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How Can You Replace the CEO of a Struggling Angel-Funded Company?

Question: I own shares in a company in a 5 year old private company. The company to date has raised its capital through a series of convertible notes and warrants. The company has failed to gain traction over the past few years and the CEO needs to be replaced. Do any of the debt and shareholders have any recourse? Any suggestions?

(Jason) This is a meaty question, but without more background it’s hard to give you a definitive answer. The “easy” answer is that you should look to the provisions in the debt instruments that the company issued to see if they are callable. If the debt holders agree that the CEO needs to be replaced and the debt can be called, then (even if the company cannot pay the loans back), you might have the leverage to make the change. Either that, or you can shut the company down.

One more thing to consider: who is on the board? The board can replace the CEO at any time. If the board still supports the CEO, then you really only can threaten to call your loan.

In general, it’s very difficult for a debt holder or shareholder to be able to replace the CEO. Their only recourse normally is leverage they have as stakeholders.

Keep in mind the above is the “lawyer” answer. The “business” answer is that you can rarely forcibly remove a CEO – either you have the support of the board, the employees etc. and most likely the CEO doesn’t want to stay around, or you don’t. If you don’t have this widespread support, changing out the CEO is probably not going to help turn the company around. CEO transitions are hard enough, especially if the majority of the company isn’t supportive.

June 18th, 2007 by     Categories: Exits    
  • http://www.venturelaw.blogspot.com Suzie Dingwall Williams

    You need to ask yourself why the board hasn’t taken action. Not only is the board capable of removing a CEO(as Jason notes) but that’s its primary function – to assess the performance of the CEO and management. If the CEO is implementing poor strategy, or leading lousy execution, the board should have done something about it. Period. If they haven’t, this may indicate that they don’t agree with your assessment, or they don’t care. Either way, you’re in an undesireable minority. Time to get back your money, and maybe the cost of capital.