Ousted

A Control Arrangements in Private Startups

Founder-CEOs have a distinctive trajectory. Their story typically starts as an entrepreneur with a business idea. If the entrepreneur funds the entire business, she will remain the sole owner, and thus ownership and control will be fully aligned in the founder.^[22] However, rather than bootstrap a company on their own, it is more common for founders of innovative ventures to raise money from venture capital investors. By doing so, they can raise potentially large amounts of capital for development and growth, gain access to investors’ knowledge and networks, and establish credibility. Venture capital firms’ willingness to invest can provide confidence in the prospects of a company, which can be valuable for attracting other investors, customers, and employees.^[23]

By giving up equity in their company in exchange for funding, founders opt into relinquishing some level of control over the company.^[24] Despite the broadly shared goal of maximizing the company’s value, differences in opinion and preferences, asymmetric information, and agency costs can make control valuable to each party for different reasons.^[25] Founders typically value control not only for financial private benefits but also for nonpecuniary private benefits or for protecting their idiosyncratic vision.^[26] Meanwhile, venture capitalists may not invest without substantial control rights, including board seats and the ability to block certain transactions, in order to mitigate the risk of information asymmetry and agency costs.^[27] As a result, the allocation of control rights becomes a matter of bargaining between the parties. The key levers of control that get negotiated include board composition, financing and cash flow rights, shareholder voting, and protective provisions.^[28] Each of these levers of control is important in determining the balance of power between founders and venture capitalists, and the resulting corporate governance structure.^[29]

B Founder-CEOs and the Difficult Path to Going Public with Control

The transition to the public markets generally signifies a shift in company governance and control mechanisms.^[43] Notably, the power dynamics between founder-CEOs and venture capitalists have markedly changed over the past several decades on the path to public company status.

There was a time when founder-CEOs were widely perceived to be structurally weak.^[44] The venture capital playbook of the 1980s and 1990s dictated that after a few financing rounds, experienced executives from established corporations would be brought in to help the company go public.^[45] A successful IPO was the preferred exit path for venture capitalists, who often controlled the board, to liquidate their financial positions.^[46] Sometimes founder-CEOs managed to hold onto their CEO roles through the time of IPO, and this may have been aided by the relatively short average timeline to going public.^[47] But even in that era, the founder-CEO retaining the top executive spot through IPO occurred less than half the time for those companies successful enough to go public.^[48] In many instances, going public meant that the company had to convince investment bankers that its leadership team was competent and reliable. Narratives recounting this dynamic used colorful, if perhaps loaded or paternalistic, characterizations of bringing in “suits,” “gray hair,” “adult supervision,” or other variants conveying the perceived need for more experienced executive leadership than startup founder-CEOs could typically provide.^[49]

Yet professional outside management failed to prevent the dotcom bust of the early 2000s, and in the aftermath, the conventional wisdom of bringing in a “responsible adult” was not uniformly followed and began to lose its sway. Contributing to this trend were companies like Microsoft and Amazon, which experienced phenomenal success after going public with their founders still in control. Steve Jobs, Apple’s cofounder who was famously ousted from the CEO position and had served as a cautionary tale to ambitious entrepreneurs, was eventually brought back to reinvigorate the company.^[50] In the early 2000s, Google cofounders, Sergey Brin and Larry Page, agreed to hire Eric Schmidt as CEO once the company began to take off, but they stayed highly involved as cofounders. They trailblazed a Dutch auction for their IPO and commanded a dual-class structure.^[51] Their IPO prospectus featured a letter from the cofounders that boldly proclaimed their intention to continue leading the company with their vision, including “moonshots” that might fail, displease public investors, or take long periods to pay off.^[52] Although dual-class stock structures had a long history, particularly in media corporations and family enterprises, they had not been regularly used at the time of the Google IPO. The move by Brin and Page became a talking point in Silicon Valley, serving as inspiration for entrepreneurs hoping to maintain control of their companies while going public.^[53] Some other entrepreneurs indeed managed to be rich and king.^[54] When Facebook went public in 2012, Mark Zuckerberg was able to retain his CEO position and maintain a controlling interest through a dual-class stock structure, a significant shift from the traditional model but in line with the growing trend of founder control.^[55]

