Key Man Insurance

In the midst of negotiating a series B round of financing for our company, one of the term sheet requirements was to get key man insurance on the founders. The reason for getting the insurance is that theoretically the business would suffer a significant and potentially life threatening loss if one/all of the founders snuffed it. Wikipedia has a fairly concise definition here. The amount is fixed, so it will be interesting going through the exercise of determining how much coverage is needed (how much am I worth vs. other founders). I'm kidding of course, but do want to know how the amount is determined.

On a side note, this insurance policy in no way covers the buy out of my shares from my estate in the event of my death. I'm told by my attorneys that this is not often done because if the company is still a good bet than the estate would be better off with the shares. I'm not sure this makes complete sense, since the investors want the company to take out Key Man insurance on the assumption that the company may not be as good of bet in the event of a founders death, but I'll mull that one over for a bit.

One thing that has become more popular is the creation of a vesting trigger in the event of death. I've heard this mentioned recently after a company co-founder nearly perished. The next company they started, they put this trigger in place. Certainly makes sense to me.

Term Sheet Terms: On Good Terms

We've been actively fund raising again, so I think it's time to revisit some of the terms you will encounter in term sheets. Term sheet terms are largely market driven and reflect the availability of capital during the time you raise funds. If you're raising money in a pullback environment (like I did back in 2001-2002) time frame the terms are going to be fairly conservative and not very friendly to existing share holders. If there are a lot of investments being made, then money supply exceeds demand creating competition for deals and friendly terms to existing share holders. I think we've swung back to somewhere in the middle from the lean times of my last company and so, happily, terms are looking better these days.

The interesting negotiating terms are:

• pre-money valuation
• option pool size
• liquidation preferences
• dividend
• seniority to previous round
• no shop clause
• redemption
• drag along rights
• anti-dillution

I'll post on a few of these in the coming days