The Founder’s Dilemma

Here is an excerpt from a classic article written by Noam Wasserman for Harvard Business Review (February 2008 Issue) and the HBR Blog Network. To read the complete article, check out the wealth of free resources, obtain subscription information, and receive HBR email alerts, please click here.

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Every would-be entrepreneur wants to be a Bill Gates, a Phil Knight, or an Anita Roddick, each of whom founded a large company and led it for many years. However, successful CEO-cum-founders are a very rare breed. When I analyzed 212 American start-ups that sprang up in the late 1990s and early 2000s, I discovered that most founders surrendered management control long before their companies went public. By the time the ventures were three years old, 50% of founders were no longer the CEO; in year four, only 40% were still in the corner office; and fewer than 25% led their companies’ initial public offerings. Other researchers have subsequently found similar trends in various industries and in other time periods. We remember the handful of founder-CEOs in corporate America, but they’re the exceptions to the rule.

Founders don’t let go easily, though. Four out of five entrepreneurs, my research shows, are forced to step down from the CEO’s post. Most are shocked when investors insist that they relinquish control, and they’re pushed out of office in ways they don’t like and well before they want to abdicate. The change in leadership can be particularly damaging when employees loyal to the founder oppose it. In fact, the manner in which founders tackle their first leadership transition often makes or breaks young enterprises.

The transitions take place relatively smoothly if, at the outset, founders are honest about their motives for getting into business. Isn’t that obvious, you may ask. Don’t people start a business to make pots of money? They do. However, a 2000 paper in the Journal of Political Economy and another two years later in the American Economic Review showed that entrepreneurs as a class make only as much money as they could have if they had been employees. In fact, entrepreneurs make less, if you account for the higher risk. What’s more, in my experience, founders often make decisions that conflict with the wealth-maximization principle. As I studied the choices before entrepreneurs, I noticed that some options had the potential for generating higher financial gains but others, which founders often chose, conflicted with the desire for money.

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Here is a direct link to the complete article.

Noam Wasserman, a long-time Harvard Business School professor and author of the bestseller The Founder’s Dilemma: Anticipating and Avoiding the Pitfalls That Can Sink a Startup, is the founding director of the Founder Central initiative at the University of Southern California.

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