Although it was rare for entrepreneurs to achieve such circumstances, the fortunes had started to play more in their favor. In the internet software era, startup costs fell, new funding sources emerged, and competition for talent increased, leading many entrepreneurs to negotiate for more favorable control arrangements.^[56] Keeping founders in managerial control also became more attractive as M&A exits began to far outnumber IPOs, and acquirers often valued the opportunity to add key innovators to their team.^[57] Further, the JOBS Act of 2012 eased regulatory restrictions in U.S. federal securities laws, generally allowing companies to stay private longer.^[58] New capital sources in the venture ecosystem, including sovereign wealth funds, corporate venture capital, and private equity, diminished the need to go public in order to raise growth-stage capital.^[59] The greater availability of private capital reduced firms’ needs for public financing and led to an increase in the frequency of founder control over time.^[60] Many venture capital firms adopted a “founder-friendly” policy towards ambitious entrepreneurs, or at least accepted these terms.^[61] With an abundance of capital flooding the private markets, before the tech downturn set in, some founder-CEOs in the past decade had the luxury of raising large rounds of private financing while wielding significant bargaining power.

Historically, founders often had to sell their stock to realize their riches.^[62] However, in the founder-friendly era, companies provided loans to their founders and permitted them to pledge their shares as collateral in margin loans.^[63] This allowed founders to tap into their illiquid wealth without sacrificing voting rights.

The uptick in founder control, and the use of dual- and multi-class structures at the time of IPO, has been dramatic. When Google went public in 2004 with a dual-class structure, this structure accounted for only 3% of all IPOs.^[64] By 2017-2019, 19% of all IPOs were founder-controlled dual- or multi-class companies.^[65] Companies have typically issued Class B shares that have ten times the voting power of Class A shares. However, some companies, like Alphabet, Under Armour, Blue Apron, and Snap, have pushed the envelope on the dual-class concept by offering common shares with no voting rights.^[66] Palantir went public through a direct listing and a multi-class structure that included a special class of stock, called F shares, owned by the cofounders through a trust that guarantees them at least 49.99% of the total voting power.^[67]

C The Dual-Class Debate

The proponents of dual- and multi-class structures claim they allow founders to focus on a long-term or idiosyncratic vision rather than short-term profits.^[68] Furthermore, proponents argue that the availability of these structures could help convince founders to take their companies public, thereby increasing the number of public companies and allowing public market investors to share in the company’s growth and associated returns.^[69] Another argument in support focuses on the potential efficiency of private ordering and allowing parties to arrange governance structures in a way that accommodates a diversity of investors and their priorities.^[70]

Others have criticized these structures as inefficient or unfair to public investors because they can reduce insider accountability and increase agency costs.^[71] While several index providers have excluded or limited the addition of companies with multi-class structures from major indexes including the S&P 500,^[72] calls for regulators and stock exchanges to adopt prohibitions banning these structures outright have been unsuccessful thus far.^[73]

Given these challenges, some scholars and industry players have sought a compromise. As a way to strike a middle ground, they have advocated for sunset provisions for dual-class structures in which, under specified circumstances, the high voting shares in a dual-class structure are automatically converted to a single class with equal voting power.^[74] Thus, the sunset clause is intended to protect the founder’s vision for a limited period, while minimizing agency costs over the long term. Others have pointed out that time-based sunset provisions impose arbitrary cutoffs and have suggested different triggers, focusing on the transfer or dilution of the founder’s interest or the death, incapacitation, or departure of the founder.^[75] As we highlight in Part II, however, founder-CEOs often face pressures to resign and relinquish control well before any sunset provision would require them to do so. This underscores the disproportionate focus on these legal mechanisms despite the complex dynamics of founder-led companies.

