Giving Up Control Is Key to Creating Value

In the two years after Lew Cirne founded Wily Technology in 1997, he assembled an experienced executive team, hired 50 employees, and raised two rounds of VC funding. But he also had to relinquish three of five board seats to his investors, who promptly decided that Cirne should be replaced by a CEO with a stronger business background. CA eventually bought the firm for US$375 million — a far larger haul than Cirne could have brought in, as he admitted. But the founder was still chagrined about the early decisions he made that led to his ouster.

Whether in Silicon Valley or any of the other startup hubs around the world, Cirne’s dilemma is all too familiar. To grow their firms, founders desperately need financing, skilled employees, and the kind of “social buzz” that makes investors reach for their checkbooks. But the more investors or key hires who come aboard to provide much-needed resources, the more autonomy the company founder must surrender. Founders face a trade-off between retaining control and increasing the value of a young firm.

According to a new study of more than 6,000 high-potential U.S. startups that launched between 2005 and 2012, how one navigates this early-stage founder’s dilemma has a profound impact on the firm’s long-term value. The more power retained by founders, the author discovered, the less valuable their companies are.

For every additional position of power a founder occupies (being both CEO and chairman, for example, as opposed to controlling just one of those roles), the company’s value decreases by between 17.1 percent and 22 percent. The author also found that startups whose founders retain an additional level of power see a 35.8 percent to 51.4 percent decrease in the amount of financing they raise, depending on which variables he used to measure a founder’s control.

But this trade-off effect kicks in only after three years, at that delicate stage in which founders’ technical expertise or visionary outlook typically become less crucial to growth than the resources a firm has attracted.