Sweat equity may be the financing vehicle of choice in most communities, but more and more professional insurance advisors are helping venture capital firms and private equity firms protect human capital.

Venture capital firms supply “risk capital” for startup firms and small businesses that have a chance to do big things. Private equity firms often help managers who know and love an established business buy it from owners who have let it go to seed.

Firms making either type of deal are depending heavily on the managerial and technical expertise of the key people at the target company. Today, many of the firms are asking insurance brokers, agents and consultants about strategies for handling the risk that the key people such as business creators or star computer programmers might die or become disabled during the first 3 to 5 years after a deal is made.

In the venture capital market alone, there were about 3,000 deals completed in 2005.

The sudden loss of a key, difficult-to-replace individual can mean the loss of the entire $5 million to $10 million investment and a serious blow to the reputation of the venture capital firm.

And disability risk is not a rare kind of risk: Statistics show that a 45-year-old is 4 times more likely to be disabled for 90 days than to die and is 2.67 times more likely to be disabled for 365 days than to die.

In some cases, one large individual disability policy can be enough to protect the VC firm or the private equity firm against disability risk. In other cases, the advisor will offer the clients a group policy or a package of several individual policies.

The disability policy must be a specialized policy designed to protect the investors against the true cost of the loss of an individual’s services, not simply enough to help individuals maintain their standard of living during a period of disability.

Here are some questions an insurance professional can use to help VC and private equity firm managers understand human capital risk:

–Is your human capital investment fully evaluated in the due diligence process?

–How is your human capital investment calculated?

–Can your investments withstand the loss of the services of key individuals due to disability within the first 1 or 2 years?

–Have you made contingency plans for the disability or death of your critical talent? How will this effect your investment in the short term and long term?

The answers to these questions will lead to greater, more detailed understanding of the overall investment risk and insight as to whether insurance is needed to hedge against any unforeseen loss of investment.

Of course, professionals who go after this market must understand how VC firms and private equity firms operate, recognize the specific strategies followed by different firms, and have the sophistication to hold intelligent conversations with firm managers who are setting up intricate deals in what may be cutting-edge industries.

The insurance professionals must be working with carriers that are familiar with the demands of this specialized market and able to supply policies with high enough coverage limits to meet the investors’ needs.