Tuesday, July 1, 2008

I Almost Died - The Importance of Key Man Insurance

People often ask me:
"Paul, why do VCs seem to make such a fuss about key-man insurance?"
I've said it before and I will say it again. People matter most.
Thus, VCs often insist on key man insurance, because they fund people, not ideas. They simply want to protect their investment. VCs who insist on key man insurance feel that you, as the entrepreneur, are critical to the success of your company.
I've been very sick for the last week, and it made me realize how critical key man insurance can be. While I was out of commission, many things just couldn't get done. If my illness was more serious than just a flu, my business would have been at risk. When a founder/CEO gets hit by a bus, a lot of domain expertise and experience is lost. From an operational standpoint, it's also a huge distraction and disruption to the business.
A VC friend of mine from MIT has an interesting view on key man insurance, which I will leave you with.
"We want to make it (key man insurance) high enough to protect ourselves, but not so high as to make us want to knock you off."
Keep it in mind when VCs talk to you about key man insurance. Don't fight it, understand that VCs just want to protect themselves and think that you are important.

1 comment:

Anne said...

I believed every company should or must have this kind of insurance. We can never tell what the future bring, we don't know what will happen tomorrow insuring our key person is like giving assistant or shield to the company. The company may loss something but it will never be hard to face it because of the assurance of the keyman insurance can give.