When Should a Startup CEO Step Down?

At what point does a founding CEO grow the company beyond their ability to grow it even more?

It sounds like a Catch-22 of a question, but it’s a standard move that I believe startups get wrong more often than not. Replacing a founding CEO at any point in the growth cycle comes with an enormous amount of risk. Getting it wrong likely means shuttering the company. And getting it right still sets the startup several steps back.

So why do we do it?

“I think I’m done being CEO”

Last week, I got an email via my website from “Jasmine,” the founder and CEO of a high-growth tech startup with products that focus on both businesses and consumers. Jasmine has been the CEO for the life of the company, now four years old and just over 20 employees. It’s also her first time as a CEO, though she has a solid, if short, background.

From her first email:

“I’ve been CEO at [the company] probably for longer than I should. Giving up control of your baby is hard but if you want it to survive you need to see beyond your ego and accept your own limitations. Just because I started something (as a founder) doesn’t mean I’m the right person to run it, right?”

Well, yeah it kinda does. But we’ll get into that.

I’ve got some experience with this. Two years after my last startup was acquired by a private equity firm, things were going swimmingly. I had just returned from a speaking spot at SXSW with about 50 leads at the bottom of my backpack. As soon as I walked into the office, our CEO, with whom I co-invented our technology, pulled me into a conference room to tell me he was leaving.

A couple years before that, one of my startups was 100% acquired for all cash. I was asked to remain CEO for a while and did, but because I was trying to sell startup #1 above, I removed myself from the day-to-day and remained CEO in name only. Classic figurehead.

Years before that, I had handed the CEO duties of my previous startup to my second-in-command so I could go build the two startups I wound up selling.

And finally, I’ve been involved with five other startups at which the CEO was absorbed into a smaller role either via acquisition or investment.

Guess how many of those scenarios worked out?

The case for ousting a CEO

I’m not here to rant against acquirers and investors and their whims to replace founders with seasoned talent. Far from it. I’m actually one of the folks they call when the replacement question comes up.

Besides being a founding CEO, I’ve also been a fractional, interim, and de-facto CEO at companies where I was not the founding CEO. Replacement CEO is part of my skillset and career path at this point, with this many years and so many disparate roles in my rearview.

I’ve also been involved with startups and walked away because the CEO wasn’t up to the job and wasn’t going anywhere. We can have a lot of problems to fix at every point in the company org structure, but a problem CEO can’t be fixed.

So I’m totally down with replacing a problem CEO, as long as we agree on the definition of “problem.”

Jasmine came to me like she already knew it was her time, and I couldn’t help but wonder what got her into that mindset. Jasmine is not a problem, she’s open to ideas and input and help and leadership coming from others. So I started asking questions and going through the options as to why a founding CEO gets taken out in the first place.

Removing the CEO for one with more experience

This is how it usually goes down and how we usually think of replacing a non-problem founding CEO. As the startup grows, either the board, the investors, the executive team, or even the employees, start to believe that the founding CEO has reached their limitations and the company has grown past them.

It can happen in good times or in bad. If it happens in good times, it’s usually connected to an event, say a new investment or an acquisition. If it happens in bad times, it’s likely a last-ditch effort to bail out a sinking ship. But a founding CEO can get replaced at any point and without reason.

And that’s the only time I have an issue with it. Here’s why:

An acquirer already has a CEO. A new investment is usually made on a story that’s much bigger and broader than the startup’s original story, and that new story may be way out of the founding CEO’s wheelhouse. A failing startup means that what the founding CEO was doing wasn’t working. Those are valid reasons to bring in a new CEO. Call me. We’ll talk.

But a growing startup means that what the founding CEO is doing is working, so why replace them? The natural response to that question is that the company needs to be growing faster. And that’s an excellent answer. But before I’ll take that job, I’ll need to know exactly what flaw in the founding CEO was preventing that faster growth.

If no one can show me that, then I’m being set up to fail.

I’ve seen this happen too many times. The new CEO has all the tools to get the company from X to exit but the startup was at Y. What happens next is the new CEO starts doing what they’ve done before, same methods, same connections, same strategy. None of it fits with the startup’s story, tech, or culture, everyone from employee to customer gets alienated, and it’s a slow meltdown from there.

The CEO who shouldn’t be CEO

Jasmine’s company has not been acquired or landed new investment. The company is not sinking. If none of those things are happening and we’re asking ourselves whether or not we should be CEO, there are only a few reasons why we shouldn’t.

Like I said before, the startup may be growing fast and beyond our experience as a leader. But there’s a difference between experience and limitations. The fact that she got the startup from idea phase into growth phase says a lot about her potential to lead. If we never made new leaders in the field, the old ones would just die off, because we certainly don’t make new leaders in a classroom.

However, if Jasmine feels she’s really not picking up the strategies to be successful at this stage, or she’s not surrounding herself with the people who can get her there, then yes, it might be time to step down.

Another reason Jasmine shouldn’t be CEO is if she can’t sleep. Leading a company is a high-stress, high-responsibility life choice. She’s already mentioned, unsolicited, the 20-plus employees in her care, not to mention the much larger number of people using her products. There is no shame in admitting the stress is too high, and startup has seen too many examples of founders crumbling under that strain.

The final reason a founding CEO shouldn’t be a CEO is because they don’t want to. If we’re not all in, we should be out.

A word of warning. If none of these are the case, watch out for the psychological push for political reasons. The quickest way to get a first-time founding CEO out is to convince them that they’re no longer equipped for the job. If someone wants the CEO removed for their own reasons, this is what they’ll do.

So we get to…

The CEO who doesn’t know if they should be CEO

There’s a lot of nuance in leadership. There’s a lot of nuance in startup. And there’s a lot of nuance in self-analysis. Jasmine’s call is not an easy one to make and there’s no equation that will make her decision binary.

If we’re considering removing the founding CEO, whether that person is us or not, remember this: We have to be so sure that the replacement CEO is going to be better than the founding CEO that we’re willing to bet the life of the company on it. Because that’s exactly what we’re doing.