To sell or to step down?

Founder CEOs should not confuse these two questions. One is about them and the other one is about the company.

Early in my career as a founder, another company reached out to discuss acquiring us. Even though we weren’t looking for buyers, a thought crossed my mind: “Maybe we can indeed sell it, and I won’t have to run it anymore?”

I went to my lead investor and said that I would like to sell the company. Much to my surprise, he pushed back very strongly, although very politely. The message was: you won’t get my signature because most of the company’s potential is still ahead.

At the time, I was pissed off. Wasn’t it my company? Wasn’t I the founder? Didn’t this very investor tell me earlier that he’s there to support me?

Of course, I was wrong. With a bit more perspective, I now see that the lesson I needed to learn at that moment was that these two questions should not be confused:

• Should I leave the business?

• Should I sell the business?

For a founder who doesn’t see themselves running their own company anymore, for any reason, the obvious alternative to consider is selling the business. However, this may be difficult to accomplish or go against the interests of other stakeholders — or even the founder and CEO themselves.

It would be a mistake to confuse the interests of the founder CEO and the interests of the business in such a situation because the right timing of selling the business and the right approach to it will rarely align perfectly with the right timing for the founder CEO to leave.

Personal and business perspectives

Instead, these two perspectives need to be considered separately. One is all about the founder: what’s the right thing to do for them? Another is all about the business: when and how is it right to exit? The overwhelming chances are that the answers will be different.

Startup exits are opportunistic. The best way to sell the company is to build a great business and be open to opportunities. Trying to control the timing or having a CEO who’s considering leaving can reduce the strategic options available to the business.

Stepping down as a founder CEO and exiting the business are unlikely to be aligned even if the founder CEO controls the board because their goals and preferences as a human being might not align well with their goals as a shareholder.

A human being may feel like the last thing they want to do is to run this company for another year, and they’d accept the first offer. A shareholder in them may decide that hiring another CEO to keep growing the business may lead to a materially better return a few years later.

Therefore, these two questions should not be confused. One is about the person who might be considering leaving their job. Another is about the business, its shareholders and its goals — whether it’s maximising enterprise value or social impact. Trying to “solve” both in one go is more likely than not to lead to poor deal terms or the deal falling apart.

Managing the earnout

In many cases, the acquirer will insist on the continuity of leadership by locking in the founder CEO as an employee for a period of up to a few years, known as an earnout.

While there are examples of founders who find their earnout period happy and relaxing, there seem to be many more of those who resent golden handcuffs that shackle them to the otherwise thankless job of integrating their business into a new entity, following someone else’s orders. To many, this may seem the opposite of stepping down: you’re still locked in, but now you’re not even in charge anymore.

Incidentally, one way to avoid the earnout is not to be in the leadership position when the business is sold. While it should never be the sole reason to step down, it could be considered a collateral benefit.

High stakes gamble

One founder of a sizeable UK-based business, who’ll remain anonymous, not only appointed an MD to run the business before selling it, but he deliberately acted as the most useless person in interactions with a potential acquirer. It was a high-stakes gamble, but the acquirer concluded that the business was great, except the founder wasn’t adding value to it. They offered to buy it without an earnout for the founder. This story is still told in entrepreneurial circles after a few drinks, a decade after the company was sold. (If you know who I’m talking about, hit Like on this post :) )

In most cases, it’s not easier to exit the business as a way to stop running it. These are two different events happening on different timelines and for different reasons. Forcing them to be aligned is rarely the best move.