Negotiating succession plans protects the first-time founder’s interests and gives opportunity for a professional CEO to lead the next phase of growth for the company. Founder CEO succession often calls on venture capital investors that have the proven ability to sustain infrastructure and organizational growth. VCs effectively communicate, interface, and energize investors, directors and the media. Negotiating CEO succession allows investors to use their experience in scaling ventures to liquidity, before investing millions of dollars to fuel the next stage of growth. First-time founders that seek capital need to recognize that founder CEO succession is likely, and sometimes inevitable; because of this, it is imperative to negotiate succession plans. First-time founders should build a strong board that includes independent, tech-savvy directors. Investors should not overload the board, rather it is best to have an independent majority of industry representatives who can empathize with the founder CEO and a minority of VC members who can offer input but not control the direction of the firm. In taking investment, and negotiating CEO succession plans it is prudent to choose character over cash, time should be spent evaluating past investments, experience and judgment. It is also important to ask questions: what input would the founder have? What would be the composition of the board? Founders should be looking for mutual respect amongst their investors and other members of the board.
First-time founders need to look for protection, to assure legal protections for his or her post-CEO business position with regard to the company past directed. Basic protections are:
- Minority shareholder protections including for information, against dilution and cast-out rights;
- Exercise rights over options, vesting of shares;
- Board representation or observer rights;
- Role in successor selection and transition;
- Post-employment paid consulting;
- Back licenses of technology, office support;
- Severance pay, post-termination benefits and coverages;
- Negotiation of noncompete, nonsolicitation, other restrictions
June 2011, Attorney Robert Adelson worked with a Massachusetts Founder-CEO, Ted Brennan to negotiate successions plans. Succession is a two-way street, Ted shares the goal of making money with his investors, founder CEO succession is about success not power. Attorney Adelson advised Ted Brennan to yield power to allow future financial gain for the firm, which allowed for the time for Ted, the founder, to achieve protection for his own stake in that financial gain. For both founders and the company, careful planning and appropriate legal counsel improves the chances of the founder’s consent to succession and successful transition of the successor CEO. Attorney Adelson offered expertise and counsel while negotiating CEO succession for Ted Brennan, creating a smooth transition from founder CEO to successor CEO. Attorney Adelson served as a counsel who is not only skilled in negotiating succession plans but was focused on Ted Brennan’s interests and was engaged early on in the process. Attorney Adelson was able to effectively and swiftly protect Ted’s investment of money, sweat and years of his life that went into creating the company that was once his baby.
*All dates, client’s names and companies have been altered to keep confidentiality.