Two directors were building a rapidly growing start-up. Both played a central role in the business, with its progress closely linked to their expertise, decisions and day-to-day involvement. Their personal financial position was also closely connected to the company’s performance.
That dependence created two distinct concerns. If a director died, there could be uncertainty over the future ownership of their shares and how the remaining shareholder would fund a purchase. Separately, losing a key director’s contribution could disrupt operations and put pressure on cash flow.
The directors needed a protection approach that addressed ownership as well as the practical cost of losing a key person. As the company grew, the arrangements would also need to remain relevant to a business whose value and financial commitments could change.
The proposed solution combined shareholder protection with key person insurance. Shareholder protection was intended to provide funds towards purchasing an insured shareholder’s shares following a covered event, while key person cover would provide a separate financial reserve to help the company respond to the loss of a director’s contribution.
We treated the ownership question separately from the operational risk. Money needed to purchase shares serves a different purpose from money needed to recruit a replacement, support cash flow or manage reduced revenue.
The shareholder protection element addressed the potential share purchase following an insured event, alongside appropriate arrangements governing how that purchase would take place. The key person element addressed disruption to the company, providing funds that could help meet recruitment costs and give the business time to respond following a valid claim.
The proposed approach also recognised that protection for a growing company needs ongoing attention. An annual review was recommended, using the latest accounts and an updated assessment of business value to consider whether the level of cover remained appropriate.
That review would also provide an opportunity to reconsider the company’s dependence on each director as the business developed. The relevant question was whether the protection continued to reflect the potential share purchase requirement and the effect of losing a director’s contribution to operations.
The resulting approach addressed both the continuity of ownership and the financial impact of losing a key director. It gave the founders a clearer basis for considering how the business could respond to an event affecting either of them.
The intended outcome was funding to support a share purchase and a separate financial reserve following a valid key person claim. The recommended annual review would help keep the protection aligned with the company’s changing circumstances as it grew.
