The Problem of Founder / Owner Replication

What happens if the founder gets hit by a bus? This is a question prospective investors and board members sometimes ask themselves behind closed doors. The problem of founder/owner replication is often the gating issue to making an investment, or performing one’s fiduciary responsibilities to shareholders if serving as a director or advisor to a young business. When a company is over-reliant on the founder, managing partner, or other individual with a controlling interest, all could be lost if no one is capable of stepping into his or her shoes.

A charismatic founder is often the face of the company. Few people can imagine the company without its visionary leader. Examples include Elon Musk of Tesla, Jeff Bezos of Amazon, and Mark Zuckerberg of Facebook. In these examples, succession planning became a priority when the companies went public. What happens in pre-IPO startups, small businesses and partnerships? Succession planning is usually a mere afterthought and, more often than not, initiated only after it is too late.

None of us are going to live forever and no matter what superpowers we possess, escaping death is not one of them. If the entire value of the business resides in the founder/owner, then the business will die with him or her. The most common example of the problem of replication is the sole proprietor: the doctor, lawyer or creator. These owners typically practice alone. They never take on a partner or groom a successor. They pass away unexpectedly or become disabled. With just a little foresight and planning, their work could have lived on – the value they created could have continued to benefit their loved ones for generations.

The problem of founder/owner replication is more urgent in a startup that wants to raise outside capital, or a small business that has taken on debt. Founders/owners are typically control freaks to begin with. They hate the thought that they can be replaced. It is this drive and air of invincibility that attracts people to them like magnets. But ironically, it is this same trait that causes many smart investors to pass on the deal, and keeps board members awake at night. If Steve Jobs could do it, any founder/owner can do it. No big-company CEO exercised more control than Jobs, but one element of that control involved having the foresight to replicate himself and leave his company in good hands. His shareholders were protected and his legacy strengthened as a result.

What are some strategies for minimizing the problem of founder/owner replication?

  1. Take the long view. Look far into the future, to the day when the founder/owner is ready to step aside and travel the world, buy a winery, or do whatever s/he wants to do. Who will be running the company then? What kind of person is s/he? How long will it take to groom him or her?
  1. Start now, build a team, formally anoint a successor. A growing company is not going to be able to raise money without a team in any case, so it may as well recruit someone who could fill the founder’s shoes sooner rather than later. The way many startups and small businesses handle this is by hiring a President, COO or Chief-of-Staff to work alongside the founder/owner. Everyone knows that person is the likely successor in the event the founder/owner can no longer run the company.
  1. Draft a succession plan. A good succession plan is authentic. It takes into account the skills and talents needed for the top leadership role. It also assesses and forecasts the needs of the business, in good times and bad. The plan can identify specific individuals in the space that might be a good fit, such as leaders of similar companies, including both competitors and firms in other industries that share similar characteristics.
  1. Recruit awesome board members and/or advisors, and use them well. If the company recruits a strong board and uses top-notch advisors, then any one of them could step in if needed in a pinch. Too many boards are mere names on paper. They are not active in the business, or are involved passively at best. This is a huge mistake of early-stage companies and small businesses. Recruit a board that knows as much about the business as the founder/owner, and if they won’t keep abreast of the company, replace them with directors who will.

No founder/owner likes to think that they can be replicated. Fact is, failing to do so means their creation dies with them, their legacy short-lived. If you are a founder/owner, face-up to your mortality and take steps to protect your stakeholders and family. If you are an investor, board member or advisor, insist that the company have a credible plan to replicate the founder/owner.

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This post was co-authored with Mitchell Stier, a resourceful attorney, with sophisticated experience as public company general counsel and as a private equity and M&A attorney. Mitchell focuses on close strategic partnerships with business clients to promote growth.

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