Startup CEOs and the Three Doors

Everyone knows the old joke about the new CEO and the three envelopes.  I thought I’d take a moment in this post to talk about the new CEO and what I call the three doors.

I think most people fail to grasp the commitment that hired (non-founder) CEOs make when joining a startup.  First, the new CEO is are typically leaving a perfectly reasonable job to join the startup, so there can be a significant opportunity cost.  Second, and more importantly, the new CEO is voluntarily signing up for a situation from which there are only three exit doors — because from the board’s perspective (and the venture capitalists on it) there are really only three possible outcomes:

Door #1:  he* got an exit.  This is definitionally a good case because, grumbles aside, boards will generally not approve exits that they don’t believe are sufficiently good.  The issue is that getting exits can take from 7-12 years in today’s market and unless exited via door #2 or door #3, the new CEO is expected to remain on board for the duration.  If you compound this fact with one of my favorite definitions of a board of directors (“a group that meets 4 times per year to decide whether to fire the CEO”), it becomes clear that the new CEO may be signing up for a long haul.

Door #2:  we fired him.  This is a bad case because the CEO is perceived to have ultimately failed, pretty much regardless of how many good things he/she did in the often many years before the last one during which the board lost faith.  Steve Jobs comeback stories are very rare (though one just happened this week at JC Penney).  The better analog is football or baseball coaches who seem never to quit but who are only fired.  While some CEOs seem to defy gravity in terms of investor patience with consecutive non-successes, these are most likely types brought into broken situations who ultimately end up leaving through door #1 (at modest but acceptable value) as opposed to door #2.

Door #3:  he screwed us.  This is also a bad case because venture capital is a trust business.  Given that the CEO is expected to stay on until either an acceptable exit is achieved or he/she is asked to move on, the only other option is door #3.  While there are definitely both good and bad ways for a CEO to voluntarily leave, any departure that is not provoked by the board is likely to be seen to some extent as a betrayal of trust (with the possible exception of a family crisis).  

In rare cases, CEOs can leave via door #4, but it requires that they have been tremendously successful in growing a company 10-20x in size over the course of four or more years.  In this situation, he/she can possibly run the “scale out” play and gently signal that perhaps the company has been so successful that someone else is required to take it to the next level.  Done at the right way at the right time, this can actually earn goodwill credits for foresight and lack of ego.  

But that case aside, and unlike the Captain of the Costa Concordia who tripped and fell into a lifeboat, startup CEOs are expected to stay with their ship.

So if you’re thinking of taking your first CEO job, I have one piece of advice: be picky, because unlike your SVP or GM job at a big company, you’re taking a position with only three doors out.

If you’re on your 2nd or 3rd CEO job, you know this already.

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* = I’ll use “he” for “he/she” both for brevity and to reflect the (sad) reality of Silicon Valley.