Company Startup Funding and Key Man Insurance | Spectrum Financial Advice
Date: 11 October 2018 Author: Lewis Cable
Company Startup Funding and Key Man Insurance

Company Startup Funding and Key Man Insurance

Most company startup funding investors insist on key person insurance. Here is why investors consider company startup funding and key man insurance to be two sides of the same coin.

keyman policy cover

 

Company Startup Funding and Key Man Insurance

Funding your company start-up with the help of venture capital investors is an excellent way of getting your new business off the ground. Naturally, these investors are not ‘in it’ for the fun of it. They too, hope to gain from the investments they make – and subsequently, want to protect their investments. Key person protection is the perfect way to achieve this, as it protects businesses against the potential loss of a key staff member due to unexpected death or diagnosis of a critical illness.

Consequences of Losing Key Personnel

Most companies, large or small, have one or more staff members of key importance to the business’ success. Offering specific skills, direction or vision, such key employees could be owners, directors, designers, sales representatives or technical experts, for example.

In any case, these individuals make vital contributions to the company’s success in general and, more specifically, to the effective, efficient running of the business and ultimately potential profits.

Losing such a vital member of your personnel through an unexpected death or critical illness could have far reaching consequences, including:

  • Loss of good will/trust and subsequently key suppliers/clients
  • Inability to honour existing contracts
  • Loss of contacts vital for the generation of new contracts/business
  • Inability to make repayments on outstanding business debts/loans
  • Recruitment & training of temporary/permanent replacement staff necessitating additional expenses

Ultimately, your company could suffer significant losses in profits and could even fail altogether – which would, of course, also affect your backers’ investment. Protecting you against the loss of a key employee by paying out a lump sum that can be used to mitigate these effects, key man insurance is also a highly effective way for investors to protect their interests – which is why many of them make it a prerequisite to backing start-up companies.

Setting Key Man Cover Levels

The correct level of key person cover is usually set in cooperation between a company looking for investment and potential investors. A multitude of different insurance providers, policy types and cover levels can, nonetheless, make finding the right policy and level of cover a rather daunting prospect.

To determine the right cover level, it is essential to take several factors into consideration, including:

  • Potential profits put at risk by a key person’s death/critical illness
  • Each key individual’s level of contribution towards the business profits (net or gross)
  • Any given policy’s tax treatment

By rule of thumb, cover levels of key person insurance policies should approximately equal:

  • 2x your key employee’s contribution to your gross profits, or
  • 5x your key employee’s contribution to your net profits

Limits set by insurers are generally determined based either on your profits or your employee’s or director’s income.

Spectrum FA

Do you need key man protection to secure company startup funding? Our advisors have the necessary experience, know-how and skills to help you find the right type of policy and cover level to adequately and effectively protect both your profits and your investors’ interests. To learn more and/or discuss your requirements, please do not hesitate to contact us.

E-mail: info@spectrumfa.co.uk or speak to one of our experts on 01279 315 013 today.

Copyright Spectrum Financial Advice 2022. All Rights Reserved.

Website designed and built by Unity Online