Written by Saanvi Sangla pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) offered by Lawsikho as part of her coursework. Saanvi is a 5th year Law student at UILS, Punjab University and pursuing B.A. LLB (Hons.).
Introduction
Entrepreneurs are often known to seek external capital and support to hasten their growth. This principle is true especially in markets that are hotly contested and where fast growth can turn out to be the difference between success and failure. Yet these outside funding or cash inflows (in case of a turnover) will most likely come with strings attached, which can prove to be a pause for the entrepreneurs. Founders will likely find their influence diluted, in terms of both financial equity and their control over the board of directors. They may even find themselves out of a job if their investors decide to fire them and find a replacement.
It is every entrepreneurs dream to make his company a success and a profitable takeover could mean just that. The founders receive huge mountains of money in some cases but grass always looks greener on the other side. A founder may find himself out of the company that he carried on his shoulder since its inception or the terms of the takeover barbaric.
Between 20% and 40% of founders are not found on the same position and are typically replaced by a more experienced executive who might have more experience and is better positioned to prepare the company for the acquisition or the IPO market.
There are many reasons due to which the founders either feel the need to leave the company or are pushed out. It can range from the fact that the founder is no longer interested to carry on to him being forced to relinquish whatever control that is left with him after the completion of the takeover. It can be said that once a company has been taken over by another company the founders of the previous company find themselves in trouble. The following are some of the reasons why a founder might leave after a takeover.
They are not able to manage the transition
Entrepreneurs who are founders are inherently unique creatures. The best ones are usually critical thinkers who have a balanced amount of paranoia coupled with unyielding optimism, and an enviable work ethic. They are masters in their fields and are impeccable leaders. They have it in themselves to sell their product in the market and become its leaders as well. Founders of such nature and caliber are more than capable to do it all on their own.
But it has to be acknowledged that they love their independence and often they don’t want to continue after their company has been taken over. The founders after working for so long in a particular field grow accustomed to it and most of the times only want to do the same kind of work in the future as well. It does not matter whether it is the technical side of the work or the amazing marketing skills that are being put to use. They have usually grown accustomed to the work and mainly love doing so even after the takeover.
Due to these reasons founders who have lifted their ‘brain-child’ businesses on their shoulders for a substantial amount of time often find it difficult to fit in and step in the shoes as of the business matures. They mainly want to remain as innovators and are reluctant to take on the role of a businessman. Due to this reason many a times they plan to opt out of the business and leave the company once it has been successfully taken over.
They are not able to adjust to not being in charge
Founder is almost always the apparent leader of his team. He is used to giving orders and having complete power to make decisions as to how to move forward in the business and what is best for the company. But once a company is taken over by a larger company, this power goes away. The founder suddenly becomes a part of the company and loses its complete autonomy. He can no longer take decisions on his own and is suddenly answerable for whatever decisions that he does get to make.
The perfect example of the above mentioned reason is the recent resignation of the Instagram co-founders CEO Kevin Systrom and CTO Mike Krieger. They have given a statement that they shall be leaving Facebook. In the recent times it has also come to light the Facebook CEO Mark Zuckerburg and Systrom have not been getting along as Instagram’ autonomy has dwindled since the past few months. This shows that the founders as more often more than not able to adjust in someone else’s kingdom. The founders grow increasingly frustrated by their sudden lack of influence. All they have thought of since the inception of their brain child is its welfare. But the acquiring company’s agenda are bound to be different. They shall concern the whole venture rather than the acquired company that only constitutes as a part of the whole. The acquiring company cannot single out the welfare of the company it has taken over and that can prove to be a point of clash between the founders and the owners of the new company.
The company is no longer interested in the founder
When a company is acquired by another company sometimes the acquiring company is no longer interested to retain one or more founders. The issue can range from ideological or fundamental clash or it may turn out that the acquiring company does not see any viability to hold on to one or more than one founder. In many cases the company is only interested in acquiring another business and not the baggage in the form of the founders.
The same can be seen in the case of the very recent Flipkart-Walmart merger. Once the deal was in its last leg one of the founders of the company i.e., Sachin Bansal had to leave his own company. Walmart has acquired a 77% stake in the company. This made them the majority stakeholder in the company. Soon it became quite evident that the whole time Walmart was only interested in keeping one of the founders only (in this case that was Binny Bansal) as till this sudden revelation there were no indications that Sachin Bansal had any plans or meant to quit the company he had raised from the ground after the completion of the said deal. Walmart had always backed Binny Bansal and the company’s CEO Kalyan Krishnamurthy to manage the venture after the deal had been completed. It was also being said that Sachin Bansal was also planning to increase his stake in the company by buying more shares and solidifying his position but rather he had to sell his complete share in the company and also quit his position.
This shows us that an acquiring company usually makes such fundamental changes after the takeover deal has gone through and thus can threaten the position of the founders which can ultimately lead to the resignation or shunting out of the founder.
The founders like starting things, not running them
Entrepreneurs create, it is what they do. It does not happen to be a switch that they can easily turn it off, it is part of their DNA and a part of who they basically are. Just because they had succeeded with their start up and earn a lot of money through a takeover deal does not mean that their instinct to create also goes away. It does not mean that the founder has to take himself out of his comfort zone. If anything, once their mission to make their venture a success has completed it becomes accelerated as they suddenly have ample time to think about their next move. In many cases people will ask you to stay on board and be secured in your current situation and may present opportunities and partnership ideas. One may be asked to sit and be a part of multiple boards, help in the running of the run industry organizations, or a host a number of other things.
“My advice is to take your time making your next move post sale,” says Craig Cummings, Co-Founder of Moonshots Capital, an investment firm specializing in investing in high potential technology companies.
Due to these reasons many founders quit their companies during or after the completion of the deal to start something new. They are not interested in running or managing the new company but are ready to come up with some new ideas. They are happy with the way their company turned out to be and many also know when it is time to move on new things.
Conclusion
These are the main reasons why a founder and his company might have to part ways after it has been successfully taken over by another company. A founder should always be vigilant about the terms and condition of the contract that he is signing along with the long term repercussions of entering in such a deal. But also has to be sad that the founder should also be clear in his head in regard to the role he wants to play after such a deal has gone through and in what capacity he wants to stay or be linked with the new changes.
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