Since Investors know that 2% of Founders die within 5 years do not be surprised if this happens: Your Start-Up is a success and you are meeting with potential investors for your next round of funding. All seems to be going well, when the Partner of the VC company asks you: What happens to the company if you die suddenly?
Photo: Scientific American
Great moment of awkwardness. You either hem and haw while trying to wing it or you confidently say, “We have a succession plan in place!”
If your company has a plan – Congratulations! If you do not – read on!
The foundational study on what happens if a founder dies without a succession plan in place was researched by Sasha O. Becker and Hans K. Hvide . They studied Norwegian Start-Ups from 1999 to 2015.
Their sample size was 73,500 Start-Ups. Low and behold 1,500 founders died during the first 5 years of their company’s existence. That risk is significantly higher than being struck by lightening.
Even more scary is the fact that five years later, firms where one of the founders died had 50% less in assets and sales than comparable companies that did not have such an event.
Photo: Fortune/Nicholas Monu
What is needed in a Succession Plan?
First and foremost, as part of the succession plan, make sure your partnership agreement is in writing and covers the steps needed to value the company should a partner leave or die. Keep in mind that nobody wants your co-founder’s ex husband owing 50% of her shares because you are located in a state with community property laws. Nor do you want to have to deal with various relatives who might inherit her shares when she died. Valuation, buy-out clauses and key person life insurance are a must.
For an interesting example read the story of Mr. Jeff Pino and XTI . XTI is struggling but surviving. Unfortunately in a similar situation, most companies do not.
Photo: Yukon Review
According to Fidelity Investments, a business succession plan should also address the following:
- Development, training and support of successors
- Delegation of responsibility and authority to successors
- Outside directors/advisors to bring objectivity to the process (when necessary)
- Maximizing retention of key employees through equitable compensation planning for management, family/non-family employees and active/inactive shareholders
If you do not have a succession plan in place now, I hope that this article concerned you enough to get one in place quickly. It is relatively easy to establish and it will give you peace of mind so that you can focus on growing your business.
Photo: Managers Resource Handbook