[Resource] Do You Insure Your Management Team?

The success of companies, especially those in the early stage, does depend a lot on the founding / management team. I cannot emphasize enough the importance of the same. An idea is only unique till the time it goes live. Post that, it becomes a public property. The Intellectual Property is only protected till the time someone has not found a reverse engineer code. The Winners’ edge is largely driven by the management’s execution capability.

Do not get me wrong. I am not saying that an idea or an IP is not important. My point is that out of the three, the execution capability is the most difficult to replicate.

My definition of execution capability is also pretty broad. Execution is not about completing a defined project in the least possible time. Business building is lot more ambiguous and open-ended. You start any business with certain assumptions but rarely do things go as planned. The process is seldom as envisioned; the directions might indicate the end product to be there. The capability to be proactive, adapt and persevere defines execution capability.

A good manager need not be told that a specific product / approach will not work. If he gets the sense, he will burn the midnight oil and create a new alternative. After all, the investor’s money is only a means to the end and not the end itself. So, he got to care more for the business than the investor. Else, what’s the point?

Certainly good managers are hard to find. Every investor would swear by his thorough diligence on the management team. If the above is true and so obvious, and a management team is so critical to the business’s success, do investors act enough to protect them? What if an unfavorable incident were to occur to the management team, is the investment secure?

Keyman insurance was devised exactly for this purpose. In the event of death, disability or critical illness to the founder, the company is paid a lump sum amount to compensate for the loss of income earning capability. The typical cost is 0.1% of the investment amount. This is less than the opportunity cost of funds lying idle for a week in a current account. This will not give 10X to the investor that he planned however would ensure that it does not become 0 because of some incident that none had control over.

Especially for growing firms, Insurance is seen as an avoidable cost. The inherent belief that they are “young and smart” is so strong that they overlook any possibility of an untoward event happening. On the contrary most established firms, who have a 15-20 year history have had a first-hand experience of a black swan insurable incident wiping out a significant amount of their wealth. Hence certain insurances like the Keyman are made mandatory.

In the end, all I would like to say is that a penny saved is a penny earned. So not taking insurance definitely adds to the bottom line. But watch out for the classic case of being penny-wise, but pound-foolish.

Guest Author: Abhishek Bondia, Business Head, Corporate, SecureNow Insurance Broker. The company advises companies to structure, procure and service insurance programs.