Why Investors Replace Founders

The poorly handled firing of Miyoko Schinner last year (which we all learned about this winter suddenly) should remind us that investor/founder alignment is not always great. This is especially true if both parties are not really listening to each other up front and are caught up in the whirlwind of a market fad. Gold fever, they call it. 

As the more empowered party, investors should take far more responsibility than they often do in ensuring that founders understand what the investor wants today in a founder and how that founder would need to evolve to remain in their CEO seat.

Here’s a list of known reasons why investors will argue for your replacement:

·      You don’t understand how investors view ‘control’ (i.e., 51%) and accidentally lose it! They now need no argument at all, really.

·      Don’t believe you can professionally develop yourself to scale a CPG business.

·      You display an inability to shift from your initial position on anything, even when presented with complex data.

·      You make substantial operational blunders that wound the topline trajectory.

·      Believing you should have the final say, regardless of your legal voting power, simply because you started the business. 

·      A prejudice against founders with no prior executive background once the company reaches $100M or more.

·      Prejudice against those without a finance background

For years, I’ve watched venture capitalists move in and seize control of emerging brands founded by wide-eyed, liberal arts innovators with little to no business background. Most of the time, it blows up as the VC underestimates the challenge of communicating with non-business types. So many founders have had to hire lawyers to buy out these folks and regain their autonomy.

Replacing the founder is most ethically accomplished when the founder approaches investors, asking them to take their business over. (e.g., Angie’s Popcorn did this years ago). Great. So be it if that’s what you want. I have no idea how often this happens, but it’s how you want to cede control if you ever do.

Founders must accept that once they sign terms sheets, the legal math of control is in charge, and their symbolic status as ‘founder’ won’t save them. 

So, if you believe you have what it takes to ride your brand to scale, then you need to:

a)     Never cede control at all

b)   Or, if you do, commit to intense professionalization of yourself so that you evolve to meet the standard that investors want to see in an operator of a $100M business.

Refusing to accept what ‘legal control’ means helps no one in the end.