This post is written from a slightly different perspective as it is spawned by three conversations of about a year ago wherein VCs asked me what I thought about replacing CEOs and what the ideal process might be.
No, this is NOT the ideal process.
I typically advise CEOs and advised three CEOs who were replaced, so I knew the territory from their perspective. In every one of those instances, the CEO ended up in a fairly good place and in all of the cases they ended up being treated fairly from a financial and stock ownership perspective.
It is worth noting that two of the CEOs had Employment Agreements and the third did not.
I strongly recommend that CEOs and Boards of Directors ensure they have Employment Agreements that address the issue of termination of the CEO.
Why do CEOs get replaced, Big Red Car?
In startups, the most common reasons are:
1. Wholesale loss of faith in the CEO by a majority of the Board of Directors. This one reason could, arguably, subsume all the others.
2. Repeated failure to perform based on recognizable yard sticks or KPIs with repeated failed efforts to “hit the numbers.”
I don’t think “numbers” for startups are particularly important other than providing a road map to measure progress. I have never seen a startup actually hit its original projections. How could they?
3. For cause — some bad act that is so far outside the norm that the CEO must be fired as a consequence of the inexcusable act. [Micro doses of LSD before important investor meetings? Yes.]
CEO Shoptalk — No LSD Before Investor Meetings
4. The inability to build a cohesive team — typically a leadership/management style issue. This could be the prelude to a mutiny. It happens.
5. Lack of diligence and focus on the business at hand. This happens fairly often amongst visionary CEOs — they latch onto a new idea, a different, more attractive vision.
6. Creative exhaustion, burnout, health issues.
The list could go on a bit more, but we have covered the breadth and depth of the reasons. Business failure, leadership/management issues, untoward acts.
Termination may be “for cause” or “without cause” which is often called “for the convenience of the company.”
These distinctions are relevant as it relates to the issue of the Employment Agreement and severance. Let’s put them aside and assume that a CEO is being replaced.
So, now what, Big Red Car?
The first thing is to have a plan. Here are some thoughts:
1. Know exactly why you are firing the CEO. Yes, you are firing the CEO. Know why.
2. Enunciate specific reasons, test them with reality, brief them to the balance of the Board of Directors, and have a robust discussion.
Many CEOs will have “rabbis” on that board who will champion the CEO’s cause. Be aware of this phenomenon.
Plenty of these type of discussions do not arrive at a consensus which is good. This is why “process” is important.
3. Get buy-in from the entire Board or a majority sufficient to make the decision in accordance with the ByLaws/Articles of Incorporation.
This might be a good time to run this by legal counsel and get a thumbs up.
By now, you have a severance package drafted. It is in compliance with the Employment Agreement if such a document exists. It is otherwise fair if there is no Employment Agreement.
If the termination is “for cause,” you are certain as to the facts beyond any doubt. If it is “for cause” you may elect not to offer severance. This is perfectly reasonable and would be infinitely better if you had an Employment Agreement that spelled this out.
4. It is at this point that the search for a replacement CEO begins in earnest.
5. A well run company has a “contingency plan” whereby every position of importance on the org chart has a replacement in the unlikely eventuality that aliens kidnap that person.
Does the company have a logical internal candidate? If not, they should.
6. Identify exactly what the Board wants in a replacement CEO and make a determined and realistic assessment as to whether that person exists, is available, and is affordable.
This is very hard work. It has to be done correctly and there is no golden bullet. Do the work.
7. At this time, nothing has been done that cannot be undone. Now, you check your parachute, open the door, stand in the door, say a prayer, and jump.
8. Notify the CEO of the Board’s decision to fire him/her. Do it concisely and unequivocally. Do not say, “we are THINKING about replacing you.”
Tell them, “You are being replaced effectively immediately and here is a severance package in accordance with your Employment Agreement (or a fair package).”
Wow, now what happens, Big Red Car?
This is where things can go very, very, very wrong and I have seen it really get screwed up.
1. Put the interim person — if she exists — in charge.
Know that the interim person may have strong personal loyalty to the replaced CEO. The former CEO is likely to have hired this person.
Keep it professional and be ready to slap the problem with a checkbook. An interim CEO will likely be paid more than their former job.
A firm slap with a checkbook solves a lot of problems.
2. Announce how the permanent replacement will be selected.
There is always the possibility that the Board has already found a replacement and there is no necessity for an interim CEO.
3. Communicate to the company, not so much about the why, about the future. If it is a raw startup, you are going to have critical employees updating their resumes and firing up their networks. These things travel like lightning through the industry.
Speak one-on-one to all critical employees whose departure would hamstring the company. You are playing defense here.
If you have the right folks on the Board — this is where a former CEO comes in handy — hold a town hall style meeting and get the poison out. Answer questions for hours until the toxicity, the potential toxicity, is neutralized.
4. Only then anoint the new CEO and introduce him to the company. From here on out, it is the new CEO’s challenge to take control and run the operation.
If you have selected the right person, the new CEO will make this happen with ease.
Sounds easy enough, Big Red Car, what else?
Sometimes these things are easy.
1. The company knew the former CEO was not up to the job. The crowd is wise.
2. Sometimes, the former CEO was a visionary and what the company needs now is a CEO who focuses on execution. This is a normal transition.
You can argue that both the replacement of Steve Jobs and Bill Gates as visionary founder/CEOs was an exercise in finding “execution” CEOs — Tim Cook and Steve Ballmer. Both of these guys dramatically increased revenue and profits whilst slowing the speed of innovation.
The Etsy CEO replacement, Josh Silverman, is an example of a replacement that went very well. He came on board in May 2017.
Etsy sold almost $1B in facemasks during the Pandemic. Hello, America. When the big guys failed, the cottage industry of Etsy took over. Huge admirer.
3. The loss of a visionary CEO can wreck some companies who were operating/living on the dream — WeWork comes to mind.
Bottom line it, Big Red Car?
Some 75% of startup CEOs will be replaced within 4 years of receiving venture capital funding.
CEOs will be replaced and some of the transitions will be smooth and others will be a train wreck. This is on the Board of Directors.
Like everything in business, planning including contingency planning will prevail and separate the smooth transitions from the train wrecks.
It can be done well.
But, hey, what the Hell do I really know anyway? I’m just a Big Red Car.
Be well, amigos.