And, as no conclusive evidence links dual-class structures with negative economic outcomes, the debate has remained unsettled, and dual- and multi-class stock structures continue to be perceived as a contentious issue of corporate governance.^[76] The rise of venture-backed IPOs using dual-class stock notably suggests that investors are less concerned about this issue than academics. The following Part may shed some light on one possible explanation for investors’ acceptance—namely, that even firmly entrenched founder-CEOs may be forced out through countervailing forces—and the subsequent discussion explores limits to these forces and a broader market perspective.

A Poor Financial Position or Performance of the Company

In a strong economy, with skyrocketing valuations and soaring stock prices, a founder-CEO’s missteps seem to have little to no consequence. A decline in the stock price and dissatisfaction with the company’s performance, however, may build pressure to resign. When the tide shifts, even the most powerful founder-CEOs can find themselves in a precarious situation, particularly because their net worth is often intricately linked to the value of a single company. This section first delves into the dynamics observed in private companies and subsequently in public companies.

B Legal Enforcement and Risks

Our analysis thus far has demonstrated that even the most firmly entrenched founder-CEOs are vulnerable to losing their leadership position due to the poor financial position or performance of the company. Founder-CEOs can also lose control if regulators or shareholders pursue legal action against them.

It is not uncommon for startups to skirt regulations. In many industries, companies that circumvent the law and seek to change regulations are rewarded for their actions. In Silicon Valley, startups have been encouraged to “move fast and break things,” as Mark Zuckerberg famously advised Facebook employees.^[114] However, as companies grow and mature, this mentality could lead to one too many conflicts with regulators. Understanding when a brush with a regulator has gone too far can be challenging and is often only realized in retrospect. Public outrage or poor financial performance can give the regulator a tailwind, and vice versa, regulatory actions can spark public outrage against a company and its leadership. Both dynamics can ultimately lead an overconfident founder-CEO to fall from power.

One of the most notable examples is Travis Kalanick’s conflict with regulators. Kalanick resigned from his position as CEO of Uber in June 2017 amid a series of scandals, including Uber’s use of a program called Greyball to evade law enforcement investigations.^[115] This resignation has become a defining story in the technology industry, partly because the investor group that ousted Kalanick held only 40% of the voting power. Despite holding most of the voting power and the ability to nominate additional board members, Kalanick was persuaded to step down.^[116]

Uber’s plight mirrors that of Zenefits, a San Francisco-based company that provides a technology platform for businesses to administer and manage human resources, including employee payroll and health insurance coverage. The company’s founder-CEO, Parker Conrad, resigned in February 2016 after admitting he had written software that allowed employees to circumvent state insurance broker licensing requirements.^[117] Later investigations revealed that Zenefits employed unlicensed salespeople in multiple states, violating local insurance laws and regulations.^[118] In addition to regulatory issues, Zenefits missed its revenue targets and showed slower than anticipated growth. In response, Fidelity marked down its investment in the company by 48%.^[119] Following these regulatory issues and financial woes, reports detailed Zenefits’ poor internal infrastructure and fraternity-like culture, which made it a “leading exemplar” of “Silicon Valley’s cult of hypergrowth.”^[120]

The series of scandals led the company’s primary backer, the venture capital fund Andreessen Horowitz, to push for Conrad’s resignation. As with Kalanick, with three of the company’s four board seats under his control, Conrad could have fought to keep his seat, but according to media reports, instead he leveraged his position to negotiate his ouster, accepting a severance payment and keeping his stock, including shares that vested within six months of his resignation.^[121]

