Venture Capital Investors and Key Person Protection
Date: 27 September 2018 Author: Lewis Cable
Venture Capital Investors and Key Person Protection

Venture Capital Investors and Key Person Protection

If you have set up or expanded your business with the help of venture capital investors, they will most likely have asked you to get insurance to protect your key personnel. Here is why venture capital investors and key person insurance go hand in hand.

Spectrum FA insurance specialist discussing Key Person Insurance with a client.

Venture capital investors increasingly make key man insurance a must for the companies they back. The reason for this is simple: they want to protect their investment – and key man life and critical insurance offers them this protection by insuring companies against the potential consequences of losing a key member of staff through illness or death.

Potential Risks

Most businesses employ one or more key individuals whose vision, direction and/or expertise are vital to the company’s success. In the event of one of these key individuals being diagnosed with a critical illness or, in the worst-case scenario, unexpectedly passing away, the company’s ability to efficiently and effectively run the business and indeed its very identity could be at stake.

Losing a key member of staff through such a diagnosis or death can have a range of potentially serious consequences, including:

  • Loss of key suppliers/clients
  • Inability to generate new business/contracts
  • Inability to deliver on existing contracts
  • Inability to repay outstanding business loans/debts
  • Extra expenses due to having to recruit & train replacement staff (temporary and/or permanent)

What’s more, if these consequences were to cause a business to fail, its owners could also require additional funds to start over. All this obviously also puts the investment made by venture capital backers at risk – which is why most of them will now insist on key man protection.

Setting Up Key Man Insurance

The correct type and cover level of key person insurance is typically agreed upon by investors and the businesses they invest in working closely together.

Factors to consider here include the contribution made by any given key person to the company’s net or gross profits; how the policy will be treated in terms of tax and, of course, the potential level of profits at risk.

While cover levels can vary significantly depending on insurance providers and types of policy, the rule of thumb says cover levels for key personnel should ideally be set at:

  • 2x the key individual’s contribution to the gross profit of the company, or
  • 5x the key individual’s contribution to the net profit of the company

Insurers generally set limits based either on the company’s profits (gross or net) or the employee/director’s income. Tax liability of policy benefits must also be factored into these calculations.

Expert Assistance

Considering the sheer numbers of insurance providers offering this kind of insurance, finding the correct type and cover level to adequately protect both your profits and your venture capital backers’ investment can be a somewhat daunting undertaking. With years of experience, our advisors have the knowledge and skills necessary to help you obtain the right type of policy and a suitable cover level to effectively protect both.

If your business start-up or growth depends on finding the right type and level of key man protection, call us on 01279 315 013 today. Alternatively, you can also get in touch by e-mailing us at: One of our experts will get back to you to discuss your specific requirements as soon as possible.

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