Arrogant CEOs to be shown the door

▶ Benchmark lawsuit against Uber signals that boards will hold imperious leaders accountable

When Uber Technologies backer Benchmark Capital filed a lawsuit against the start-up’s founder Travis Kalanick for using allegedly fraudulent means to pack the board with his loyalists, it sent a strong signal that Silicon Valley’s so-called founder-friendly era is coming to an end.

Going back years, venture firms have given Mr Kalanick and his peers outsize influence over their companies. Critics say this has led founders to take a freewheeling approach, loading up on shares for themselves and their friends and presiding over toxic workplaces.

At the heart of the Benchmark lawsuit is a provision that venture capitalists (VCs) say stands out for its deference to Mr Kalanick, and is highly unusual. It allowed the Uber founder to personally appoint three new members to Uber’s eight-seat board.

According to Benchmark, Mr Kalanick got investors to sign off on the measure “fraudulently”, among other things, hiding “gross mismanagement” at the company. Jimmy Asci, a spokesman for Mr Kalanick, said the lawsuit is “completely without merit and riddled with lies and false allegations”.

On Friday, three other investors sent a letter to Uber’s board, shareholders and Benchmark, saying the suit was designed to “hold the company hostage” and asked Benchmark to step down from the board. The investors are Sherpa Capital’s Shervin Pishevar, Yucaipa Companies’ Ron Burkle and Maverick’s Adam Leber. They didn’t immediately respond or couldn’t be reached for comment. Members of Uber’s board, not including Mr Kalanick or Benchmark’s Matt Cohler, said they were “disappointed that a disagreement between shareholders has resulted in litigation”.

Mr Kalanick is far from the only founder deemed to have abused investors’ trust in him. Other examples include Jawbone founder Hosain Rahman and Tanium chief executive Orion Hindawi, who were both given considerable autonomy or control by boards and then disappointed in their leadership. Mr Rahman led Jawbone into bankruptcy and has now launched a longshot bid to become a player in medical devices. Mr Hindawi was forced to apologise after past and current employees described abusive behavior that prompted a talent exodus.

In the 1990s, it wasn’t unusual for venture firms to replace founders as CEOs, usually because the investors believed the company needed a leader with more experience. That practice fell out of favour but has resurfaced in recent years.

Take GitHub, the developer platform. In early 2014, a former Github employee, Julie Horvath, complained that co-workers – going right up to company’s co-founder and chief executive, Tom Preston-Werner – had harassed and discriminated against her. Mr Preston-Werner ended up resigning after an internal investigation; in a more forgiving time, he might have taken a leave of absence and returned.

In an extreme case, at vegan food maker Hampton Creek, most of the board, not founder Josh Tetrick, was forced to resign after directors lost all rights due to the voting control they had allowed Mr Tetrick to amass.

But once again, venture firms are wising up.