Legal pressure does not always come from outside the company. In rare circumstances, the founder-CEO may be sued by insiders rather than state authorities. In one such instance of a Silicon Valley investor suing a founder, Benchmark Ventures sued Kalanick in 2017 to remove him from Uber’s board. Benchmark accused Kalanick of covering up a number of misdeeds before he was given the authority to nominate new board members.^[122] The previous year, Benchmark had approved Kalanick’s proposal to add three new board seats and give himself the authority to delegate directors for the seats. The lawsuit alleged that Kalanick failed to divulge information about the Greyball program that deceived law enforcement and the possibility of intellectual property litigation with Google’s Waymo.^[123] The lawsuit against Kalanick was settled in a grand bargain tied to an investment deal between Uber and a group of investors led by SoftBank.^[124] As part of that deal, Kalanick sold close to one-third of his 10% stake in Uber to SoftBank, giving SoftBank a total of 15% in Uber, making it the company’s largest shareholder. Uber expanded its board from 11 to 17 directors, including four independent directors, reducing Kalanick’s control and limiting early shareholders’ voting power.^[125] Following the governance changes, Uber was able to go public in May 2019, and Kalanick eventually stepped down from his board seat in December 2019, after selling his remaining Uber shares.^[126]

The examples of Zenefits and Uber illustrate how regulatory pressure or a combination of pressure by regulators and investors can further erode the control of a founder-CEO, making resignation more appealing than battling in court and potentially imperiling the company. In the following section, we examine how a public outcry and employee protest may further exert pressure.

C Public Outrage and Stakeholder Pressure

As the saying goes, when it rains, it pours. When a founder-CEO struggles, whether due to declining firm performance or regulatory pressure, reputational loss and employee pressure usually exacerbate the problem. In technology startups, where talent is unique and at times irreplaceable, the power of a founder-CEO is intrinsically tied to his or her ability to lead the team effectively, and founders may lose their position if the team loses faith in their leadership. This dynamic, while pronounced in startups, also occurs in public firms where leadership accountability is heightened by public scrutiny and shareholder expectations. When a company’s reputation is tarnished by scandals and missteps, it may have to pay a larger compensation package to retain and hire employees.^[127] Furthermore, it is not uncommon for employees to leak information to reporters or regulators, walk out, or resign in large numbers if they feel the company has strayed from ethical standards.^[128]

One example is Pinterest’s founder-CEO, Ben Silbermann, who resigned in June 2022 following complaints about racism and sexism at the company. In contrast to WeWork and Uber, the media hailed Pinterest as a well-disciplined unicorn that rejected Silicon Valley’s “bro” culture and relentless growth mentality.^[129] The company branded itself as the “anti-unicorn,” one that valued equity and inclusion and wanted to provide “a safe and happy place for inspiration.”^[130] Nevertheless, the company’s IPO in April 2019 put it under new scrutiny.

The company went public using a dual-class structure, which gave Class B shareholders, including the founding team and venture capital investors, 20 votes per share, in contrast to the Class A shares with one vote each. Immediately after the IPO, Class B shares held approximately 99.2% of the company’s voting power. Pinterest also adopted a divestment-based sunset provision under which Class B shareholders stand to lose their super-voting rights in 2026 if they sell more than half of their shares. Concerned about Pinterest’s unusual voting arrangements, the Council of Institutional Investors attempted unsuccessfully to get Pinterest’s board to adopt a simple time-based sunset provision that would eliminate all special voting rights for the firm’s Class B shares within seven years of the IPO.^[131] In the immediate aftermath of the IPO, the cofounders Silbermann and Evan Sharp held 13.4% of the voting power and 11.5% of the equity of the company.^[132] The third cofounder, Paul Sciarra, who had left the company earlier on, held an additional 9.3% of the voting power.^[133] Over time, however, as other Class B shareholders sold their shares at a faster rate than the founders in the post-IPO market, Silbermann’s voting power grew to 37% and cofounder Paul Sciarra’s to 33%, effectively giving the pair hard control over the company (Sharp’s voting power, in contrast, diminished to just below 4%).^[134]

In an analysis of Pinterest’s governance structure ahead of its IPO, prominent scholars warned:

