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I like the lean startup approach and our company has been set up to minimise its fixed costs. So we have one founder (me) "inside" but our development team, finance partner, attorney etc is "outside" and on variable cost terms. We even try to crowdsource what we can.

In raising money, I've been asked what happens to the company if something happens to me. Whilst our development team are also charged with the weekly running of our site, the marketing, customer feedback and interaction (not support desk - that's the dev company), growth channels and general management would be affected.

Surely there is a more creative approach than bringing someone else "inside" just to mitigate that risk? I know that keyman insurance is a possible option but how do others on this forum tackle it?

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2 Answers

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For smaller seed-stage startups where there's really only one person driving the vision forward, the truth is that when you think about it, if something happens to that person, realistically, the business is going to shut down. If that founder has dependents he or she will, hopefully, have life insurance, but at seed stage realistically if something happens to the founder it's over.

At later rounds (Series A, millions of dollars raised) it would be normal for the investors to ask for key man insurance, but more importantly, you'd want to have some conversations with the investor to make sure there's an understanding as to what the succession plan is.

Key man insurance is not actually intended to solve the business's problems that erupted due to the loss of a leader. It's there because normally you have a clause in the founder's vesting that allows for accelerated vesting on death. E.g. if the founder dies, his or her shares are fully accelerated. You then end up with an outsider (the estate of the founder, which might mean, his idiot child) holding a substantial number of shares, and the company will probably want (need) to buy them back. This is what the key man insurance is for.

However, the real question here is not what happens in the extremely rare case where you get hit by a bus. That is not what your potential investors are asking. They're asking... why are you still doing this alone? Why aren't you recruiting, teaching, and grooming great leaders for your company? There's a bit of a red flag when a founder wants to do everything alone.

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+1 for the red flag of doing it all. Investors want a solid team to handle their money and develop the product. Having just one person is way too risky. – Jarie Bolander May 27 '10 at 16:14
Thanks for the considered answer Joel. I agree that you don't build great companies alone. But you have to start somewhere. As much as I would have like to find someone that was in the financial position where they could work with me for equity, I didn't. Hence the variable cost model of using outsource partners to fulfill critical functions. At some point, of course, I will need to bring others in - but the question is about mitigating the keyman risk between now and then. Thanks also for the insight about the purpose of the insurance - I hadn't thought about it that way. – Stealth May 28 '10 at 11:18
A WAY better answer than mine! Thanks!!! – Warren E. Hart May 28 '10 at 12:41
up vote 1 down vote

As an investor, I'd want to see two things:

1) Keyman insurance to cover the cost of interruption and the cost of bringing in a seasoned leader to get things to the finish line.

2) Someone on the team identified as your future back fill and a thoughtful and realistic development plan to groom that individual.

This is an area where having a board that's actually involved could help manage the disruption and the recruitment of a new leader.

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