Founding CEO: What’s Their Real Job?

July 23, 2010

Here is a really interesting article in Business Insider from Steve Blank this week about CEO compensation and how it should be linked to business growth strategies.

Blank posits that both founders and VCs have the wrong model for founding CEO equity compensation.

Founding CEOs often believe that the value they bring is their idea, as well as the time and energy they put into their company. To them — since they had the original thought, built the product, found the first customers, and worked hard — they should be entitled to vest all of their equity over time and run their own company.

VCs often feel that if a company has grown past the founder’s ability to manage it and hasn’t yet had a liquidity event, that the VC should be able to remove the founding CEO and “walk them out the door with only the stock they vested to that day.”

Blank believes that the founders’ real job is to find a repeatable and scalable business model, and that it’s going to be found in the first few years. If there is no repeatable, scalable business model, there is no company. As a result, Blank believes that the founder’s value is nonlinear over the traditional 4-year vesting model and is heavily scaled to the first few years of chaos. Founding CEOs are not often the right CEOs to turn a startup into an established company. Therefore, CEO equity comp should be directly related to the period of when a founding CEO is focused on finding a repeatable and scalable business model.

If this model hasn’t been attained after the VC invests, then the CEO should be replaced and entitled only to the amount of equity vested at the time of exit. If the founding CEO does lead the company to a repeatable and scalable business model, then they should be fully vested and appropriately compensated if they are removed, with those metrics agreed upon upfront by the Board, investors and the CEO.

As a Boston venture capital firm that invests in expansion stage tech companies, CEO compensation and equity is a common topic of discussion for us. After reading Steve Blank’s ideas, what do you think?