Pinterest’s IPO structure will secure extremely long-lasting lock on control for Pinterest’s co-founders. If Pinterest were to go public with a standard one-share-one-vote structure, the 13.4% aggregate ownership stake of Pinterest’s co-founders would not enable them to be insulated from removal in the event of under-performance. In such a case, if Pinterest’s co-founders eventually became value-reducing leaders, public investors would be able to facilitate a leadership change. However, with the dual-class structure now in place, Pinterest’s co-founders can be expected to obtain over time a lock on control that subsequently would enable them to remain in power even if they became value-reducing leaders.^[135]

Given the disparity in voting power, Pinterest’s dual-class structure was evidently a risk. In reality, however, Silbermann resigned under public scrutiny rather than remain in power as predicted.

Several reasons likely precipitated Silbermann’s resignation. The site was very popular during the pandemic, but its user base declined as demand cooled, resulting in a 76% drop in share price. In addition, the company was repeatedly accused of fostering a toxic work environment and discriminating against minorities and women.^[136] Lawsuits over these claims led to a “digital walkout” by employees and to lawsuits accusing the company’s executives and directors of tarnishing the reputation of the company among its overwhelmingly female user base.^[137] Upon stepping down as CEO in June 2022, Silbermann became executive chairman and stayed on the board.^[138] Silbermann vacated the CEO position to Bill Ready who was previously in charge of Google’s commerce division, declaring Ready the “right leader” for the company’s e-commerce transition, causing shares to rise 5% in after-hours trading.^[139]

Interestingly, as with Peloton, the corporate governance of Pinterest, including the fact that its cofounders retained a majority of voting rights after Silbermann’s departure, did not deter an activist hedge fund from targeting the company. In July 2022, Elliott Management bought a large stake in Pinterest. With 9% of the shares, Elliott Management’s voting power was negligible in terms of hard control, suggesting that Elliott Management believed it could drive change by persuasion.^[140] Subsequently, in December of that year, the company announced that it had reached an agreement in which an Elliott Management portfolio manager would join its board.^[141]

Pinterest’s example is by no means unique. Kalanick’s resignation as Uber CEO in June 2017 came amid backlash from the public as well as employee protests over a hostile work environment.^[142] Kris Duggan, founder-CEO of BetterWorks, another Silicon Valley HR startup, resigned in July 2017 following allegations of assault and sexual harassment.^[143] Mike Cagney, the founder-CEO of online lender SoFi, resigned in September 2017, stating that “a combination of HR-related litigation and negative press have become a distraction from the company’s core mission,” shifting focus “more toward litigation and me personally.”^[144] Dan Price, founder-CEO of Gravity Payments, who had grabbed the media’s attention by cutting his own pay so employees would each earn at least $70,000, resigned amid allegations of sexual misconduct.^[145] These and other examples demonstrate that focusing solely on governance control mechanisms underestimates the potential impact of public opinion and employee actions in the current workplace climate.

In our discussion so far, we have explored how poor financial performance, legal battles, and stakeholder outrage and pressure may undermine founder-CEOs’ ability to remain in executive positions. Lastly, we examine founders’ psychology and personal struggles and motivations, which may impact their desire to keep their position when adversity surrounds them.

D Personal Reasons and Motivations

The psychological value of being in control of the companies they created is a significant factor for founder-CEOs,^[146] and it sets them apart from other professional CEOs. For some founders, their company is often not just a job or a career, but rather an extension of their identity and purpose.^[147] This emotional attachment and sense of ownership can motivate them to go above and beyond in leading and growing their company.^[148]

The flip side of the founder-CEO’s emotional investment in their company, however, is that they bear a significant mental and emotional load when their company is underperforming or under attack. The scrutiny and criticism that come with being a public company CEO can exacerbate these feelings, leading some founder-CEOs to consider resigning voluntarily if they no longer enjoy being at the helm or believe they are no longer the best person to lead the company through a challenging period. The prestige of being a founder-CEO declines when the company or their performance falters.

