Lost & Found(er) – Lessons Learnt When Losing a Founder

This article is a short insight in to Peter Cowley‘s thoughts on losing a founder from the point of view of an investor and entrepreneur. He explores the resignation or removal of founders and that there is no formula or rule book that can be consulted.

The article was republished with permission from the Invested Investor.

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One of the most stressful times for a founding team is when one of the founders leaves.  I analysed my current 67 investments and was truly astonished to find that 10 of these have lost a founder.

Of those ten, one successfully exited, three have since failed and the other six continue, of which four are increasingly successful.  Hence, I have enough data to comment, but not enough to generalise.

But first, what do I mean by loss of a founder? Although I have heard of the tragic case of a motorcycle accident claiming one young entrepreneur’s life, I hope that scenario is statistically no different than in the general population.

Not all founders are executive members of the founding team, although that is rare except in the case of university spin-outs where academics commonly want to retain their teaching and research roles. I have six in my portfolio with part time founders, one of which has provided a very good exit.

I am talking about the loss of full time founding member, which would be a huge blow if the company was young and had few employees.  Terminal of course, if the startup has a single founder – one of the reasons that I mostly invest in teams of 2 or 3.  I have been directly involved with the emotional and administrative upheaval of four of these.

Clearly it would be wrong to describe individual situations, but some statistics:

– 3 founders to 2: two

– 3 founders to 0: one

– 2 founders to 1: four

– 2 founders to 0: two

– 1 founder to 0: two

The resignation or removal of all founders (although not necessarily all at once) is a special case, and usually occurs because of a change of direction of the company and, in my limited experience rarely leads to a successful result.

However, it depends on the stage – it is not uncommon after a trade exit, that the founders will not be working for the acquirer a few years later and the entity continues to thrive under new management.  Of course, having no founders means the investors will be running the company with the help of hired senior managers.So, I have six companies who have lost one co-founder.  But why have they left?

In all cases, it was because of misalignment between the founders, the departure then either being voluntary or, after long discussion, under pressure from the board.

The misalignment could be a disagreement about the strategic direction of the company or because one founder’s own motivations and enjoyment have diminished and can’t be re-ignited.  As is often said: a great entrepreneur rarely makes a great corporate manager.

It doesn’t take any imagination to realise that the process of realisation, acceptance, discussion and eventual exit negotiations are a dangerously large distraction and drain on the founders and board.

There is clearly no formula or rule book that can be consulted, and one of the reasons that angels strongly recommend reverse vesting to entrepreneurs is to limit the level of unfairness the remaining founders may feel when a departing founder retains shares, although Bill Gates allowed Paul Allen to retain what became a 11 digit fortune.

Whatever the circumstances, this is where the non-executive director(s) have to get heavily involved to protect the company and its shareholders.  I can’t imagine a positive result for a startup, if there is no one there to moderate, to help negotiate and provide a shoulder to be cried upon (literally in my case).

So what is the take away from this?

Companies are run and exist because of humans (for the time being) and humans have emotions and needs, hence founders will always leave companies.

However painful or seemingly unnecessary it is, my recommendation that this is thought through before investment and this discussion is forgotten forever (hopefully).

Peter Cowley

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