3 Tidbits from the “Emerging Ventures” Conference

On Wednesday, I gave a keynote address at the Emerging Ventures conference. I also chatted with several founders and venture capitalists, some at lunch Wednesday and some after my address. Three tidbits from those conversations that are relevant to this blog:

  • Succeeding at Founder-CEO succession? - A central issue in the “After the Firing” project and in my “Wily” case (which I explored for several minutes during the address) is whether the (replaced) founder stays in the company post-succession, and if so, whether the founder’s presence will be beneficial (e.g., if the founder willingly takes another executive role) or disruptive (e.g., if the founder isn’t happy being displaced). I had a quick chat with a GP from a Boston-based VC firm about attempts to improve the chances of post-succession success. Whenever one of their founder-CEOs is replaced, his firm institutes a bonus program for the founder and for the incoming CEO. Under the program, if both of them are still working in the company a year after the succession event, then they both get paid a bonus. (The rest of the team is informed about the program.) An interesting use of compensation to try to shape the dynamics between the founder and the incoming CEO. (In what cases should it not be used?)
  • Changes in founder attachment - A central issue in the Entrepreneurial Compensation paper is how company evolution changes the founder discount. One of the explanations for the disappearance of the founder discount over time is that founder attachment decreases, diminishing the gap between founders and non-founders. Chatting at lunch, the founder-CEO of a 5-year-old IT start-up (who did not see my keynote and thus did not know about the Entrep Comp explanation) observed that a year and a half ago, he felt himself shift from feeling like a founder to feeling like a “hired gun”/employee.
  • Equity-split adjustments: Not painful? — As I wrote in “Upcoming Posts” a little while ago, the new “Splitting the Pie” project will examine the equity split within the founding team (and whether that split has an impact on team stability and company growth). A GP at the conference argued that even if the founding team does a bad job of splitting the equity, it is actually very easy to adjust equity within the team, using additional equity grants. This runs counter to much of what I have seen (and, to cite a couple of specific cases we use, is counter to what Robin Chase of Zipcar said regarding HBS’s “Zipcar” case, and was what the founders in the “Ockham” case were so focused on avoiding). I’d love to hear about people’s experiences with this issue. More specifically: How easy is it to adjust “bad” equity splits later on (e.g., when the company is raising its first VC round)?
7 Comments
  1. I haven’t found the need to make a monetary incentive to make the founder/ceo succession work. There is significant institutional knowledge, vision, passion, etc in the hands of the founder. If the founder has has the right mindset and can take on a very specific functional role in the organization, you get the best of all worlds with the visionary founder and the experienced operator CEO. Some founders have no interest in staying with the company if they aren’t CEO. Sometimes their are team issues that prevent the founder from continuing in the company. If the founder and the team want to make it work, then it can. The founder took the risk to start the company and deserves a lot of respect. For the respect of the founder and for the retention of this institutional memory, it is worth it to try hard to find a specific role for the founder and make the transition a success. If the founder fully supports the process, or fully accepts it in the end, and is committed to building a great company vs being committed to being a ceo, these relationships have worked well. A founding CEO who is no longer CEO has amazing influence in the organization. If he operates in unison with the new CEO it can be a big value add. If he as much hints to his lack of unity with the new CEO to the team, the new CEO can easily be undermined. Thus you try v hard to make it work but if the new CEO is feeling undermined, you have no choice to support the new CEO.

  2. Managing a founder/CEO succession can be one of the more difficult tasks a VC can face. I agree with Tim that if the founder and the team want to make it work, then it can. However, in my experience the succession road is bumpy and fraught with peril. A founder, having taken the risk of starting a venture and building it against a backdrop of limited resources is often going to be reticent to turn over day-to-day control to an outsider. Indeed, no matter what reason is given as justification for the need to bring in a new CEO, the founders’ ability to internalize objectively is going to be distorted by his ego. Human nature gets in the way here.To this end, instituting a tandem bonus as suggested in the post, in my opinion will not necessarily overcome the founders’ dissonance. I’ve seen this attempted a few times without success.I’ve found that succession difficulties can be minimized if the founder feels he is being replaced by a “legend”. If you get lucky enough to be able to bring on a CEO who is well-known, respected and has demonstrated success in building and exiting companies, a founder can be made to feel that the decision was justified and may be willing to defer to and give control to the CEO. In essence he may feel like his initial work and success has allowed the board to bring in this new superstar. With respect to a bad equity split, I would agree that it is more difficult to fix then simply using additional grants. I’ve found that the bad split is often a result of founding team dynamics. So, having an investor come in an “level” out the splits is really just a band-aid. Great care (and a significant amount of time) should be spent trying to understand why the equity was split the way it was. Doing so will reveal much about the team and its inter-relationships and can lead to the creation of actionable steps to fix/eliminate underlying issues and tensions. Once this is accomplished, then it might make sense to adjust the equity splits.

  3. Mechanicaly it is “easy” to level out bad initial equity splits, but I don’t think that is the question you asking. And like other forms of compensation, it’s “painless” to grant additional equity to folks on the short end of initial grants, but the tough part is managing the delivery of tje, “well, you got an unfair share to start so we’re going to have to take some away” message. It can and has been done, but it’s certainly not easy. It helps having a “neutral” party like a VC investor involved to arbitrate.My personal take on founder / CEO succession is that I’d prefer to be a “ball boy” on the world series winning Red Sox than “general manager” for a team that didn’t make the playoffs. And it’s that attitude that I look for in employees as well as founders. I often joke that one of the hardest parts of a startup is “getting the right people on the bus and the wrong people off.” Well, it’s even harder when you realize a year or two later that your bus has turned into a Lear jet and now you’ve got a bus driver in the cockpit!

  4. Noam — “Splitting the Pie” would be a really timely topic for me; I need some guidance. Any chance you could publish links to resources you have found, about fair ways to gauge the potential contribitions of “late” founders i.e. those who’ve come in after the business has gained a customer or two, and can add value in part by contributing their industry “street cred”? This has to be a common situation: Founder builds product, acquires customer or two, needs money to exploit all available business, recruits co-founder of some repute and ability to assist. Thanks if you can post some links to sources you have.

  5. I am currently in the Zipcar situation with a co-founder who never moved full time but got a significant number of share. I need to adjust the unfair share split. I am considering issuing new shares to make up for the bad split but I am meeting some resistance from the investors. I am also getting ready for the “difficult discussion” with the co-founder. This is my first venture and I am learning the equity split and structuring the hard way;) Any suggestion or example of how a bad equity split was corrected will be highly appreciated.

  6. In the situation above where a bad split needs to be fixed after raising outside capital, it is complicated by tax and other issues. As anonymous points out, issuing additional shares to him has the effect of diluting both the co-founder as well as other investors (thus the “resistance” he mentions). There are a couple of solutions I can think of:(1) have the company simultaneously repurchase some shares from the under-performing co-founder and issue new options to the over-performing one. Since there has likely been a step-up in value since the original shares were issued, there’s going to be a short term or long term hit that you’ll have to figure out how to handle.(2) Another option is to have the over-performing founder purchase shares directly from the under-performing one. Again, there are tax issues to deal with here.All of these will require approval from the 3rd party investors and need to be structured / reviewed by tax/legal professionals. This pain is the cost of getting the original split wrong and underlines the reason to spend the time to get it right to begin with.

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