More generally, many founder-CEOs would rather take an honorable exit from the top executive role and maintain their reputation than stay in managerial control of a company navigating the choppy waters of public markets. For example, Google founders Larry Page and Sergey Brin stepped down from their executive roles at Alphabet in December 2019, saying they did not believe in holding onto positions when they thought there was a better alternative for the company.^[149]

In a public company, the pressure to deliver strong financial results, meet investor expectations, and maintain a positive public image can be immense. The skills relevant to the startup context, such as generating traction, aggressive growth, and fundraising, are distinct from managing investor expectations in public markets and hitting quarterly earnings targets. Thus, as companies grow and change, founders often lose interest, and stepping down can provide a sense of liberation, allowing the founder to refocus on their strengths or pursue other interests or hobbies. For example, Jeff Bezos stepped down as Amazon’s CEO in July 2021 to focus on ”new products and early initiatives” such as his Blue Origin space company.^[150] Jack Dorsey left Twitter in 2021 to focus on Block (Square) and develop his passion for cryptocurrencies.^[151]

Moreover, even though founder-CEOs may brand themselves as larger-than-life characters, they are just human and have their own vulnerabilities. For instance, the timing of Travis Kalanick’s ouster from Uber came after taking a leave of absence to grieve over the tragic death of his mother in a boating accident.^[152]

In a similar vein, it goes without saying that a CEO may decide to step down if they are facing major health issues. For example, Steve Jobs retired in 2011 after battling pancreatic cancer for several years.^[153] He died only six weeks after his resignation. Likewise, a CEO may decide to step down to focus on their family and personal relationships, or may at least highlight this as their key motivation.

Overall, many personal reasons may incline a CEO to voluntarily step down, and each individual’s decision is likely to be influenced by a combination of factors. Founder-CEOs may have attained a level of wealth that frees them from the need to keep working. It should not be underestimated or overlooked that managing a company’s daily operations is challenging, and if the company is struggling, the experience may not be enjoyable. Even after taking extensive measures to maintain their control, founder-CEOs may realize they no longer want managerial power.

A Limits of Counterforces on Powerful Founder-CEOs

Several important limits to the above analysis arise and ultimately temper the effects of counterforces on powerful founder-CEOs. First, although poor financial performance, legal exposure or scandals, and stakeholder pressure or personal struggles can put a founder-CEO in a tenuous position, such circumstances do not always dethrone them. There might be a tipping point or individual calculus that must be reached in circumstances where the founder-CEO has control and does not want to step down. While certain patterns emerge between the types of circumstances that lead a founder-CEO to ouster or resignation under pressure, it is not entirely predictable. Personal characteristics and preferences likely play a role, and counterforces are a matter of degree.

For instance, Mark Zuckerberg, one of the most prominent examples of a founder-CEO becoming “rich and king,” famously had a business card in the company’s early startup days that said, “I’m CEO, Bitch.”^[154] And, while the freewheeling culture of a young Facebook and its leadership has evolved from that time to today’s Meta, Zuckerberg has notably not stepped down despite Meta’s stock experiencing a downturn of more than 50% at one point.^[155] The company faced bruising market scrutiny of its strategic focus on the metaverse and was entangled in a high-profile consumer privacy scandal.^[156] Zuckerberg also encountered pushback against a plan to issue a new class of non-voting shares to the public that would have allowed him to retain control while selling his shares to fund philanthropic endeavors.^[157] The company withdrew its plan in the face of a shareholder lawsuit arguing that the recapitalization plan amounted to unfair self-dealing.^[158] Through all of these challenges and potential off-ramps, Zuckerberg has persisted in leading the company.^[159]

Second, in some instances, the founder-CEO is ousted but the circumstances are so dire that the company also fails—Elizabeth Holmes of Theranos and Sam Bankman-Fried of FTX are prime examples. In the case of Holmes, her shares held 100 votes each, giving her complete control over company decisions.^[160] Bankman-Fried led a company for an extended period without a traditional startup board, instead concentrating managerial control in a small group of individuals with little experience or oversight.^[161] These examples serve to highlight that market forces, legal pressures, and personal accountability may not be sufficient to save a company in the face of fraud allegations or extreme governance failures—ousting a founder-CEO is sometimes little comfort.

