actually thrive under the same helmsman from founding to widely acclaimed success. Change at the top is more the norm than the exception. However start-ups, particularly in their early days, are so closely identified with their founders — and founders with their companies — the change, of a founder leaving or being asked to leave, can be traumatic. So it is best planned for and, hopefully, never actually encountered.

Leaving voluntarily

I remember the day when one of my partners informed me that another of our founding team (there were five of us founders) wanted to quit. We had not been at it for a year and the fire of a new adventure still burned in our heart and flushed our cheeks — so it came as a shock!

In this instance, the issue was one of personal belief regarding religion in the workplace. I am not sure, to that day, we had even thought about religion (or its absence in my view and excessive presence in the departing partner’s view). This is an instance where a founder wanted to leave voluntarily as he felt there was an irreconcilable difference in personal beliefs.

There can be numerous reasons for a founder to leave voluntarily, many of which may have nothing to do with the business itself — family commitments (wife wants to relocate) or health reasons (allergies in Bangalore) are examples.

Of course, there could be several other reasons — loss of faith in business partners; the gradual realisation that a start-up is not for him or her; or the thought of a Web-based cobbler service no longer exciting them — there are as many reasons for a founder to leave as there are people.

Having an inter se — Latin for “between or amongst themselves” — agreement amongst the founding team members is the best way to prepare for this eventuality. While the heartache that follows the departure of a founder may take time to dissipate, such an agreement will minimise the business impact. Also, the fact that such an agreement is in place prepares the concerned parties to consider the possibility of a founder leaving and address the potential causes up-front.

A good inter se agreement would at the least cover issues pertaining to shareholding: Do insiders or the company get first right of refusal? Will the leaving partner be permitted to still hold some or all of his or her shares? If so, will he or she retain voting rights? If the company bought the shares, how would these be valued? What would the payment terms be? How would the death (strictly speaking this would be an involuntary departure) of a partner be handled?

A good corporate lawyer would be able to pull together a reasonably well thought out inter se agreement. Most people are comfortable having health insurance and don’t blame it as the cause when they fall sick. However, many folk balk at having an inter se agreement believing this may sow the seeds for the undesirable to happen.

As someone who’s been there more than once, I would say that you are better of thinking and planning for all eventualities and this will never be the cause of a partner leaving. And you will be glad it is in place, when they do actually leave.

Forced to Leave

There are primarily two different stakeholders — the Board of Directors and the management team — who may force a founder to leave.

In venture-funded companies — most of which have active boards — the board could be the primary driver for change, particularly if a founder is the CEO of the company. This could arise for good reason — if the company is growing faster than the CEO/founder is, someone else should be brought in as a replacement.

The founder, in this instance, could then focus on other areas such as key technology, marketing or other contributions.But if he is not prepared for the shift, he may be asked to leave.

Alternately, a founder may be asked to leave for not-so-good reasons such as having rubbed powerful board members the wrong way.

For such founder/CEOs of venture-backed companies, having an explicit employment agreement could avert dismissal under unfavourable terms or without cause.

The other founders or management team, particularly in closely held start-ups, can also force a founder to leave.

Again, the reasons could range from the appropriate, namely incompetence, unethical behaviour or sexual harassment, to the inappropriate — politicking with other members of the founding or senior team in the company.

The best way to address this is to have a clearly spelt out code of conduct, periodic performance reviews (including peer feedback) and open communication so that there are no surprises.

The inter se agreement is once again a good safety net for all parties in this instance.

Asked to leave

This is the hardest thing to both plan for and execute. While asking a founder to leave may not sound that different from forcing them to leave, it is not trivial and is the most likely of the three situations an entrepreneur will be faced with.

When a founder is caught stealing, for instance, the decision can be black-and-white and he can be terminated or forced to leave.

However, it is much harder to confront and tackle issues that have to do with cultural mismatch or personal behaviour that, while legal, show poor judgment or the more common issue of self aggrandisement at the cost of the company or its employees.

The best way to address this situation is to ask ourselves the question, if the person doing this was an employee or anyone other than a founder, would they be asked to leave. If the answer is ‘yes’ for an employee, it ought to be ‘yes’ for a founder.

This is, of course, easier said than done — for founders have great emotive appeal — to the rest of the company, the community and, of course, to themselves!

However, as our mothers taught us, a stitch in time, does indeed, save nine!

Here experience and my scuffed knees speak — all those start-ups that avoid confronting this sooner, end up regretting it later.

(This article was published in the Business Line print edition dated December 15, 2008)