We usually talk about key man insurance with our clients in the wake of a freshly closed round of institutional funding. Investors typically make their portfolio companies get key man insurance to protect their own cash. They realize that at most startups, the team is the company. It takes a truly phenomenal team to guide a startup through its inevitable pivots, re-brands, re-builds, etc, and that team is what early stage investors bet on.
Building a great team is not an easy task. Complimentary skill-sets are not necessarily enough. Having someone “hustler/hacker” combo is great and all, but its doesn’t inherently equal success. You need the perfect blend of personalities as well. While one founder should be emotional and charismatic, another should be more calculated and logical. Usually a good team will be truly complimentary in more than one aspect.
So the question is this: why is key man only important to investors? When you really look at the steps necessary to create a successful company, building the core team is definitely one of the most crucial. And when all the stars align and you assemble that perfect team that’s ready to execute, how could you not want to protect all of that hard work? What happens if that hard work is derailed before you actually close a round of funding?
Key Man insurance is designed for exactly that. If a key team member happens to suffer a fatal or disabling accident that takes him out of the equation, any momentum you’ve built up is gone. And that projected burn rate? Throw it away because it’s not even close to accurate anymore. A Key Man Life and Disability policy pays out to your company for the time your key man is out of the game or for the time it takes to find the right replacement.
This is a huge value-add because it’s particularly hard for startups to find a good replacement. Startups are founded to disrupt industries, and usually key personnel includes a veteran of the industry about to be disrupted. Finding another veteran willing to jump ship isn’t exactly easy! And finding another veteran that also fits the company culture is even harder. With Key Man insurance, you can buy your company at least 12 months to get back on track and you don’t have to stress about running out of cash in the interim.
While a Key Man policy is clearly a value-add for any startup, it may not be appropriate for every startup. It’s definitely an easy way to cut out a fair bit of risk and tilt the odds slightly more in your favor. Of course if you’re really strapped for cash, maybe hold off until that round is finalized. However, these policies are actually pretty affordable, and as long as your company is not surviving month-to-month, it’s certainly worth considering.