Third, it is important to note that even when a founder-CEO is ousted, they may still retain significant control over the company. This is exemplified in cases such as Uber’s Travis Kalanick, Peloton’s John Foley, Blue Apron’s Matt Salzberg, and Pinterest’s Ben Silbermann where the process of dislodging the founder-CEO from managerial power may occur in stages, starting with the CEO position and subsequently from the board of directors. Moreover, the founder may still hold a significant percentage of the voting stock, which can allow them to exert influence over the company’s decision-making processes post-resignation. For this reason, researchers who have studied founder control have created an assortment of measures, such as characterizing a founder as having “weak” control if he is CEO and “strong” control if he has a voting interest of at least a certain percentage, such as 30%.^[162] Scholars have also raised concerns about small minority controllers regardless of whether these controllers remain as CEOs.^[163]

Finally, an ousting may be temporary—it exists at a particular moment and the founder may go on to have another act. Steve Jobs staged a “boardroom coup” to return to Apple as CEO, and it was in this second phase of his leadership that the company reached record success.^[164] Ironically, the Apple board abruptly ousted its then-chair and CEO, Gilbert Amelio, during a period of poor financial performance and stock decline, to reinstall Steve Jobs.^[165] And, while it is relatively rare for a founder to step down or be ousted and then brought back to lead the same company, it is relatively commonplace for the founder to have a rebirth with a new venture.^[166]

Over time, the startup ecosystem has evolved to be more founder-friendly, reflecting the interdependent relationship between founder-CEOs and investors, often repeat players in the space. Maintaining a founder-friendly reputation is crucial for investors, but at the same time, founders are dependent on venture capital investors as they aspire to launch new ventures. This interdependency encourages both parties to work together and maintain, at least superficially, the appearance of an amicable decision. Examples of this dynamic abound. Travis Kalanick, for example, started a new company of “ghost kitchens” after his ouster from Uber.^[167] After taking WeWork to the brink of collapse, Adam Neumann walked away with a personal fortune and started a new venture in residential real estate, backed by brand-name venture capitalists.^[168] After losing 87% of his wealth on paper by the end of his tenure at Peloton, John Foley started a new company that makes custom rugs.^[169] And the stories of rebirth go on. Indeed, the potential for starting anew, and maintaining one’s reputation to do so, likely is a consideration when a founder steps down under pressure.

B Implications for the Dual-Class Debate

In this final section of our discussion, we conclude with the implications of our analysis for the dual-class debate. Corporate governance literature notes that many dual-class stock offerings have originated from technology companies, which are often financed by venture capital firms.^[170] Theory suggests that companies are motivated to create optimal governance systems upon going public. Consequently, the literature acknowledges a puzzle: why do dual-class structures persist in IPOs of venture-backed companies, even when they are perceived to have high agency costs?^[171]

According to the literature, dual-class shares have both benefits and costs for shareholders: They are getting shares in a young, fast-growing company led by a visionary founder, but the downside is that if the founder decides to take the company down a path that investors consider destructive, there is not much they can do. Our analysis of the forces and factors that may lead to a founder-CEO’s resignation provides new insight into why structures can be offered by venture-backed startups to public market investors at no cost or at a slight discount.^[172]

A first point to keep in mind is that venture-backed startups often go public before turning a profit, which can lead to cash shortages that force founders to return to the capital markets or lenders for further funding. While financial constraints in public companies may not be as immediate as in private companies, they still impact a founder-CEO’s ability to wield control. For example, the founder-CEO of cash-strapped Peloton, John Foley, was readily ousted despite possessing several means of control.^[173] Similarly, in the case of Blue Apron’s Matt Salzberg, he opted to relinquish his board seat ahead of an equity issuance to generate much-needed capital. In stark contrast, Mark Zuckerberg has remained impervious to comparable pressures thanks to Meta’s vast reserves of cash.^[174]

