Key Man Insurance: VCs – You’re Doing it Wrong
COO & Co-Founder
COO & Co-Founder
Given our relationships with a lot of early stage VCs in around the country, we do a ton of Key Man Insurance policies. If you’re unfamiliar with these, Key Man policies are basically a life insurance policy that pays out to the company if anything happens to the “Key Man.” And if you’re unfamiliar with these, I’d venture to guess you’re not a Venture Capitalist. That’s a pretty safe guess because almost all VCs require Key Man insurance when investing in the early stage space.
It’s easy to see why VCs want this coverage in force. Most institutional Seed or Series A deals are bets on the team, not the current product or idea. The RoI is dependent on a core team with complimentary talents absolutely crushing an industry. Rarely does the initial idea remain unchanged during the company’s path to profitability; conversely, a great team manipulates the MVP into something amazing.
So what’s with the title of this article? Seems like early-stage VCs are doing it right by requiring Key Man coverage. Here’s where the problem lies: most VCs require Key Man Life Insurance when they should be requiring Key Man Disability Insurance. A life policy acts like a standard life insurance policy briefly described above. A policy with disability coverage, however, expands coverage to include not only fatal events, but also disabling events.
VCs should be much more worried about the threat of employment-ending disabilities rather than the threat of death. Here’s why:
Statistically, it’s much more likely for a founder to suffer a disabling accident than a fatal one. So why would you get coverage that ignores the more probable event? This is why most VCs are “doing it wrong,” and why it’s important to make sure you have the right kind of Key Man policies in place. And that’s where we come in. If you have any questions or are ready to go ahead and get a quote, you can reach out to us at (646)-854-1058, shoot an email to firstname.lastname@example.org, or go ahead and use the button below!
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Key Person Insurance can be a valuable policy for when the unthinkable happens, but it has its disadvantages. We examine Contract protection insurance (“CPI”) and other alternatives.
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Many VC investors require founders going through an institutional round of funding to get key person insurance. For those of you that are nearing the close of your first big seed or series A round, there are two routes you can go in procuring your key person insurance policy: The traditional route or the Founder Shield
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