If you’re starting a venture capital, private equity or another type of business with a focus on investments, you and your partners or other key executives are likely the ones with investment experience and expertise that will be crucial to your business’s success. Any investment decisions will need their approval.
The reputations of these key people for making smart investments and managing them successfully will be crucial to attracting clients who will give you their money to invest. Other key people may also include those with expertise in product development, sales and other areas that are necessary for the success of an investment.
That’s where the “key man” or the less-gendered “key person” clause comes in. It’s wise to identify these people and include their roles in their contracts. Including a key person clause in your client contracts assures them that no investment decisions will be made without the input of one or more designated key persons. It also protects your business because it prohibits fund managers or others from making these decisions on their own and potentially losing a good deal of money.
Naming a replacement key person
Obviously, if one of your designated key people leaves the company, dies or takes an extended leave, you’ll need to appoint a new one – or at least remove them from your list of key people. Sometimes, however, a key person may get involved with other investments and no longer have the necessary time to devote to a specific investment. It’s best to have temporary and permanent replacement processes in place.
You can also obtain key person insurance that can help you recoup some of your losses that might occur if you suddenly lose a key person. Of course, it’s better not to rely too heavily on one person, if you can avoid it. By having a number of highly qualified key people, you can ensure your clients that there will always be key people available to make decisions that affect their return on investment.
Don’t try to do this on your own. Incorporating key person provisions into your contracts and developing procedures that help ensure continuity of business if you lose a key person requires experienced legal guidance.