Eighteen months after the deal closed, the new chief executive of a midmarket software business told me about his real problem. His executive team were listening to someone else. The founder had stayed on as chair and was exerting what the CEO saw as unhelpful influence: slowing, distracting, and sometimes outright blocking the change investors had brought him in to deliver.
In private equity deals involving founder-led firms, the founder is routinely kept on as chair or partner, alongside a professional chief executive who is brought in to deliver the value creation plan. Three things make the arrangement popular. Founders want to stay involved. Investors want to be seen as founder friendly. And nearly everyone believes that keeping the founder close buys continuity and, therefore, insurance against failure. Which is fine, except that all the evidence points the other way.
In one study of nearly 200 CEO successions, researchers found that when the departing boss stayed on as board chair, the new CEO achieved less strategic change. And while founder retention did provide some stability, it wasn’t in the way hoped. In fact, retention was more effective at impeding large performance gains than at preventing large drops. So, the arrangement so often adopted as downside protection is actually more effective at removing upside.
Another study found that while replacing a founder tended to improve the odds of a strong exit, it improved them much more when the founder left the business than when they stayed. So, the evidence is clear. Results are better when founders leave. The question is why.
Why it goes wrong
The usual explanation is personality clash. Two strong people, bruised egos, a failure to communicate. That sort of thing. It’s certainly a credible-sounding explanation. But it’s also often wrong, because the real causes of founder-CEO tensions are usually structural, and likely to affect even the most reasonable people.
The first issue is ownership. Founders develop psychological ownership of the business, in which the company becomes an extension of themselves. Hence the research showing that they tend to describe delegation as difficult, uncomfortable, and even frightening. A transaction changes legal ownership. It doesn’t touch the psychology of it.
Authority comes second, and everyone anticipates this one. A team with two credible sources of authority routes around whichever is slower, and the founder is often faster because they’re operating from experience.
The third is informal reporting and communication lines. Formal reporting may move to the new CEO on day one, but informal relationships don’t. People who joined for the founder may still tell the founder things first and may be more likely to be open with them, too. So the founder may hear things the new CEO never gets a chance to.
Finally, a new CEO can all too easily get caught up in managing the founder and their impact, and every moment they do so distracts from their core mission.
What private equity amplifies
These mechanisms exist in any founder-succession scenario, but PE involvement turns everything up to 11.
To begin with, the hold period compresses everything. Three to five years doesn’t allow for the handover period that much succession advice assumes. Then there is huge pressure on the incoming CEO to drive growth and change, and drive them fast—certainly before either party has learned how the other operates. And the CEO is often left to deal with any tensions alone, as most PE firms have an interest in keeping founders happy, or at least maintaining a reputation for doing so.
So, what can leaders do about this?
What to do instead
If you are the incoming chief executive, you did not choose the arrangement, and in most cases, you cannot end it.
The standard advice is to secure the founder’s blessing. Move slowly and ask what to preserve before you look at what to change. There is certainly sense to that. But it also has limits. Invest too much in keeping founders happy, and it can slow change, distract from objectives, and undermine your authority.
There are, however, things you can try. What works will depend on the specifics of your situation and the personalities you’re dealing with.
- In firms that have been used to flat structures and informal decision-making processes, it’s important to introduce management team structures that report to you as soon as possible. This may sound basic, but founder-led startups often have informal structures and management processes. That can be fine, but it also enables informal decision-making where a new CEO can be bypassed.
- Assume informal networks still run through the founder and mitigate for this by investing heavily in building your own information channels. Skip-levels, premortems, and an audit of which subjects reach investors through the founder have all been shown to help. If you don’t know what’s going on, you can’t act on it.
- Make sure the founder feels they have a clearly defined role, because if they don’t, they may create one. Even if they are on the board, you can ask them to lead a project or take responsibility for supporting something. Give them a sandbox and don’t let them roam freely.
- Try putting what you want the founder to do as requests for their help. By asking them for their help, they may be more likely to do it as—again—it may help them feel as though they have more of a role.
- Finally, have a conversation with them about how it feels to step back. Make them feel heard and understood. There may be useful data in there that will help you adjust your approach with them.
