How A CEO Can Be Fired From A Company He Or She Founded

A nightmare most founders of successful businesses may not tell you is that they can be fired from the companies they started. Wait, isn't one of the major driving forces for the younger generation toward entrepreneurship today being the ability to be their own bosses?

In the intricate world of corporate governance, the idea of a founder being fired from the very company they started and built from scratch is a perplexing phenomenon. That is why when OpenAI announced that it had fired its founder, Sam Altman on Friday, November 17, it shook the tech and corporate world to the core.

This is a phenomenon that despite being uncommon, has unfolded in several boardrooms, leaving many questioning the power of dynamics at play and in most cases, becomes one of the main reasons founders are afraid of getting into partnerships.

The founder of the company is nothing less than a creator who builds the business from scratch, making a business out of nothing. The founder has to work from the bottom level and work hard to bring the business to a higher level.

Silhouette of a board of directors during a past meeting. /FILE

Start-Up Phase

Woman or man, the founder is involved at every step in the course of the business, from carrying out the market research, finding the investors, building up various teams across the business set-up, to hiring the best talents available, all in a bid to turn his or her dream company into a resounding success.

However, for thriving businesses, a founder often comes second to the Board of Directors, shareholders, and investors. This denotes that a founder has the risk of being thrown out by the board at any point in time and for a variety of reasons, like an employee being fired from a company.

It is unfortunate that despite being the backbone of the company, the founders still run the risk of being fired from their own companies. Ironically, despite being the founding father of the business, the position of the founder is always under threat.

The ugly truth is that, once a business is well established, the founder is the not only sole head around whom the business revolves, especially if the business has gone public. Sadly, there have been numerous cases, wherein well-known business tycoons were thrown out of their own companies by tearing their business apart from them.

Shareholding, Investors and Equity

One might wonder how a founder who built his firm from the ground up is at risk of being kicked out. This is because when a business is started, the founder owns 100% of the equity of the company, meaning he or she would have been the sole decision-making authority then.

But to make the company prosper to higher levels, the founder has to bring in prospective investors. These funds are pitched in either as debts that the company will have to pay back or in the form of equity in exchange for the funds given by the investors.

Equity is often preferred as in that case the company only owes funds that are proportional to the profits earned by the company in the given time period. 

On the other hand, opting for equity would mean that the founder is giving the ownership to others, though in bits and pieces. By doing this, the founder also spares a potential seat at the table of the Board of Directors.

It would thus imply that by giving the equity, the person receiving it gets to take part in the decision-making process of the company.

Every time the founder accepts to give the equity to someone, another person gets added to the Board of Directors. This implies that more and more members get the power to vote for decisions, on par with the founder of the company.

The fact that a board of directors is established to provide strategic guidance and oversight becomes the most crucial point for a founder as this is where the seed for potential disenfranchisement is planted. If founders do not stay vigilant, the voting power can slip from their hands completely and the investors could take control. 

One critical element that can likely kickstart such a process is through shareholding. In the early stages, founders typically hold a significant portion of the company's shares, allowing them substantial decision-making power.

Suppose in the search for funds, the founder agrees to give 30% of equity to investor A, and another 30% of equity to another investor B. This leaves the founder with 40% of the equity in total and the investors together hold 60% of the equity, thus implying that the investors now have 6/10 votes on the panel of the Board of Directors.