In Defense of the Buy-Sell Agreement

MITIGATE COMPANY RISK USING KEY PERSON INSURANCE

Hey co-founders, partners, CFOs, VC funds, Angel Investors and companies with star CEOs, I’m talking to you!

You know you need to protect and insure those ownership interests. Here are some possible scenarios:

• Your hot venture fund just invested in the next great social media site.

• You and your partner are co-founders, and just secured Angel Funding as well your own seed capital into your new business.

• As CEO, you just hired the hottest CTO to develop proprietary software that will change the industry.

• Mr. CFO, part of your job is to assess risk that might jeopardize precious cash reserves.

• As a senior board member with skin in the game, your company just purchased a complimentary business with an irreplaceable CEO.

I have heard all the lame excuses. “Money is tight right now.” “CEOs are replaceable.” “We are willing to assume the risk.” Really? If these statements are true, let’s dim the lights and set the tone:

1. Maybe you have the next great idea and are entertaining multiple funding offers.
2. Perhaps you have put all your shoestring capital into your new kickass venture.
3. Possibly your company is preparing its term sheet to pitch to a group of angel investors.

If you are an investor, why are you not demanding the founders secure this safeguard for you?

Want to make your package more attractive? I strongly suggest you spend a few dollars to offer some protection for those investment dollars.

As Managing partner at Fifth Street Financial Group, I speak to C-level execs every day that are willing to roll the dice on the financial survival of their company. Recently, we spoke to a VC firm that just pulled the trigger on $15 Million of their investor’s money, but were unwilling to spend $10K annually on pure protection that would repay investors and preserve their reputation in the unfortunate case of the demise of the founders. Come on, that’s .04% per annum.

By simply securing a key person life insurance policy on owners or management who are critical to the success of the company, and also creating a buy-sell agreement if needed, you are assuring that millions of company cash reserves are available to buy those equity shares back in an unforeseen catastrophe. MITIGATE THAT RISK!!!

There are more complex uses and additional applications for key person insurance. That will be discussed in part 2.

The opinions expressed here are the blogger's and not necessarily those of the local editor's or anyone affiliated with Patch.