What have you done to ensure your entity functions after departure/death/incapacitation of a principal?


7

This is a question that was mostly theoretical for me until now. I just found out that the owner of a small company I did freelance work tragically died recently in a small plane accident. (His wife called me today to inform me of the accident and to ask me for some help)

I created a document for my current startup venture so that my business partner or my wife can find things like contracts and other business documents so that the company can proceed in case of my early departure.

What sorts of things do you have in place should a tragedy occur? Is there a mechanism that automates your business or allows some other easy continuance of the entity?

What are the best practices? Has anyone gone through something similar (does not need to be a death - just an exit or a partner) - what was done right? What could have been improved?

EDIT

To clarify - I am not so interested in the high level generalities - I can figure most of those out - what I am interested in is how the specific details are implemented - like how does the phone bill get paid, how the server and other hosting logins are transferred, how the bank account signatures are set up, how are ownership shares transferred, etc. I presume that in many partnerships there was one person who handled many details that the other partner or founders know little about and may not even be aware of the things that go on. (For example a CTO or architect knows nothing of the business side of the company - what bank they use, etc.)

EDIT

What sort of testing/examination would be good to see that everything is in place for the incapacitation of a key person? Again, I am looking for specific details, not just high level concepts.

Legal Business Process Entity

asked Dec 1 '09 at 07:00
Blank
Tim J
8,334 points
  • You need to have passwords stored somewhere. There was a problem in a Scandinavian country where the one person that knew the master password died suddenly, and this was for some critical data. I read about the contest to break the password a few years ago. So, somewhere very secure should be a way to recover any passwords that protect data. – James Black 8 years ago
  • This is a great question. Incapacity is an even more difficult problem for those who remain than is untimely death (as if death is ever timely). – Kenneth Vogt 7 years ago
Add Comment

5 Answers


7

For my business, I have done two things. First, I have a "key employees" insurance policy for my top employee. He's not an official partner, but he is instrumental in the success of the company. If he were to pass away, the policy provides enough cash to help me recruit and hire a replacement, and it also helps cover the reduced revenue/profit that we would suffer while the position was unfilled.

Second, I have an insurance policy on myself, paid by the company, with my wife as the beneficiary. This is a multi-million dollar policy that helps ensure that my wife does not have to sell the company at "fire sale" prices in order to pay bills, etc. The policy is worth less than the company is worth (so my wife will still want to sell the company to monetize its value), but it's large enough so that there should be no time pressure to find a buyer. Ideally, a group of my employees (the other executives and managers, probably) would put together an offer to purchase the company from my wife, either by getting a loan to finance it or by paying her off with the profits from the company over time. My key employees and my wife know that this is my wish, but of course what they do when the time comes is up to them. Worst case is that she has to sell to a private equity firm or similar.

answered Dec 2 '09 at 14:17
Blank
Michael Trafton
3,141 points

4

I have thought about that question quite a lot as I have two very young children, and I wanted to have their future secure in case something happens to me (doesn't have to be death, it could be complete incapacity to work).

Two angles:

1. Personal: I have various insurances in place, so my wife is protected. If I die, she gets £1 million, which she can use some to pay off the house (for example), and find her feet again. It won't keep her financially secured for the rest of her life, but at least she doesn't have to make any quick decision about the house, the school for the children, etc...
If I am not able to work at all, I have critical illness insurance, which again, will provide us with a monthly income equivalent to what I would earn if I was working.
Without going into too much details, all of those policies are setup in a trust, which is more tax efficient (here in the uk). It can be passed to my children quite effectively.

2. Business: Nothing written here, however: my goal is to build a business that works without me. So I would in time "just" be the business owner. Which means if I die or is critically ill, it doesn't impact the day-to-day running of the business. Which means my wife could be the business owner and it wouldn't change anything.

So for the next 3 years, the goal is to remove myself from the company until the day where I can recruit a Managing Director to run the company for me. I just collect dividends.

How do I do this? Well, I prepared an organigram of the company structure with all the various positions (HR, admin, sales, marketing, operations, manager, etc.. etc...). And then I put a name in each box for who is filling in that role at the moment. When you start your company, your name is in EVERY BOX. Starting from the bottom, you remove yourself from each box, until the last box which is "THE BOSS".
Too many people make the mistake of recruiting a boss first, it's the wrong way around: you need to start from the bottom up.
So for example: First box I removed myself from: cleaning. I got a cleaner coming twice a week to clean the office. Second box: programming (I run a web development agency). I recruited an extra programmer to cover the hours I was doing. Etc.. Etc.. This gives me more time to focus ON the business, instead of keeping my head buried IN the business.

