New Firm Performance and the Replacement of Founder-CEOs

In this paper we study some causes and consequences of founder-CEO replacements among a sample of 4,172 Danish startups created by single founders in 1999 and 2000. In contrast to the extant literature on VC-financed firms, replacements among firms in our sample are more likely among the worstand best-performing firms, and replacement is not unambiguously associated with better subsequent performance. Firms that replaced the founder as CEO were much more likely to fail, but the surviving firms among them grew considerably faster. We also analyze subsequent earnings and occupational choices of founders who rescinded operating control of their firms. Although subsequent founder income is increasing in the performance of their firms, those that left good firms were no more likely than others to found another business. Our results are consistent with the notion that founder-CEO replacement is driven in part by mismatches between business quality and founder ability.