The quintessential tech entrepreneur? Names like Mark Zuckerberg, Steve Jobs and Sergey Brin come to mind. Each created a company, weathered some early bumps and turned their businesses – and themselves – into iconic brands.
But most entrepreneurs do not. According to Harvard Business Review author Noam Wasserman, four out of five entrepreneurs are forced to step down from the CEO role. Wasserman explains: “Most [founders] are shocked when investors insist that they relinquish control … and the manner in which they tackle their first leadership transition often makes or breaks young enterprises.”
Odds are 4:1 that, as an entrepreneur, you’ll leave — and earlier than you wanted to go. And how you plan and execute your exit has huge ramifications for you (obviously) as well as for the company, investors, and employees you leave behind.
The good news is that, bruised egos and feelings aside, there are a few simple rules that will allow you to play the game right for yourself – as well as set your company up for future success.
Play 1: Face the facts
There is a myth about CEO transitions, and it goes something like this: A passionate young founder grows startup company before handing it off to an operational CEO to scale the business. The founder actively helps recruit the new leader – and graciously takes on a vision-oriented role such as chief strategist, innovator, or evangelist. Everyone wins.
It’s a nice story as far as it goes. And it’s true that a CEO change generally starts out as a fairly pleasant and amiable transition. Everyone – board, incoming CEO, founder – has a vested interest in making the process as smooth as possible.
Here’s the part that they don’t tell you: As a founder, you are about to become 100 percent powerless. Your company is essentially gone.
You won’t realize that right away. At first, it’s impossible to imagine the company you’ve created is no longer your own. But it’s true.
You have a small window of time to take care of yourself and your team. If you don’t, no one else will. And the more quickly you can accept this, the more effective you can be at authoring a successful exit.
Play 2: Create a liquidity event
As a founder, you took a lot of chances. There were a lot of unknowns. You and your team worked brutally hard to create this company, and you deserve to be rewarded for that.
This isn’t the time to beat around the bush. Be direct. Tell the new CEO and board that you want a liquidity event that will compensate you for your success so far.
Keep in mind that it’s all a negotiation and they have no obligation to agree to it. You have some great leverage points, like your client relationships and the social capital you’ve built up during your tenure. The most important thing is goodwill. You’ve brought the company to this point. Investors and clients are happy. The potential is limitless.
You may not get an immediate answer, but keep pushing. The future of your business is bright – and some investor is going to want a bigger piece of it.
Play 3: Take care of your team
Your founding team took on jobs under market value and made tremendous sacrifices to build the company. Everyone’s hard work and success is the reason that a new CEO is even an option.
Unfortunately, you can’t rely on the new CEO to understand the sweat and tears your team put into building the company. It’s up to you to do it.
Include as many of your core team members as possible in the liquidity event. Give them the opportunity to cash out some of their hard-earned shares – if they want. And don’t wait to give raises, hand out more equity, or promote people. It’s the right thing to do on your way out.
Play 4: Strengthen external relationships
Chances are you own the relationships with the company’s key clients. You have very literally built your business – and often a new category or industry – together.
Be sure to reach out and schedule face time with each of them. Share the news of your transition in person and reassure them nothing will change. Whether it’s a golf game, lunch, or even a formal meeting, this is the opportunity to cement your relationships for the days, months, and years ahead.
Next, ensure that executives take ownership of these key relationships. Facilitate introductions if necessary to ensure these clients are left in good hands. These are the people who took a chance on you in your early years, and now it’s your turn to make sure they are taken care of under the new management.
Play 5: Don’t hang around
A founder and the new CEO cannot coexist in the same company for a long period of time. It’s an impossible relationship, so set a strict departure date.
Be sure to give yourself a set amount of time to impart institutional knowledge, negotiate the liquidity event, pass off clients, and mentally prepare for life without the company you founded. Communicate the deadline to everyone at the company, stick to it, and don’t look back.
The relationship a founder has with his company is complex, emotional, and highly unusual. A successful exit is more common sense than rocket science. But it requires a real shift in mindset and is not for the squeamish. The sooner you realize that your exit is strictly business, the better it is for everyone. You may even find that your exit has worked out astonishingly well.
Ken Cho is cofounder and CEO of SaaS platform People Pattern. He previously founded Spredfast, a SaaS company that allows organizations to manage, monitor, and measure their social media programs. He has served as an adjunct professor at the University of Texas Austin and held tech and finance roles at IBM, Lehman Brothers, and Enron.