How Not to Become a Victim of the Peter Principle: 3 Warning Signs Still stuck in the "king" role rather than that of the (hopefully rich) leader of growth? Look out.

Laurence J. Peter had perhaps one of the most succinct and insightful observations in the world: People rise to their level of incompetence. Called, appropriately enough, the Peter Principle , this observation springs from the premise that people are promoted based on their work in the job they are in, not the skills they would need to meet the demands of the "bigger" job.

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If you, yourself, have been in the workforce for some period of time, you've undoubtedly seen this principle in action. In fact, most of us are very good at pointing the finger at co-workers and bosses who have been promoted one step beyond their maximum level of competence. We all have a nose for the Peter Principle. More often than not, however, entrepreneurs don't have the same nose when it comes to the person in the mirror.

In an insightful article in the Harvard Business Review, Noam Wasserman, a professor of clinical entrepreneurship at the University of Southern California, wrote about how few founders of organizations remain at the helm as their companies grow. Wasserman argued that this stems from the fact that entrepreneurs must choose between being king (running the show) or being rich (giving up control to grow the company faster and increase its value).

As somebody who has been in two startups, I can confirm that his tradeoff is a real one -- and one that many don't manage well. Wasserman noted that less than 25 percent of founders of companies that end up going public are still running those companies by the time of the IPO. So, what happens along the way?

Here's what happens along the way.

The choice between being king and being rich is to a great degree driven by the inescapable fact that as successful new ventures grow, they need to move toward more complex management structures. The organization I run, HBX -- Harvard Business School's online education division -- has experienced this very transition over the last year.

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We recently moved from small startup to established enterprise. And that evolution meant that our decision-making changed from a consensus model -- where all employees met to discuss the issues of the day and decide a course of action -- to one where functional managers make many decisions without consultation (as they should) across the broader organization.

For early members of HBX, this new model was initially unsettling. They felt cut out from the decision-making. They felt disconnected from strategy. They saw the startup vibe as slipping away, like a boat drifting from a dock. They saw the organization as becoming too formal.

In fairness, some of these feelings were valid and rooted in fact. What's more, employees who weren't "founders" felt some of the same angst. Transitions from startup to going concern are never easy. But it's also true that it's often hard for founders and early employees to accept the need to move to more formality, process and division of responsibilities defined by functional expertise.

There is often a longing for "the "good old days," when everybody knew everything, and being a generalist (i.e., "jack of all trades") was valued above all else. Yet such longing is not necessarily a good thing: It can be insidious and can hamstring growth if it leads to resistance to process and specialization.

To get around this problem, as leader of an evolving company, you need to ask yourself, As an entrepreneur, how self-aware am I of my ability to determine if I am trying to be "king" long after my company has moved to a new phase?

This would be a phase where your company might need more leaders with more specialized functional skills. Further, it's a phase where it may be time to change your role for the good of the entire firm. One where you realize that perhaps you are the one falling victim to the Peter Principle.

The three things that signal that you might have that "king" problem

The above question doesn't apply just to leaders of tech startups on their way to an IPO. The reason is that it doesn't take having that many people in an organization before its increasing complexity drives this tension between control and growth, between being a king versus being the leader (hopefully a rich one) of a growing company.

How do you know when you, as that leader, might be getting in the way of growth just by hanging on to the past? I'd suggest three warning signals to watch out for:

1. You become frustrated by decisions being made (even good ones!) without your input. This is an indication that you want to be involved in everything; and it's one that can lead to you becoming a bottleneck in your own company (and ultimately limiting growth).

2. You invite way too many people to meetings. This points to a desire to include everybody in decision-making the way it was in those first early days when it was you and a few others in one room. Hanging on to those early days will ensure you stay small.

3. You continue to hire generalists. Alternately, functional experts can be incredible assets when your company is trying to execute better -- because executing better drives competitive advantage.

David Allen, an expert on productivity, wisely said that, "You can do anything -- but not everything." And those are words every entrepreneur should hang on a wall in his or her cubicle, office or -- yes -- even a garage (if the company is still small).

Related: Success Is Its Own Worst Enemy

The important thing here is that taking that phrase to heart will ward off the hard lessons of the Peter Principle, where you are the one elevated to your lowest level of incompetence. That's something you never want to happen.