There was no question in my mind that allowing any of the founding team to leave would be a disaster for the company. There was also no question in my mind that scaling the organization was going to require hiring a VP of Engineering. Before the XenSource plane could take off, I needed to switch around a few parts. In hindsight, it all seems so simple.

SpiderNet (like XenSource) needs to keep its founder and hire a VP of Engineering. In both cases, a change of this sort needs to be done thoughtfully. Before I made any changes at XenSource, I needed to know more about the organization I was running. To help better make decisions, I did the following, and would recommend this to SpiderNet:

1. I engaged myself in the cadence of the business: product, sales, strategy, finance. I met with all our employees, asked questions, and tried to identify areas of weakness. But instead of stopping after I met with all our employees for the first time, I kept going, every day and every month afterwards, so that I felt what was happening in the organization. I understood our DNA, and as a result, I could make changes that were credible and respected.
2. I held everyone accountable to measurable quarterly objectives. While this may sound bureaucratic, I had each member of the team come up with three, four or five quarterly objectives. It became one of the easiest and most effective ways of managing and reporting on our business. The result was that I could objectively determine areas of strength and weakness and make necessary changes.

In the case of SpiderNet, there are several possible organizational outcomes. They are:

1. The co-founder moves to an individual contributor role (CTO, Architect, Evangelist). He may find this role more acceptable and will appreciate the suggestion that he move to a different position. This change augments and leverages his strengths as an architect or CTO. It is important for the co-founder to understand that he will continue to have a key role in shaping the company on a go-forward basis and will continue to report to the CEO. This move allows the company to hire a VP of Engineering, reporting to the CEO.
2. Keep the co-founder in the current role and hire an operational engineering VP under him. This organizational structure might work, though you need to be certain that the company can recruit a senior enough VP of Engineering, or whether the co-founder is capable of continuing to manage the entire engineering organization (even with the help). I would have the conversation with the co-founder about how, together, you will manage this structure and determine if in the future this situation is right for the company. The new engineering VP will need to feel comfortable working under the co-founder. I would have the engineering VP sit on the executive team, in any case.
3. Hire a VP of Engineering above the co-founder. Probably not a great outcome since the co-founder should have a place at the executive table and continue to have a direct reporting line to the CEO. I would consider this structure if the co-founder suggested it, though I could not imagine this situation working in the long term.
4. Leave things as they are. Bad outcome. This is the short-term easy way out and not a long-term solution. It simply moves the problem into the future. Product quality and scale in the engineering organization continue to suffer.
5. Co-founder leaves company. Really bad outcome. This is the least desirable outcome, given that the company was created by the vision and group dynamics of the founding team. Sometimes it is necessary to replace a co-founder, but only as an absolute last resort and only if the co-founder is disruptive to the growth of the company or has become a negative influence on the organization. The SpiderNet facts do not warrant co-founder replacement.

Once you have determined the optimal structure, having an open dialogue with the co-founder will be more helpful than not. Ideally, you want the co-founder to be excited about the change, and your leadership is key in making this transition seamless. Many times, a person who is struggling in a role may actually feel relieved that you’ve identified a new and better position.

Regardless of the new organizational structure, it would be advisable to ask your co-founder to help hire the new VP and stay in his current role until the new person is on board. You also want to make sure that you’ve made the right kind of communication to the company. My advice is that once the decision is made, you need to quickly communicate it to the company. It’s best for the information to come from you, rather than through the rumor mill.

Some might suggest “two-in-the-box management” as an option. I have found this structure easy to implement, but it never works. It is a nightmare to manage and is a weak organizational structure. Make the decision upfront, put in a simple line of management and don’t take the easy way out.

Remember also that your board can be helpful in a situation like this. In many cases, early board members and investors will know the founding team, and you may be able to use a specific board member to help with the transition and coaching required to effectively re-position the co-founder. Never feel bad about using your board to discuss key issues. In this specific example, your investors already highlighted the possibility of the change when they funded the company, so bringing it up with them is a relatively straightforward discussion.

As for XenSource, we went with an org structure that approximately mapped to option #1, and the rest is history.

Peter Levine is a general partner at Andreessen Horowitz. He has been a lecturer at both MIT and Stanford business schools and CEO of XenSource. Prior to XenSource, Peter was EVP of Strategic and Platform Operations at Veritas Software, where he helped grow the organization from no revenue to more than $1.5 billion, and from 20 employees to over 6,000.

Five hundred million dollars. Quite a sum–especially when XenSource is burning through $15 million a year in expenses, but generating just “a few million in revenues,” according to Citrix CFO David Henshall.

That said, Citrix expects the server- and desktop-virtualization market to balloon to $5 billion by 2011, and this acquisition will put it in a good position to carve itself a piece. Said Peter Levine, CEO of XenSource: “This move is not about competing for the 5% of the market that is already being served. It’s about steering into the 90% white space that is wide open, both at the server and in new emerging opportunities at the desktop.”

Course, that space won’t be wide open for long. Microsoft is belatedly developing its own virtualization product called Viridian. And when it finally debuts the virtualization land grab will really begin. As the research outfit 451 Group told its clients: “The virtualization market now revolves around three players: market darling VMware; Citrix’s combination of young blood and old money; and the (potential) threat of Microsoft’s Viridian, slated to ship in Q3 2008. Both Citrix and VMware have a 12-month window of opportunity before Microsoft shows its full hand.”