How to plan for growing founder exits as the rules of the game change

Historically, founders were integral and enduring parts of the companies they founded. However, as the 1991 economic reforms led to the first wave of entrepreneur-led, professionally-managed firms, there were exits of co-founders. Ashok Arora and N.S. Raghavan at Infosys, Ashish Dhawan from Chrys Capital, Arjun Malhotra at HCL, Mindtree’s Ashok Soota, and Rakesh Gangwal at IndiGo. More recently, Akasa Air lost two of its co-founders: Neelu Khatri, who led international operations, and Praveen Iyer, who was the Chief Commercial Officer.

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The reasons for parting ways range from differences among founders, changing competitive landscape, shareholder or board pressures to oust the founder or any unforeseen circumstances like the passing away of Akasa Air’s Rakesh Jhunjhunwala. Arjun Malhotra moved out of HCL, which was then primarily manufacturing computer hardware, to found US-based Headstrong to take advantage of the emerging software development, which was then bundled with hardware and sold. Business model innovation in information technology across the world brought up new opportunities, which Malhotra was keen to leverage. 

Shalini Rahul Tiwari, Associate Professor in the area of Strategy, Innovation and Entrepreneurship at IMT Ghaziabad, says exits by partners could be hostile or friendly. The real problem, she argues, is when it is the former. Guardrails should be in place in the event of such a development. 

While most of the above exits did not, by and large, impact the future growth of the companies, the case of Akasa is different for a number of reasons, ranging from the airline being in the middle of a very turbulent time in Indian skies to the untimely passing away of its iconic principal founder, Rakesh Jhunjunwala. The fact is that a duopoly rules in Indian aviation today, and any new airline will need oodles of cash to stay the course. In the case of Rakesh Gangwal, reports suggest that different perspectives of governance standards and a breakdown of trust between one-time good friends led to parting of ways.

Recent research by Wharton School management professor Danny Kim and Minjae Kim at Rice University’s Jones Graduate School of Business found that nearly 40% of founders leave before their startups reach an initial public offering (IPO). Today, India has the third-largest start-up ecosystem in the world with more than 60,000 start-ups. Most of them are founded by more than one entrepreneur. These founder exits should be a trend to watch out for.

Reputed New Delhi-based corporate lawyer Rishi Bhatnagar, who has been associated with companies where founders have exited, says this should be expected more and more in the future because with the advent of AI and disruptive geopolitical conflicts, hyper competition with undue pressure on founders will test their appetite to play the long game. How then should companies plan for a possible period beyond the founders?     

New rules of founder exit

At the very beginning of the company, there should be clear and detailed legal documentation to plan for a situation where one or more founders move out. Further, Bhatnagar argues that swift and seamless severing of the umbilical cord of the founder even when he may continue to keep his shareholding in the company would be useful. Even though the company would have been founded on the basis of the vision of the founders, moving quickly to professionalise the organisation would help in limiting any damage if any of the founders leave the organisation.

With the advent of AI and automation, deep data insights can be drawn up so that if the founder exits, such information will help to institutionalise the process of transition in a better way. Further, there is growing recognition of the advantages of welcoming back a founder or a co-founder who has left the company should there be a need to bring him or her back. One of the most famous examples of this was when Steve Jobs was brought back again to head Apple Computers in 1997 after he was shown the door in 1985. Co-founder Ajay Singh of SpiceJet was brought back to the airline in 2010 five years after he was ousted by the Kalanithi Maran in 2010. 

Professor Shalini Tiwari also points out that when intangible assets are as important as tangible ones, unlike in the past, agreement about ownership and valuation of intellectual property would be something to be kept in mind. Further, with more and more start-ups going public detailed information of how founder exits should be managed will come out in the public and cannot be hid under the carpet unlike in earlier instances. Finally, to contain any fallout of a founder exit, if and when it happens, strategic communication becomes paramount.

Clearly, founder divorces are increasing, and pre-nuptials could save the day for the company.