As you can see, once I am out of every box, it doesn't really matter if I am here or not. This protects my wife as well as giving me more free time to spend with my family whilst I am NOT dead!

answered Dec 3 '09 at 01:25
Blank
Guillaume Justier
786 points
  • My specific question was what framework, paperwork and other specific details were taken care of to ensure the operation of the business - like how shares are transferred, how things like telephone and web services and email and other day to day accounts and customer facing things are migrated. – Tim J 8 years ago
  • Interesting considerations, but not all relevant to the question. – Pate 8 years ago
Add Comment

2

Here's what I've done:

  1. Legally separate yourself from the center of your business entity as early as reasonable. This means a corporation of some form or at least a limited partnership rather than a sole proprietorship.
  2. Access. I regularly update a secure, encrypted file with every important password and account number vital to my life and business. A couple of key people would have access to the file if I were to be incapacitated.
  3. Surround yourself with really smart, loyal people. Hiring early helps take the sole burden of the company's success off your shoulders. I viewed these early hires as invaluable investments in the longevity of the company.
  4. Insurance. Buy a healthy term life insurance policy. Removing the cash flow issue is a great help when a principal needs to be replaced.
answered Oct 8 '10 at 02:46
Blank
Keith De Long
5,091 points
  • I have the same list. To get more explicit about your #2, I use Google docs to hold this key information. Then I share the doc with some #3 people. In my case, that means a key manager and my adult son. It does not include my wife, not because I don't trust her, but because it wouldn't help her. She is not technically adept and it would only add to her stress in the event of my death to have the responsibility. I trust the two with whom I share this vital information not just to take care of the company but also my wife. – Kenneth Vogt 7 years ago
Add Comment

2

Here is how I proceed :

About the structures You are running company A and you have a large percentage of the shares. This can be dangerous if you die, so one solution is to have a holding company (I am speaking here of an holding under French law). Any representative of the holding can speak for it at the level of company A. So Company A, which is one of the cash cows of the holding, won't have any decision problem. Of course, problems are just transferred to the holding, but hey, this is not of any concern for the company A. In fact my principle is to have 2 managers for the holding, even if they don't have the same amount of shares to avoid problems if one disappears.

Documents and projects All documents are managed electronically with a dedicated tool so that anyone that have access can know everything that must be known in order to make the company running.

For any action our policy is to share it with at least one collaborator.

All passwords and "secret" information is in a (very big) notebook which is in a safe at the bank.

All bills (electricity, phone, etc.) are paid automatically each month.

All bank accounts are authorized for 3 persons at least : the boss, me and the accounting person.

The scheme for shares transfer is known : who will inherit, or who will buy it to the inheritors.

Proof of concept ?

What sort of testing/examination would
be good to see that everything is in
place for the incapacitation of a key
person? Again, I am looking for
specific details, not just high level
concepts.

The idea is to organize a fake-but-real crisis. The scenario can be quite simple : imagine you send Alice, Bob and John to a meeting with potential clients far away and that the plane crashes.
Basically it means that you send Alice, Bob and John to a few days break, and you see what happens.
Each time one task cannot be completed (or simulated since you will not actually transfer shares for instance), you organize a meeting with the folks involved. In this meeting you will design a process that handle the case and you stop the roleplay here.
A few days or weeks later, you do that again, and again, until everything works fine.

At the end of the whole process, you should have an emergency book, with the task that must be completed to survive some events.

answered May 4 '11 at 06:49
Blank
Sylvain Peyronnet
371 points

0

Here is what I have done so far and what I have to do for the two entities I am part of:

Entity 1

(just me - sole proprietorship - desktop app for very small niche)
This product is sold through my site via paypal. No interaction with me is needed. I have configured it so that another entity can set up licenses for users, but the people who pay via paypal can get a license via my web site.

I have one more step I guess which is to direct any of my successors to make a configuration change to a script so that the software is just free with no licensing necessary.

I will also release the code to the public in the case that I am unable to continue. It makes very little money, but the people who need it really really are appreciative.

Entity 2

S Corp with another person 50/50 split
I just finished a pretty thorough document that lays out all the providers we have for things like Voip phone service, SVN, web hosting, bank accounts, etc. I put this doc in svn and told the person about it.

This should be sufficient for now.

We will eventually get insurance for each of the principals as well.

answered Dec 18 '09 at 14:35
Blank
Tim J
8,334 points

Your Answer

  • Bold
  • Italic
  • • Bullets
  • 1. Numbers
  • Quote
Not the answer you're looking for? Ask your own question or browse other questions in these topics:

Legal Business Process Entity