Insurance to the Rescue for Early-Stage Startup Risk?

How to mitigate risk of an untimely startup failureMy whole career has revolved around financing entrepreneurial businesses. I have worked with thousands of companies, helping them in their quest for capital. My approach has always been to look at alternative techniques [as well as write about out-of-the-box startup funding approaches for Wharton Magazine]. One technique that has always seemed just out of my reach has been: mitigating the risk to the investor’s original capital in an early-stage company.

I have been obsessed with mitigating this risk for years. I have come up with all kinds of solutions, but none of them have ever been practical enough for the investment community. I’ve suggested ways to set up a private Small Business Administration financing program. I’ve helped to devise a way to insure against bankruptcy.

Well, folks, I think I have finally found how to do it.

The answer lies in a proprietary way to use so-called “key person” life insurance, structured to take advantage of an irrevocable asset protection trust. When properly put into place, it would protect investor capital from the high risks normally associated with early-stage companies.

I know what you are thinking: “Has Bruce turned into an insurance salesman?”

The key person insurance solution might sound confusing and convoluted, but it is real and backed by major insurance companies—and this approach will soon be available.

Have we finally found the holy grail of entrepreneurial investing? Let me tell you what it does for investors and companies looking for capital, and let you be the judge.

For investors, the key benefit is that they receive a return of 100 percent of their investment capital:

• Irrespective of how the company they invested in performs, even if it goes out of business.

• Despite what might happen to the key executives of the company.

• Even if creditors or courts try to come after the investment capital.

The key benefits to companies are:

• It takes away the final “no” from an investor, making it easier and quicker for the company to raise capital.

• It offers the company better financing terms because a major risk has been taken out of the investing equation.

• It protects the company from the loss or incapacity of key people.

Key person insurance can also:

• Work even in extremely volatile markets.

• Provide excess cash and death benefits to the company.

• Ensure that the company does not incur any debt.

OK, I could go on gushing, but you get the idea.

This concept provides investors the opportunity to realize venture capital-like returns with the peace of mind that their capital is protected.

The implications are immense. Anything that helps put more capital into the hands of qualified entrepreneurs will create more jobs and move this country forward. I am all for it.

 

 

Wharton Magazine - Background

Type to Search

See all results