What is a Key Man Clause?

Explanation

It is an important clause for an investment firm that prohibits them from making investments when the key executives are not available for failing to devote time to the investments. It says if certain numbers of executives are absent, the investment firm won’t make any new investments until these key executives are replaced first.

Since managing investments is a huge task, the key executives (in charge) invest a large chunk of time. When they’re unable to do that, according to the key man clause, they should be replaced, and there can be many reasons why the executives aren’t able to perform their tasks quite well.

Now, let’s look at the possible causes for which the key executives cannot provide enough time to manage investments.

When will Key Man Clause apply?

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Among these causes, some are unavoidable causes, and some are avoidable causes.

  • Death: If the key person dies, nothing can be done about it. In that case, this clause will apply.Suffers from a long-term disability: This is also one of the unavoidable causes. What would the key executive do if she suffered from a disability or disease?The key executive has quit the job: If the executive has got a new job with better prospects, an investment firm can do nothing about it.The executive is fired: If the key executive is fired for any reason, this clause will apply.Does other tasks more efficiently: If the key executive does another task more efficiently than managing the investments, then it’s high time that she be removed and replaced by someone more responsible.The executive is convicted of a crime: This is a serious threat to an organization. What if the clients know that theAn investment manager manages the investments of others using several strategies to generate a higher return for them and grow their assets. They are sometimes also referred to as portfolio managers, asset managers, or wealth managers. They may also be considered financial advisors in some cases, but they are typically less involved in the sales aspect.read more investment managerInvestment ManagerAn investment manager manages the investments of others using several strategies to generate a higher return for them and grow their assets. They are sometimes also referred to as portfolio managers, asset managers, or wealth managers. They may also be considered financial advisors in some cases, but they are typically less involved in the sales aspect.read more is a criminal? What would the investment firm do? The Keyman clause will apply here as well.

Why it is Important?

  • A huge amount of money is at stake: To an investment firm, it’s a huge responsibility to manage investments. And they do not only manage the investments of one or two clients. The number is huge, often more than a million or a billion dollars. In that case, if the executives managing the investments aren’t sincere (or have unavoidable issues), then the investment firm must replace them.The reputation of the investment firm: If the investment firm decides not to replace them, then the efficiency of the investment firm will be questioned. And this is by no means a good thing for that particular investment firm’s prospects.Investments firm need to produce key man clause: Now, many start-ups, foundations, and investors are asking for a key man clause as their guarantee before employing an investment firm. These start-ups, foundations, and investors want to ensure that the investment firm takes the utmost care of their investments and doesn’t allow any executive to handle the investment until the person is the most qualified and eligible. Nowadays, this clause has become a mandatory clause that every investment firm must think about.

How to Implement a Key Man Clause?

If you’re running an investment firm (or an investor and wants to understand how this works), here’re three things you should keep in mind –

Add the “key man clause” to everyone under a contract with the firm.

First of all, you need to look at the contract of those making key decisions for clients’ investments. And then you need to add the key man clause in their contract. Later, it would be best to create a mandate that everyone who joins the investment firm should have this clause inserted into their contracts.

Keyman insurance:

If you’re a small firm and you really can’t take the risk of replacing your limited resources, then buying key man insurance is the right thing to do. If you’re a big firm and have ample resources and budget to replace your key decision-makers, you don’t need to buy key man insurance.

Think about the worst-case scenario

Adding the key man clause to the contract of your key decision-makers and buying key man insurance is a great starting point. But it would be best if you also prepared for worst-case scenarios. If you can write down an emergency plan and adhere to it, you will be prepared for any worst-case.

In this guide to Key Man Clause, we discuss how it works, when the key man clause applies, why it is important, and how to implement it. You may also look at the following articles to learn more –

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