In the high-stakes world of startups, it’s not the office furniture, codebase, or even the product itself that holds the most value. It’s the people. For early stage companies, especially those funded by venture capital, the death or disability of a key founder or executive could bring everything to a halt.

That’s why key person life insurance is one of the smartest risk-management tools a startup can have.

What is Key Person Life Insurance?

Key person life insurance is a policy that a company takes out on the life of a critical team member, typically a founder or CEO. The company pays the premiums and is also the beneficiary. If the insured person dies, the company receives the death benefit.

The idea is simple: if the person whose vision, expertise, and relationships are central to the company’s future is no longer around, the business has a financial cushion to recover, regroup, or, if needed, wind down in an orderly fashion.

Why It Matters in Venture Capital

Venture capital firms invest in people as much as they invest in ideas. When a VC backs a startup, they are often betting on the founder’s ability to execute, lead a team, raise additional capital, and drive the company toward an exit.

If that founder were to unexpectedly die, it could cause:

• Leadership vacuum

• Difficulty attracting future investment

• Delays in product development

• Loss of investor confidence

• In worst-case scenarios, a complete business collapse

To protect against these risks, many VCs require key person life insurance as a condition of funding. It’s not about being pessimistic—it’s about being prepared.

What Does Key Person Insurance Cover?

The policy amount will vary depending on the stage of the company and the perceived financial impact of the individual. In general, it can help the company:

• Recruit and onboard a replacement

• Pay off business loans or investor obligations

• Provide liquidity to buy out the deceased founder’s shares

• Sustain operations while the company regains stability

Who Needs to Be Covered?

Not every employee qualifies as “key.” Typically, the coverage is reserved for:

• Founders or co-founders

• Chief Executive Officer (CEO)

• Chief Technology Officer (CTO), especially in tech startups

• Other executives with unique relationships or irreplaceable skillsets

Who Owns the Policy?

The startup (the business entity) is usually the policy owner, premium payer, and beneficiary. Sometimes, founders may own policies personally in conjunction with buy-sell agreements or succession planning, but for venture-backed companies, the business typically owns the policy.

How Much Coverage is Enough?

There’s no one-size-fits-all number, but here are a few general guidelines:

• 2–3x the annual revenue or valuation (for very early-stage startups, this is symbolic and negotiated)

• An amount equal to the size of the VC investment

• Enough to cover 12–24 months of operating expenses

• Sufficient to pay down any business loans personally guaranteed by the key person

Tax Considerations

• Premiums are not tax-deductible

• Death benefit proceeds are generally tax-free to the business, so long as the premiums were not deducted.

• If the company later distributes the funds to shareholders, those may be taxable depending on how it’s structured

Beyond Life Insurance: Disability Coverage

Some policies offer key person disability insurance, which pays if the key person becomes unable to work due to illness or injury. Statistically, disability is even more likely than death before age 65 and can be just as devastating to a startup’s operations.

Final Thoughts

Startups move fast, but smart founders (and their investors) know that part of building something scalable and fundable is managing the risks. Key person insurance is one of the simplest, most cost-effective ways to ensure a company survives the unexpected.

If you’re a founder, talk to your investors and your insurance advisor about whether this kind of protection makes sense. If you’re a VC, make sure your portfolio companies have contingency plans that include key person coverage.

After all, it’s not just about backing the next big idea. It’s about making sure that idea—and the people behind it—are Set for Life.

For more information about Key Person life insurance or disability insurance or to Request a Quote, Contact Set for Life Insurance today!