Often times, Key Man Life is a requirement from institutional investment firms as part of their investment in a company. There was a similar scenario in the movie Along Came Polly if you have seen it. Some startup CEOs often wonder why this could be required. In this month’s blog, we explain why they want VCs to have it and a few nuances with underwriting.
Why Do They Ask You to Get It?
In short: Investors are looking to protect their investment in you and your company. A CEO or a technical co-founder can be absolutely critical to the future success of the company. If the success of the company largely depends on one of these individuals, it makes total sense to get Key Man Life Insurance in place. Some companies have a well-balanced founding team or leadership that is easily replaceable. If that is the case, this coverage might not be as pressing.
What Are the Typical Terms?
Most VCs would be comfortable with $1M or $2M for a typical funded startup CEO in Austin. However, it depends on the size of the investment and size of the company. In general terms, the larger the investment or revenue is, the larger the amount tends to be. Keep in mind a carrier can limit the amount of coverage to 10x the annual income for the individual. If the key person is also an owner of the company, that can be taken into consideration.
Most ask for a 10-year term since most funds expect a liquidity event in that time frame. It could be less but could also be more. However, 10 is what I write on all my startups here in Austin.
How Is This Underwritten?
Carriers will typically underwrite based on age, gender, tobacco use and general health. Most of these factors are out of your control (age, gender, height and family history). However, these are some of the factors that are controllable:
Austin is generally a healthy city, so I don’t come across this often in the tech community. Tobacco of any kind will move you to a higher risk category and translate into higher premiums. The only exception for tobacco use is a celebratory cigar for closing a round or having a baby. Keep in mind it is not a good idea to have a celebratory cigar within a few weeks of your lab test. Tobacco use of any kind in your system will increase your rates.
For the most part, this is not an issue with startup CEOs. Frankly, most are in phenomenal mental and physical health. Just know the height to weight ratio will affect your rates in case you want to work on that ‘Dad Bod’.
This might seem to go hand in hand with weight, but high sugars or high fat content in your blood stream could be a larger issue. These may be leading indicators of cardiovascular disease or diabetes. Abnormal results here could move you into a different category.
If you have seen the movie Along Came Polly, you may recall Base Jumping, Crocodile Wrestling, Shark Diving, Bear Fighting and Motor Cross Racing were all issues for Leland getting insured. This is the same as in real life and no epic speech by Philip Seymore Hoffman would get you covered.
Link (https://youtu.be/XuajBfwiuug) to see the epic performance from Sandy Lyle Played by Philip Seymore Hoffman
If you were not a big deal, your VC would not ask you to have key man life insurance. It is not weird, it’s just business. As a parting tip: be sure to choose a carrier with a good AM Best Rating that is known for ease of underwriting. This will save a lot of time on your part. If you want to take a look at some rates, click here.