What's at stake during CEO succession?
What's at stake is a lot of money, yes, but also peace of mind, family well-being and future opportunities.
In this issue:
My reflection on what’s at stake when a startup changes the leader.
An excellent CTO coach recommendation: Noah Cantor.
A 30-second ask for help from me.
Let’s dive in.
What risks and opportunities arise during a CEO transition?
Having interviewed many founders about their transition stories for my upcoming book Startup CEO Succession: A Founder’s Guide to Leadership Transition, I identified four categories of risk and opportunities:
Enterprise value,
Peace of mind,
Family well-being,
Future options.
Enterprise value
A CEO transition in a startup can create or ruin immense value, similar to how much the startup is worth today and how much it can grow in the next few years. If your business is valued at £30m today and you hope your successor takes it to a £100m valuation in the next few years, what’s at stake during a CEO transition is a few dozen million pounds.
If things go well and everything works out as expected, existing value will be preserved, and more value will be created. If things don’t go well, existing value will be destroyed, and none will be created.
A founder I know, let’s call him Steve, hired his replacement after running the business for seven years. Another seven years later, the new CEO sold the business for far more than it was worth when she took over, making both of them very wealthy overnight. Two right choices — to step down and to hire the right successor — translated into intergenerational value years down the line.
Just as common are stories of mismanaged transitions where a once-promising company is wound down years later, with all stakeholders pointing fingers at each other.
Peace of mind
What’s also at stake is the peace of mind of the founder. Depending on how the CEO transition goes, it will influence how the founder feels for a long time. This isn’t “just” about the money, it’s also about our identity.
As founders, we often feel that our identity is fused with the business. This is understandable. I know this from first-hand experience of founding and running Makers for years. When things don’t go well with the business, we feel it as a reflection on us, founders. Likewise, it’s so nice to be proud of your business as you see it going from strength to strength under the new leader.
Founder CEOs who step down often stay involved as NEDs or shareholders, maintaining their connection to the business. Depending on how the CEO transition was managed, this connection can be a source of stress or a source of peace for years.
Family well-being
A CEO transition will affect not only the founder themselves but also their family: life partner, their children and, quite possibly, their parents and extended family. What’s at stake here is an opportunity to offer different choices to the family in terms of education, healthcare and retirement options.
Money doesn’t buy happiness, but it does solve plenty of practical problems.
Future options
Life doesn’t end after a CEO succession. The founder will choose their next step, be it starting a new business, joining someone else’s company or going into investment. Their future options will depend a lot on how the CEO transition was managed.
A transition that helps the business become much more successful will, in the coming years, create professional opportunities that wouldn’t exist otherwise. Likewise, a botched transition might be little more than a story to tell over a beer.
One of the reasons for this is that our reputations are built when we navigate difficult choices. If the CEO transition is orchestrated in a way that helps all stakeholders be much more successful, they will remember it for years to come. Likewise, no one forgets the moment when they felt like success was within reach but someone’s selfish actions ruined the opportunity.
Key decisions influencing the risks
There are a few key questions that have the most influence on the success of the CEO transition:
Does the CEO need to be replaced?
Who will be the new CEO?
How aligned are all stakeholders around what success means?
How much do they trust each other?
Can the outgoing CEO genuinely get out of the way?
There are many more questions that arise during a CEO transition, but these five will have the most impact on the outcome.
First of all, it’s crucial to make the right call on whether the CEO needs to be replaced and, if so, when and how. This call can be made by the founder themselves or their board, but it’s critical to get it right. Stepping down as a founder CEO when you could have led the business to great heights despite the challenges is akin to shooting oneself in the foot.
Second, the choice of the successor is critical. This is because there are some real costs associated with a CEO change, so fixing mistakes is very expensive. The cost comes not just as cash, but as time and lost opportunities. A great CEO who joins when it’s a bit too late to save the situation won’t make a difference. You need to hire a great new CEO for your business the first time you do it.
Third, it’s crucial that all stakeholders (founders and investors with voting control) are aligned around what they’re trying to achieve and are able to trust each other. This is easier said than done because not everyone has the self-awareness, maturity and honesty to address potential conflicts before they have to. Yet, without enough trust and alignment at the top level, a CEO transition can easily be derailed.
Last, but not least, the outgoing CEO should get out of the way. It doesn’t mean leaving the company or the board. It means acting very carefully to support and not undermine the new CEO even when they disagree. If you want to run the business, don’t step down. If you stepped down, don’t try to run the business.
Final reflections
I often recall this quote:
It's remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.
Charlie Munger
The success of the CEO transition relies more on not doing anything stupid, rather than doing something extremely clever. By stupid things, I mean:
Quitting as a CEO on a whim without thinking through it deeply
Staying as a CEO out of stubbornness, fear or arrogance
Allowing one’s ego to create a fight at the board level
Not having a plan for the CEO transition, just winging it
Not putting great care into choosing the successor
Undermining the new CEO
None of these is rocket science and yet I’ve seen each of those in various startups. It all really boils down to slowing down, thinking carefully, getting in touch with emotions, being honest with ourselves and others and planning the transition. Simple, but not always easy.
An exceptional CTO coach
I’ve known Noah for nearly two decades. When I got my first job as a junior software developer after uni, Noah was leading the IT team in the business I joined. I remember being impressed by two things: how much he knew about technology and how calm he was in every situation, even when the conversation was difficult.
Today Noah helps tech leaders find their own way of running their teams, managing technical and human issues in a way that resonates with who you are and the needs of your team.
Noah, a seasoned tech expert and my trusted friend, has dedicated his career to empowering tech leaders. He's helped many, just like you, to cultivate management styles that are authentic, effective, and stress-reducing, leading to higher team performance.
Noah works with a limited number of tech leaders each year, dedicating significant time and attention to each one, enabling them to get the best from themselves and their teams.
He has agreed, at my request, to offer a free coaching session to any of my subscribers or their CTOs. You can sign up here.
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