For a VC backed start up, what happens to a founder/CEO when he is replaced/fired?

**closedbook** · 02-11-2008 12:41 PM

What happens to a founder/CEO of a start-up company when the VC feels that he needs to be replaced? Do they just have another position like "Chief Innovation Officer" or are they done, without any whatsoever?

As someone who wants to explore my options in financing, I'd like to know the worst case senario for someone like me: young, little experience, not technical, etc...who simply uses his own money to get an idea in his head to a viable business.

If I am ever fired from the CEO position, what are my options and will I still be able to have some stake in the company that I founded?

**leggomygreggo** · 02-11-2008 12:51 PM

I'm pretty sure that as long as you own a majority of shares so as to not get voted out of your position then you can not be fired. I'm kinda new to the whole corporate world stuff but i think that's how it goes.

**cbrown** · 02-11-2008 01:42 PM

My Father started a Company in early 2003, and by 2005 had expanded to four locations. Investors came in shortly after, and bought out 80% of the Company. Roughly a year after they came into the scene, my Dad was switched from CEO to Chairman of the Board, and has been there since. We now have 47 locations, nationwide, and we've been through two CEO's since my Dad was replaced.

I do know that my Father and his founding partners still own a small percentage of the Company, and were contracted to remain with the Company for three years after the initial buyout.

Not sure if this helped you out at all. Just thought I'd share.

**akula** · 02-11-2008 08:32 PM

Originally Posted by closedbook

What happens to a founder/CEO of a start-up company when the VC feels that he needs to be replaced? Do they just have another position like "Chief Innovation Officer" or are they done, without any whatsoever?

As someone who wants to explore my options in financing, I'd like to know the worst case senario for someone like me: young, little experience, not technical, etc...who simply uses his own money to get an idea in his head to a viable business.

If I am ever fired from the CEO position, what are my options and will I still be able to have some stake in the company that I founded?

sure..ceo's are replaced all the time. either they are fired/asked to resign for a variety of reasons, or their employment contracts lapse because of a particular term in the financing term sheet...but if this happens, you can still hold on to your share of the company (subject to any mexican standoff provisions)

the worst case scenario is you getting mixed up with untrustworthy investors, who ask you to leave the company and then make up lies to induce you into selling your remaining share of the company to them (or their partners) at fire sale prices, just prior to the company having a great liquidity event which you're not a part of

essentially, if you're worried about all the different ways in which vc's can ruin your company, there's a few other more pressing concerns other than you underperforming as a ceo (or being set up to underperform), getting fired and then being cheated out of your shares.

**closedbook** · 02-12-2008 09:53 AM

Daniel, I was hoping you'd reply. I really don't want to go through the VC headache, but if the time comes when I need to as a last gasp effort, I don't want to be screwed in the process.

I really don't mind taking a back seat to a professional CEO, I would actually prefer it, and work on the things that I want to work on: innovating and providing some vision to the company. I just want to be involved in the company and have a respectable stake so that I can participate in a liquidity event.

Which leads me to another question, what exactly happens during a liquidity event? Is it simply an "event" that takes a day to complete, or is it some convoluted process that takes months?

**jasaunders** · 02-12-2008 10:08 AM

If the time comes when you need VC funding, you should have trusted advisors and a respectable lawyer who has done significant work in this area in the past. You will not be here alone so that the VC's screw you.

**akula** · 02-12-2008 10:54 AM

Originally Posted by closedbook

Which leads me to another question, what exactly happens during a liquidity event? Is it simply an "event" that takes a day to complete, or is it some convoluted process that takes months?

oh sure

crass jokes aside, a liquidity event is a time when the entrepreneur and other investors are able to sell their shares for a capital gain. usually this happens when the company gets acquired. the problem area for entrepreneurs, of course, is getting the raw end of unfavorable liquidity preferences..that's a very critical point that needs to be well understood by anyone shopping for money...I personally know entrepreneurs who've spend a quarter of their career building a really sucessful company, go on to achieve an exit, and still walk away from the venture with little to no money because they failed to manage the preference issue...i can't stress enough how important these terms are to venture backed success.

**akula** · 02-12-2008 11:09 AM

Originally Posted by jasaunders

If the time comes when you need VC funding, you should have trusted advisors and a respectable lawyer who has done significant work in this area in the past. You will not be here alone so that the VC's screw you.

that's a really interesting point. venture capital is mostly a trust driven financing marketplace...even acknowledging the strength of the US court system, many researchers conclude that what holds the vc industry together is strangers avoiding doing business with strangers..it's pretty much impossible for entrepreneurs to sue their vc backers (and even if they're successful in any litigation, they'll never be able to raise vc money again), so the way entrepreneurs manage vc dispute resolution risk is by picking vc investors who can't screw them over because of family/reputation consequences...great legal advice is important...but there's more to the story.

**BusinessAdviser** · 02-12-2008 11:24 AM

Originally Posted by closedbook

I really don't mind taking a back seat to a professional CEO, I would actually prefer it, and work on the things that I want to work on: innovating and providing some vision to the company. I just want to be involved in the company and have a respectable stake so that I can participate in a liquidity event.

Interesting thought.

To each his (or her) own, but one thing is certain: Many businesses fail every day because their owners are too concerned with their "baby," doing things as they want to do them, regardless of the great advice that they may receive to the contrary.

It's great to be able to accept help where it will only improve your situation.