04 Oct 2006  Lessons from the Classroom

Surviving Success: When Founders Must Go

At some point, a start-up's founder usually cedes CEO responsibilities to a seasoned manager. But what roles does the founder assume next? Professor Noam Wasserman discusses a recent case study and what students learn from it in the classroom. From HBS Alumni Bulletin. Key concepts include:

  • Start-ups replacing their founder/CEO must consider what duties, if any, the founder assumes after succession.
  • The replacement CEO may have very strong feelings on the future role of the founder.

 

When does a company founder have to go?

In the frenzied, early months of a new venture's launch, few entrepreneurs anticipate a future beyond their role as company leader. In the case study "Founder–CEO Succession at Wily Technology," HBS assistant professor Noam Wasserman and former HBS entrepreneur-in-residence Henry McCance (MBA '66) focus on events surrounding the key moment at which a founder hands off his or her "baby" to a new CEO.

"In my initial research on founders, I focused on the question of compensation and issues around building a board," says Wasserman. "After interviewing seven or eight founders, I was struck by the fact that a far more critical moment in a founder's life is when that person is told he can no longer lead the company he started."

With the help of McCance, chairman of the venture-capital firm Greylock Partners, Wasserman identified Wily Technology founder Lew Cirne as the ideal case subject. "An inherent paradox in succession is that a founder who has been doing a good job actually increases the chance he or she will be fired," observes Wasserman. "Lew fit that profile perfectly."

After developing Wily's technology, landing some important sales, and leading a strategic transformation of the company, David Strohm (MBA '80), a VC advisor on Wily's board, requested that Cirne step down to CTO and clear the way for an executive with the expertise to lead the company in its next stage of development.

After the initial shock, Cirne agreed, realizing that "the world's best speedboat captain isn't able to pilot an oil tanker." But he asked to participate in the search for his successor, and requested the right to veto a candidate if he felt he or she wouldn't be a good cultural fit. "Initially we allocated very few pages to the search process itself, but as we got into it, we realized how much rich material was there," says Wasserman. "An added plus was the issue of how involved Lew should be in the search for his replacement." After an extensive search process, the company offered the position of CEO to Dick Williams, an industry veteran with twenty-two years of experience at IBM.

In the final stages of negotiating his hiring terms, Williams made one final, surprising request: that Cirne relinquish the role of chairman to VC advisor Strohm. The case closes with Cirne wondering if he should push back or give up yet another remnant of his position at Wily. Wasserman (who has taught the case in The Entrepreneur's Tool Kit alumni program and in the first-year course The Entrepreneurial Manager) says that classroom discussion is divided around what Cirne should do. "Is it critical to keep Cirne at Wily, or is it the worst thing for a company to keep a founder who is disenchanted with a change?" he asks. "How much should the company fight to keep Cirne from leaving altogether? What are the potential risks of keeping him around?"

The case illustrates how the decisions a founder makes early in a venture's life can have drastic implications later on. For example, Strohm, the venture capitalist with whom Cirne partnered, was the same person who later asked him to step aside as CEO. "That relates to some research I'm doing now that I call 'Rich vs. King,'" says Wasserman. "In making his early decisions about how to run the company, Cirne can be King and maintain Wily as a small firm that he's destined to rule by not accepting VC money. Or, he can go the Rich route and bring in people to build something more valuable." In the latter scenario, it's much more likely that Cirne will become a "guest prince" within the company's kingdom, Wasserman observes.

As a postscript, Cirne did cede his chairman role and stay on as CTO. And in March, Computer Associates acquired Wily Technology for what Wasserman describes as "a very nice exit." "In the end, Cirne wasn't King," he says, "but he is still playing a role within the kingdom, and has a nice bit to show for his hard work."

About the author

Julia Hanna is Associate Editor of the HBS Alumni Bulletin.

Reprinted with permission from "Surviving Success," HBS Alumni Bulletin, Vol. 82, No. 2, June 2006.

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