I work with quite a few technology companies. Some are well established and some are in start-up mode without a single paying customer. Many were founded with capital from angel investors.
Angel investors take many shapes. They may be an uncle who has very deep pockets, a group in the community pooling their resources on what they view as a great idea, or a formal venture capital firm. Or it could be a combination of all three.
The common theme among them is an expectation of a strong return on their money. It’s not a gift and they do expect something back.
So here’s the thing. Many of these tech companies are driven by one or at most two individuals. Typically one has the technical know-how and the other has the marketing/sales/schmoozing ability. Together they have all the bases covered and the company thrives. But what happens if one of them is taken out of the picture by death or disability? In short, the investors are at much greater risk of losing their money. A ship without a captain is going to crash into land at some point. Not a pretty sight is it?
I posed this scenario to a client who is in “pitch” mode trying to raise capital. He already had one round of capital infused and is getting ready to go back for more. I asked him what would happen to the company if he passed away. He gave me an empty look and said “I have no idea. I guess it would shut down. I’m the only one who has the relationships to drive the idea right now”. That’s exactly the point!
My follow up question was “how would you feel about something that would make it easier to attract new capital? It would protect your investors (and employees) and give them some degree of comfort that the company would survive if you didn’t. And it’s a tax deductible expense to the company”. The vacant look became one of “tell me more!”
It’s called life insurance. The company pays for and is made the beneficiary of a life insurance policy on its key people. It’s a tax deductible expense to the business.
In the unfortunate event that something happens to one of the insured’s, the company receives the proceeds of the policy and has some options on how to use the cash.
- Replace the key man that passed away?
- Maintain the status-quo for things to settle down and then decide and then make some decisions ?
- Cash out and walk away?
Having a lump of cash in the bank goes a long way in making a rational decision. It gives choices, versus being backed into a corner.
The same scenario can play out if a key employee is disabled from an illness or injury and not able to work. Business overhead expense disability insurance helps cover the nut each month a key employee is out.
If you’re interested in learning more about these concepts shoot me a message via LinkedIn or my website’s Contact page.
SC (803) 771-8771
NC (828) 464-0850
As my friend Adam Lean points out in this article, via a quote from Robert Kiyosaki, it isn’t how much you make it’s how much you keep. Read his article here for the rest of the story.
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The Covenant Group
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