Why Founders Risk Being Ousted Post-IPO, According to Lenny Rachitsky

In a recent LinkedIn post, Lenny Rachitsky discusses critical insights from Eric Ries concerning the pressures that can lead companies toward mediocrity and the strategic steps founders can take to preserve their original mission.

Rachitsky highlights Ries’s concept of “financial gravity,” a force he describes as a structural pressure from governance that pulls organizations toward less ambitious outcomes. This phenomenon, distinct from simple greed or corporate aging, can manifest in tangible ways, impacting brand integrity, founder roles, and product strategy.

“There’s a force that pulls organizations toward mediocrity and corruption—‘the force no one controls but everyone obeys.’ It’s not greed or aging—it’s ‘financial gravity’: structural pressure from governance.”

The Peril of Shareholder Primacy

Rachitsky, drawing from Ries’s analysis, points to the stark reality of founder survival post-Initial Public Offering (IPO). According to the data presented, a significant majority of venture-backed founders are ousted within three years of their company going public.

As Lenny Rachitsky notes, “Only 20% of venture-backed founders are still CEO three years post-IPO. Follow standard VC and legal advice, and you have an 80% chance of being pushed out.” This statistic underscores a prevalent challenge where the standard advice given to founders, often driven by conventional VC and legal frameworks, can inadvertently increase the likelihood of their own removal.

The Legal Mandate of Shareholder Value

The underlying issue, as explored by Ries and relayed by Rachitsky, often stems from corporate charters and the prevailing philosophy of shareholder primacy. Many corporate charters are written to permit “any lawful activity,” which in practice often translates to a singular focus on maximizing shareholder value. This dominance of shareholder primacy, a relatively recent phenomenon in corporate history, has legal implications for board decisions.

Lenny Rachitsky points out that current legal structures can obligate boards to accept the highest offers, even if those offers might lead to the detrimental restructuring or dismantling of a company. An example cited involves the acquisition of Vectura by Philip Morris, which, according to Ries, resulted in the company’s destruction within three years.

Proactive Measures for Mission Preservation

Rachitsky emphasizes that the timing of implementing protective measures is crucial. Founders are often advised to delay such actions, with lawyers, VCs, and bankers suggesting it’s never the opportune moment. However, Ries and Rachitsky argue that early action is essential.

“The key question isn’t what protections you need—it’s when. At every stage, founders are told ‘not yet’: lawyers say wait for PMF, Series A VCs say later, growth VCs say it’ll hurt fundraising, bankers at IPO say bundle it later, then the CFO at S-1 says, ‘Sorry, too late.’ It’s never the right time—which means you have to do it early.”

The Public Benefit Corporation Solution

One of the simplest and most effective protections suggested is for companies to become a Public Benefit Corporation (PBC). This legal structure, distinct from a B Corp certification, requires companies to define and pursue a specific public benefit alongside profit. As Rachitsky explains, PBCs offer a structural safeguard.

According to Lenny Rachitsky, “The simplest protection: become a ‘public benefit corporation.’ This is different from a B Corp, and is used by companies like Anthropic, with essentially no downside. It’s a short legal filing where you define your actual purpose. It doesn’t guarantee good behavior, but it protects you if investors push you to act against your mission.”

Founders’ Actionable Steps

Ries, through Rachitsky’s post, outlines concrete actions founders can take to safeguard their company’s mission and their own roles:

• Become a Public Benefit Corporation.
• Add a director’s oath tied to the company’s mission.
• Implement mission-protective provisions, such as founder control or specific board voting requirements.

Additionally, founders might consider reserving equity for a nonprofit foundation. These measures are most effective when implemented early in a company’s lifecycle, before external investor constraints become significant.

“Principled decisions always lose on ROI spreadsheets in the short run—that’s why structural protection matters more than values statements.”

The insights shared by Lenny Rachitsky, derived from Eric Ries’s perspective, provide a compelling argument for founders to proactively embed mission protection into their company’s legal and governance structures from the outset, thereby navigating the inherent pressures that can steer organizations away from their original purpose.