How To Protect Your Investors In Case of Untimely Death

[Leslie Zhang]

Hello,

I myself invest into a fund and have my own investors (that are not shareholders in my company) and want to know the options for protecting every individuals interest in case the lead (or only manager) faces untimely death.

Is it best to use a will, promissory note, or other recording instrument? Share certificate may not be applicable in every project so I'd like to look at all possibilities.

Thanks and Happy New Year!!
Leslie

[Bill Gulley]

This is called a "Key Man" buy out, it is funded, most economically with life insurance. Use term life insurance to cover the amounts to cover, use a Buy/Sell Agreement stating how the interests will be purchased by others and funded by the life insurance proceeds. Hint: You can also get Joint Term, insuring two lives, you do not need to be married but each must have what is called an "insurable interest" . The policy should be owned by the company and thereby a cost of doing business, premiums are deducted as expenses.

Your personal interest in and to your company can be stated in a Will, but not other interests held by other investors, that is agreed to in the above mentioned agreements.

While you can use a buy/sell agreement and agree that any purchase of any business interest be done by financing that sale, that can be done with a note, but you'll need to buy your partner out with those payments. Any partner can object and sue for the cash buy out, one reason this is successful overriding any financed amount is if the company is successful the value of the company becomes greater and that additional equity or interest may not have been satisfactorily met by any note arrangement. It can work and it can backfire if other partners decide to modify terms after you're gone!

That brings us back to insurance funding a buy/sell agreement.

A good Operating Agreement will include provisions for "events of withdrawl" and terms of a buy/sell arrangement. Good luck