Should startups pay outgoing CEOs?

In my book Startup CEO Succession, I argue that startups should offer financial security to outgoing founder CEOs for pragmatic reasons. This may seem counterintuitive initially, but it makes good business sense on reflection.

I’d love to hear your thoughts about my argument in the comments.

Not every founder CEO stepping down is wealthy enough to take some meaningful time off. Many, or maybe most, have mortgages to pay and families to feed. As a result, a founder CEO considering stepping down is taking their financial situation into consideration, as they should.

They are likely concerned about how long it might take to find another job. Even though founder CEOs have many wonderful skills and experiences, it’s not straightforward for them to walk into a new job if they spent the previous decade running their own business.

An additional complication is that many founder CEOs leave their businesses in various stages of burnout, feeling exhausted after running a startup for several years. They need rest more than anything.

Big companies don’t know how to understand founders’ CVs. Startups looking to hire C-level execs are looking for specialists, not generalists. Building a freelance career takes considerable time. In short, any founder CEO considering stepping down needs to know how they’ll cover several months of expenses—or, even better, a year or two. That can be a serious amount of cash in an expensive city like London or Zurich.

Therefore, a founder CEO may delay stepping down until they find another job or resist stepping down if the board asks them to. They may also be eager to step down sooner than planned if they get a great job offer with a fixed start date.

The problem is that a material amount of value is at stake during a CEO transition. The company’s enterprise value can go to zero if the succession goes poorly and can rise several times if the new CEO does an excellent job. What’s at stake is millions and millions of pounds of value. The attention of the outgoing CEO and the board should be focused on preserving and multiplying this value.

This argument is easy to understand, but the outgoing founder CEO can’t pay a mortgage with future gains in enterprise value. Therefore, it’s tempting to allow the personal financial situation to influence the timing of the transition. If the founder CEO is rich on paper but cash-poor, that’s a potential issue for all stakeholders.

This dynamic can be challenging when the transition timing is uncertain, as it often is. For example, it may take a few weeks to over a year to identify a suitable successor, who may have to serve a notice period before they can take over. So, from the company’s perspective, it is important to ensure that the founder CEO keeps running the business as long as needed but can step down as soon as necessary.

In the book, I argue that to prevent the personal financial situation of the outgoing founder CEO from influencing the transition, it is pragmatic and reasonable for the board to offer the founder a degree of financial certainty.

It’s also true that the actual sums of money aren’t comparable. What’s at stake for everyone is millions, or dozens of millions, or hundreds of millions of enterprise value. What’s needed to ensure financial stability for a founder CEO is a tiny fraction of that.

In effect, the contract is that the company will pay you when you step down, and in return, you are committed to ensuring the success of the transition, regardless of how long it takes.

There are several ways to accomplish this. One is a settlement agreement between the business and the founder (which is a good idea in any case) that has a meaningful cash component. Another is the founder CEO selling some of their shares to existing investors or the company (share buyback). Yet another could be agreeing that the founder CEO stays employed in a non-CEO capacity if there’s a need for their skillset.

However this is accomplished, the board and the founder should aim for complete flexibility regarding the timing of the transition (and, by extension, the outgoing CEO’s focus).

In practice, the boards do not always consider this, and the outgoing founder CEOs may be reluctant to raise this question themselves. This is misguided. In ideal circumstances, succession planning at the board level should include a conversation about the founders’ financial situation and career plans and how they all influence the timing of the transition.

After all, there’s too much at stake to get it wrong.

What do you think?