CEO Dilemma

March 1, 2008

A founder/CEO called me the other day to discuss a dilemma. The individual has done a fine job building an impressive venture-backed company which is really coming into its own. But as the firm grows, the CEO is finding it increasingly difficult to make certain tradeoff decisions.

First, as is to be expected, growth places changing demands on management and some adapt better than others. For the group of founding executives this issue is particularly difficult because it’s personal. These are the original musketeers, one for all and all for one. As the business becomes more complex, some of these individuals cope while others lag. Some embrace the need for process and delegation while others long for the early garage days.

If the CEO is lucky, those who lag voluntarily withdraw in favor of executives better equipped to deal with the demands of the business. But in many instances, life does not bear such gifts and very difficult decisions have to be made.

Second, as the company grows and gains international attention, it has attracted the interest of prominent US-based investors with valuable financial, intellectual and relationship capital to offer. Discussions invariably turn to terms and valuations and it is not uncommon for these big name investors to insist on preferential status. While exciting, such considerations can be materially adverse to earlier round investors. This leads to some difficult decisions.

Both of these dilemmas are not uncommon in the technology sector. But they become genuinely troubling when geography is factored into the equation. If the company and CEO in question are based in a small or mid-sized city, a fishbowl effect takes place. Angel and other early round investors are often local. They are also usually powerful, influential individuals, even neighbors in some instances. Similarly, founding team members are friends whose children go to school together. In a geographical fishbowl, there is no place to hide from decisions that affect stakeholders in an adverse way. There is also no shelter from their wrath.

What to do?? Can the CEO reasonably find solutions which are at one and the same time good for the business without fracturing relationships he values? How much goodwill capital is he willing to risk in the interests of the business? The deliberations test his judgment while inflicting costs of focus, time and emotional angst.

The CEO asked whether this might be the time to bring on board a new CEO, someone who could make these decisions without the burden of confounding considerations. The founder could then leave on a high, his reputation in tact, while remaining on the board. At the same time, part of him was angry that he was in this situation and that these issues were threatening his personal vision. What to do?

The first problem is one of leadership that every founder/CEO has to deal with. It is a test no doubt, but one in which he clearly knows what has to be done. The business simply cannot be saddled with the wrong bodies in the wrong chairs for the wrong reasons, and the CEO has to act in the business’ best interests.

The element of fear hampers efforts to rationally solve the second problem. Tales of ostracization and revenge against the disloyal have become folklore among institutional investors and powerful tech sector angels alike. They wreak decision-making havoc on the CEO in question, especially in a city dominated by a few major players. If the CEO has already tested the waters with his early investors, involved them in the problem-solving, and found their interests misaligned with those of the business, he will be forced to weigh the value he places of the relationships and the business. If he and his family choose the former, he owes it to the business to step down.