Erik Prince, who founded security contractor Blackwater Worldwide and remained defiant after the company became embroiled in controversy following a deadly 2007 shooting incident in Baghdad, is stepping down as chief executive of the parent company.

The 39-year-old Mr. Prince will retain his post as chairman but move away from daily oversight of the company he started 11 years ago. The closely held venture earned more than $600 million in revenue last year, with about a third of that coming from a major U.S. State Department contract to protect diplomats in war zones.

"I'm a little worn out by the whole thing, the politics of it all," Mr. Prince said during an interview at the company's headquarters in McLean, Va. "Me not being part of the equation reduces the 'X' on the thing."

The move comes at a turning point for the security industry. The Obama administration plans to withdraw most U.S. combat troops from Iraq by next summer and the Iraqi government is assuming legal authority over Defense Department and State Department contractors.

With this new legal authority, the Iraqi government is effectively forcing the company to leave by denying it a needed license to work there. That led to the State Department's announcement in January it won't renew Blackwater's contract.

The parent company, EP Investments, in February announced it was changing its name to Xe, in part to distance the company from the stigma attached to the Blackwater moniker. Mr. Prince said the new name is derived from the abbreviation for Xenon: "It's an inert, non-combustible gas." Blackwater references were also dropped from the names of its affiliated business units.

Other management changes are being made. Joe Yorio, 44, an executive from shipping company DHL with an Army Special Forces background, will become president of Xe, replacing longtime employee Gary Jackson. Danielle Esposito, 32, a veteran employee, will become chief operating officer and executive vice president. The chief executive slot remains open and is likely to be filled by Mr. Yorio, Mr. Prince said.

"It's not an entrepreneurial start-up anymore," said Mr. Prince. "Any systems can always be made better...and that's what the new management team is there to do." Other longtime executives have also recently departed.

The company's image was forged from its high-risk guard work protecting State Department diplomats in Iraq. A growing aviation business, and a successful training operation in Moyock, N.C., have largely remained in the shadow. Without the State Department contract in Iraq, Xe will largely be out of the guard business. That puts an increasing importance on military and police training as well as flying helicopters and planes for the U.S. military, with a focus on Afghanistan.

Mr. Prince defended the company's track record, saying "we have done great work for the U.S. government." With unrivaled equipment, including a fleet of helicopters, and an American contracted guard force in Baghdad, Blackwater retained a perfect record of never having one of its State Department clients killed or injured under its protection.

Blackwater's tactics were put under a microscope after a shooting incident on Sept. 16, 2007, that left 17 Iraqis dead. Although the company said its guards acted in self defense, the U.S. Justice Department recently charged five of the men for their alleged role in the incident. They pleaded not guilty and a trial is expected early next year. A sixth guard pleaded guilty and is cooperating with the government.

Mr. Prince said his decision to step aside was motivated by wanting to spend more time with his seven children, noting that his father almost died at 42 while building an auto-parts company. Mr. Prince used part of the $1.35 billion from the sale of that business to start Blackwater in 1997.

Among other things, Mr. Prince said he is also planning to start a private-equity venture.

Looking back, Mr. Prince said he is proud of the company's record in the security business, as well as its training operations in the U.S. and abroad. "The PR challenges were far more relevant than I thought they would be," he said. "I thought we operated in a meritocracy."

Write to August Cole at august.cole@dowjones.com