Investors usually have several criteria for making an investment, but most will tell you that the management team is the most important.
The business model and market opportunity may be terrific, but, if agency owners and managers do not believe the team can execute on it, they will not invest.
However, agency owners and managers sometimes fail to consider what happens after they make an investment. What happens after the closing when a key member of the management team leaves the company?
How a life insurance agency handles key person retention may involve state licensing and business continuity rules, federal antidiscrimination rules, and a variety of carrier, distributor and errors and omissions coverage provider contract terms.
Agency owners should make sure to talk to their compliance advisors and risk management advisors when developing their key person retention programs.
Of course, if you help clients set up key person arrangements yourself, you may already be familiar with this.
If you aren’t personally involved in this type of business planning, then you may need to think about how this applies to your own life insurance agency.
In this article, I will discuss four common ways to either protect employees from leaving, or to incentivize them to stay: equity vesting restrictions, restrictive covenants, key person life insurance policies, and future transaction bonuses.
The most commonly used strategy is to impose vesting restrictions on the equity of the management team. Simply put, each team member must “earn” their equity over time through service to the company. If they leave at any time, for any reason, including death, then any of their equity that is not vested is forfeited. This structure incentivizes key team members to stay with the company long enough to fully vest, and, in the event that a key member leaves, their unvested equity can then be re-used to hire a qualified replacement.
Vesting is usually time-based, because investors want to incentivize key employees to remain with the company. For most employees, the standard vesting structure is four years, with the first 25% vesting at the end of one year (often called the “cliff”), and the remainder vesting monthly or quarterly over the remaining three years. For founders or very early employees, sometimes shorter periods are used; longer periods are more favorable to investors. Similarly, if the key employees are already subject to a vesting agreement that does not have sufficient time remaining, investors may require that the vesting period be extended, or new equity be issued with a fresh vesting term.
Other terms to consider are what happens to unvested equity if the company is sold? Does the employee forfeit all of their equity if they are a “bad actor” and are terminated for cause, or breach a non-compete or other restrictive covenant?