Why Venture Capital Investors Insist on Key Man Insurance
Date: 6 September 2018 Author: Lewis Cable
Why Venture Capital Backers Insist on Key Man Insurance

Why Venture Capital Backers Insist on Key Man Insurance

Venture capital backers and key man insurance increasingly go hand in hand. Here is why venture capital backers insist on key man insurance.

business keyman insurance

Start-Up Growth in the UK

In recent years, UK companies wanting to expand and develop, have been looking for alternative funding into their business.

This can include backing from venture capital investments, in the form of a venture capital trust (VCT), enterprise investment scheme (EIS) or a seed enterprise investment scheme (SEIS).

The aim is that money is invested into a business, where investors will receive a return on their investment and the business will use this funding to help grow their business.

This growth does, however, also mean key person insurance is becoming ever more important, as many investors now consider this type of business protection as a prerequisite for “signing on the dotted line”. Here is why key person insurance is so important to investors.

Why Venture Capital Backers Insist on Key Man Protection

Most companies have one or several individuals whose expertise, vision and direction are vital to the business becoming a successful enterprise. Should one of these individuals – or key staff members – become seriously ill or die, the very identity and, of course, the ability to effectively and efficiently run the company could be at risk of being lost.

There are many ways in which a critical illness or death of such key personnel could affect a business, including, for instance:

  • Loss of key clients
  • Failure to deliver on agreed contracts
  • Failure to generate new contracts/business
  • Inability to repay debts
  • Additional cost due to the need for temporary staff and/or recruitment/training of new permanent staff

Should the business fail as a result, there is also the potential of incurring additional costs to start up again. Naturally, investors wish to protect their investments – and key man life and/or critical illness insurance can achieve this by protecting companies against the consequences of losing a key member of staff.

Getting Key Man Insurance

Putting in place key man insurance at the correct level is usually achieved in cooperation between investors and the company invested in. With so many different insurance companies offering this type of insurance, finding the most suitable type and level of cover can, however, be a daunting prospect.

Factors that must be considered include the potential profits at risk and the contribution an individual to be insured makes to the company’s gross or net profits, as well as the policy’s tax treatment.

As a rule of thumb, the level of cover for a key member of staff should be set at:

  • 5x the individual’s contribution to the business’ net profits, or
  • 2x the individual’s contribution to the business’ gross profits

Limits are generally set by insurers based on either the director/employee’s income or the company’s profits. Higher levels of cover may be available depending on the amount of venture capital that has been invested into the business.

Expert Advice

Our advisors have the necessary skills, knowledge and experience to ensure you receive the most suitable advice on the right type of policy and level of cover to effectively and adequately protect your company’s profits and, of course, your backers’ investment. If key man protection is the key to your business’ start-up or expansion, give us a call on 01279 315 013, e-mail us at info@spectrumfa.co.uk or please use our online contact form.

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