In venture capital transactions, insurance requirements are a critical yet often overlooked component of the term sheet. These provisions ensure that the company has appropriate insurance coverage in place to mitigate risks that could threaten its operations, assets, or value.
For investors, insurance requirements protect their investment by reducing exposure to unforeseen liabilities. For founders, they provide essential safeguards, enabling the company to operate with greater confidence.
This article in our ‘Anatomy of a term sheet’ series explores how insurance requirements are structured in venture capital deals, common types of required coverage, and how founders and investors can align their perspectives to strike the right balance between risk mitigation and cost.
Insurance requirements in a term sheet set out the types of insurance coverage a company must maintain and the minimum levels of coverage required. These provisions are typically included in the investment agreement or shareholders’ agreement and are monitored periodically to ensure compliance.
These requirements are designed to:
Example requirement:"the company shall maintain D&O insurance with a minimum coverage of £5 million for each director, including investor-appointed directors." |
Example requirement:"the company shall maintain professional indemnity insurance with a minimum coverage of £1 million per claim." |
Example requirement:"the company shall implement a cyber risk management policy and maintain cyber insurance with a minimum coverage of £2 million." |
Example requirement:"the company shall procure key person insurance for [named individual(s)] with a minimum coverage of £1 million." |
Example requirement:"the company shall maintain comprehensive business insurance to cover operational risks, including public liability and property damage." |
Insurance requirements should reflect the company’s sector, stage, and risk profile. For example:
Investors often require minimum coverage levels to ensure adequate protection. These should be realistic, taking into account the company’s size, resources, and operational risks.
The term sheet may include provisions requiring the company to:
Founders and investors should agree on which party is responsible for identifying and procuring insurance, with founders typically taking the lead operationally but with investor oversight.
Example of insurance requirements in a term sheetClause example: "the company shall procure and maintain the following insurance policies:
The company shall provide proof of insurance to the board annually and notify investors promptly of any material claims or changes to coverage." |
Insurance premiums can be significant, particularly for early-stage companies. Balancing adequate coverage with affordability is key.
As companies grow or enter new markets, their risk profiles change, necessitating periodic reviews of insurance coverage.
Certain types of insurance, such as key person coverage for founders, may be difficult or costly to obtain, particularly for start-ups.
Founders may lack familiarity with specific insurance products, requiring education and support from advisors or investors.
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Founders' perspective |
Investors' perspective |
Motivations |
Founders view insurance as a necessary safeguard but are conscious of its costs and administrative burden. They seek flexibility to scale coverage over time. |
Investors see insurance as essential to protecting their investment and ensuring the company’s resilience against unforeseen risks. |
Preferred position |
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Risks |
Excessive insurance requirements could strain cash flow or divert resources from growth initiatives. |
Insufficient coverage exposes the company to material risks, while lax monitoring could lead to gaps in protection. |
Where they align |
Both parties benefit from insurance requirements that are practical, scalable, and reflective of the company’s stage and sector. Clear communication and regular reviews can foster alignment and minimise friction. |
Insurance requirements are a vital part of venture capital term sheets, providing a safety net that protects both the company and its investors. By tailoring coverage to the company’s specific risks, founders can build resilience while meeting investor expectations. Thoughtfully structured insurance provisions ensure that risks are mitigated without imposing unnecessary costs or administrative burdens, fostering confidence and stability as the company grows.
Read the next article in our "Anatomy of a term sheet" series, where we’ll explore information provisions and how information-sharing provisions strengthen alignment between founders and investors.
If you're navigating the complexities of venture capital term sheets or preparing your business for investment, our experienced team is here to help. Get in touch to discuss how we can support you in securing the right deal for your business.
Our 'Anatomy of a term sheet' series breaks down each critical section of a venture capital term sheet, offering technical insights and practical real-world examples to help founders with their fundraising journey.
Our aim is to demystify term sheets and empower founders and their advisors to navigate negotiations with clarity and confidence.
Anatomy of a Term Sheet OverviewChris Dyson
Partner and Head of Technology Sector
+44 (0)117 321 8054 c.dyson@ashfords.co.uk View moreRory Suggett
Partner and Head of Corporate
+44 (0)117 321 8067 +44 (0)7912 270526 r.suggett@ashfords.co.uk View moreAndrew Betteridge
Partner & Head of the Commercial Services Division
+44 (0)117 321 8063 +44 (0)7843 265362 a.betteridge@ashfords.co.uk View moreWe produce a range of insights and publications to help keep our clients up-to-date with legal and sector developments.
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