A second point is that control arrangements may be renegotiated. In the private company context, in which ownership and governance arrangements are regularly bargained for among a relatively small number of participants, there is the possibility of pushing out a leader with the hopes of giving the company a chance at a fresh start. One way that investors can remove an underperforming founder-CEO in the private company context is by buying them out, as seen in the case of Adam Neumann’s deal, which allowed SoftBank to gain control of WeWork.^[175]

Similarly, as we have seen, Travis Kalanick, the cofounder of Uber, was ousted from his position as CEO in 2017 after a series of scandals and controversies.^[176] However, Kalanick remained on the board of directors and maintained significant voting power, which allowed him to influence the company’s direction.^[177] To resolve this issue, Uber’s board negotiated a deal to buy out Kalanick’s shares and reduce his voting power. The deal allowed Kalanick to step down voluntarily, so the company could move forward without his influence.^[178] In both cases, buying out the CEO was a strategic move to prevent the company from sinking further and protect the investors’ interests.

In the public company context, founder-CEOs with control are not as likely to be bought out, but the experiences of former Blue Apron founder-CEO Matt Salzberg and Pinterest’s Ben Silbermann demonstrate that in such cases relocating a founder from the CEO position to the executive chairperson role, potentially coupled with a compensation adjustment, can be a mutually agreeable and relatively seamless way to encourage the founder to step down as CEO and facilitate their eventual departure from the company. This approach functions as an intermediate stage until the founder is willing to relinquish their position on the board entirely.

The third point to consider is that if the founder-CEO chooses a highly destructive path (illegal or unethical), other forces will intervene to help discipline the founder-CEO, including from regulators, courts, employees, and the public. As a result, the founder-CEO’s entrenched control holds more sway in a company that is profitable and does not break the law or otherwise engage in extremely unethical behavior, and less sway in an unprofitable company where there are grave legal and cultural issues.

Lastly, in high-stakes bets on rapidly growing companies, the removal of the founder-CEO may not always address the root causes of a company’s failure. While agency costs can be a factor, there are often more profound problems at play, such as a flawed business model or a lack of sustainable growth. In such cases, the founder-CEO may have been the driving force behind the company’s initial success, and it may not be easy for another leader to replicate their vision or expertise. The issues that led to the company’s failure may be inherent in its business model or market conditions, making it difficult for anyone, including a new CEO, to turn the company around.

Taking all of the above into consideration clarifies the puzzle significantly. Investors in high-growth companies often face a potential tradeoff between the risk of agency costs and the potential rewards of investing in a rapidly growing business. While there is uncertainty about whether the company’s founder will be a visionary or a bad actor, the potential rewards of investing in a company led by visionary founders who can execute their visions without interference from market forces may outweigh the potential risks. In the case of high-growth companies, investors may be more willing to tolerate agency costs in exchange for the potential rewards of investing in a company with significant growth potential. For example, investors in Amazon, Facebook, or Google have seen extremely high returns over the long term, despite entrenched control of the founders. Additionally, investors may be more willing to tolerate agency costs in high-growth companies due to the increased level of competition in the market. In rapidly growing industries, companies must move quickly to establish a dominant position, and investors may be more willing to overlook agency costs if it means getting a stake in a company that is well-positioned to take advantage of growth opportunities.

In the event that founder-CEOs are bad actors and exploit their super-voting rights to extract private benefits, investors may lose a maximum of one time (1x) their investment. Still, if the company is unprofitable, breaks the law, or acts extremely unethically, other forces may intervene to counteract the founder-CEO’s actions. Meanwhile, if the founder is indeed a truly visionary leader, by protecting them from market forces and allowing them to execute their vision, investors could yield a return many times greater than the amount invested.^[179] Therefore, a public market investor who invests in a portfolio of venture-backed companies going public can rationally place a relatively small discount or even a premium on dual-class structures.