You just got a term sheet. Buried in it is a key man insurance requirement.

You're closing your round. The term sheet arrives. Between the liquidation preferences and the board composition, there's a clause you've never seen before:

"The Company shall obtain and maintain key person life insurance in the amount of not less than $[X] on the life of each of [Founder A] and [Founder B], naming the Company as sole beneficiary."

This isn't boilerplate filler. Your investors are serious about it. And you need to understand what it means, why they want it, and how to comply — ideally before it becomes a closing condition that delays your round.

Why investors require key man insurance

VCs aren't being paranoid. They're doing basic risk management. Here's their math:

A fund writes a $3M check into a seed-stage company with two cofounders. The entire investment thesis — the product vision, the technical execution, the customer relationships — lives in two people. If one of them dies, the fund's $3M is at significant risk.

Key man insurance doesn't prevent the loss. It ensures the company has cash to survive it: recruit replacements, maintain operations, and give the remaining team time to stabilize.

For investors, key man insurance is the same category of basic governance as D&O insurance, IP assignment, and vesting schedules. It's a sign that the founding team thinks about risk like adults.

What the standard term sheet language looks like

Key man provisions in term sheets typically specify:

  • Who must be covered: Usually both cofounders, sometimes expanded to include a CTO or other critical hire
  • Coverage amount: Anywhere from $1M to $10M per person, depending on round size and company valuation
  • Beneficiary: The company (not the individual's family)
  • Timing: Coverage must be in place within a specified period (usually 30-60 days after closing, sometimes as a closing condition)
  • Maintenance: The company must maintain coverage for the duration of the investor's involvement

Typical coverage amounts by round

  • Pre-seed / Angel: $500K-$1M per founder (if required at all)
  • Seed: $1M-$2M per founder
  • Series A: $2M-$5M per founder
  • Series B+: $5M-$10M+ per founder

These aren't hard rules — they correlate roughly with round size and company valuation. Your specific term sheet may vary.

How to comply with the key man insurance requirement

Step 1: Understand what your term sheet actually requires

Read the exact language. Note the coverage amount per person, any specific policy type requirements (term vs permanent), the timing requirement, and whether it's a closing condition or a post-closing obligation.

If the term sheet says "prior to closing," you need to start the process immediately — approval can take 2-4 weeks.

Step 2: Talk to a startup-focused protection specialist

Don't go to a generic insurance agent. The person structuring your coverage should understand:

  • How startup cap tables work
  • What investors actually expect
  • How to pair key man insurance with a buy-sell agreement
  • Simplified underwriting for faster approval
  • Tax-advantaged structures that benefit the company

Step 3: Apply early

For coverage up to $1M, simplified underwriting (health questionnaire only, no medical exam) typically takes 1-2 weeks for approval. Higher amounts requiring full underwriting can take 3-4 weeks.

If the key man clause is a closing condition, start the application process the day you receive the term sheet. Don't let insurance become the thing that delays your round.

Step 4: Send proof to your investors

Once coverage is bound, provide your investors (or their counsel) with a certificate of insurance showing the coverage amount, the insured persons, and the company as beneficiary. This is typically all they need to check the box.

Common founder mistakes with term sheet key man requirements

Treating it as a checkbox

Getting the minimum coverage to satisfy the term sheet and never thinking about it again. Your coverage needs change as the company grows. A $1M policy from seed stage doesn't protect a Series B company with $15M in annual revenue and 80 employees.

Waiting until closing day

Underwriting takes time. If coverage is a closing condition and you apply three days before the target close date, you're gambling that everything processes smoothly. It won't always.

Not pairing with a buy-sell agreement

Key man insurance provides cash when a founder dies. A buy-sell agreement determines what happens to their equity. Without both, you have money but no legal framework for transferring shares — or you have a legal framework but no cash to execute it.

Using a generic insurance agent

A standard insurance agent will sell you a standard life insurance contract. That may technically satisfy the term sheet, but it won't be optimized for startup-specific needs: tax treatment, cash value structures, coordination with buy-sell agreements, or scalability as the company grows.

The proactive approach: Get covered before the term sheet

Smart founders get key man insurance in place before investors require it. Here's why:

  • Signals sophistication: Investors notice when founders have already handled basic governance. It builds confidence.
  • Removes a closing condition: One fewer thing that can delay your round.
  • Locks in lower rates: Insurance costs go up with age and health changes. Getting covered earlier is cheaper.
  • Protects you regardless: Even without investors, your company needs this protection. The investor requirement just makes it mandatory.

Coverage subject to underwriting approval. Insurance products vary by state. Consult your tax and legal advisors for situation-specific guidance.