What Does “Key Person” Mean in a Contract?
A clause that triggers rights or consequences if a specific important individual leaves, dies, or becomes incapacitated.
Detailed Explanation
Key person provisions recognize that certain individuals are critical to a deal or business. In investments, key person clauses may allow investors to suspend funding if key founders leave. In insurance, key person coverage compensates for loss of crucial employees.
These provisions protect against dependency on specific individuals whose departure could significantly impact the business or transaction.
Example in a Contract
“If at any time during the Investment Period, either of the Key Persons ceases to devote substantially all of their business time to the Company, the Investor shall have the right to suspend further capital calls until a suitable replacement is approved.”
Why It Matters
Key person provisions can significantly impact your flexibility. As a key person, you may be restricted in your ability to leave. As an investor or partner, these provisions protect your investment in the team.
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