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Does your investment firm need a key man clause?

On Behalf of | Mar 4, 2022 | Business Law

You have worked hard to open up your own investment firm, and you know you have the right partners and business plan in place. Do you have all the right agreements?

When you have one or two executives, partners or employees who are critical to your business operations, you should consider a key man clause as part of your contracts with each other.

What’s a key man clause?

A key man clause puts a temporary halt to any new investments by the firm or fund managers whenever one of the “critical players” in your operation (as named in the clause) suddenly either stops investing enough time in the business or cannot invest the necessary time. This could happen because the key man:

  • Becomes seriously ill, even for a short time
  • Becomes disabled due to a long-term condition
  • Takes on another project and abandons their other responsibilities
  • Becomes the subject of a criminal investigation or is arrested
  • Quits (or gets fired) for some other reason

Generally, firms will only move forward with investments that were already approved before the key man clause was invoked until they can find a proper replacement for the absent executive or employee.

Key man clauses are becoming increasingly common among investment firms because they reassure savvy investors that their money will always be in the hands of the best person to handle their investments. They also provide a clear legal avenue for a company to use when there are problems with an important figure within the company – before the company suffers too much damage.

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