Directors and Officers Insurance: Do Startups Need It?
Among the many types of insurance startup companies might consider, Directors and Officers (D&O) Insurance may have the biggest impact in terms of making the company more attractive to interested investors and potential talent. D&O insurance covers specific risks not addressed by CGL policies and, when appropriately designed, will protect the personal liability of directors and managers of the business against lawsuits related to actions taken on behalf of the company. When the company is exiting the startup stage, a D&O policy may even become a necessary tool to lure much needed investor money.
Because directors and managers face unlimited personal liability if they are sued, potential investors, directors, or board members may be wary of joining a company that lacks appropriate protection. That alone makes securing D&O insurance a priority for startup companies that have taken off and are chasing top talent or seed funding in order to propel the company to new heights. D&O coverage includes defense costs for directors and managers and also covers settlements and judgments related to allegations of mismanagement or breaches of fiduciary duties in the course of carrying out company business. Coverage will typically extend to VC representatives sitting on the board as well.
For a company seeking seed funding from investors, D&O coverage will make the company significantly more attractive to investors who prefer the added safeguards afforded by an active policy. The policy will allay concerns about unforeseen regulatory actions against directors or officers for securities law violations of various types including reporting errors and failure to file certain required forms. In California, D&O insurance policies usually cover employment practices lawsuits brought by employees too.
At certain stages, D&O insurance may not even be optional. Many startups find that as a condition of closing a round of institutional funding, investors will require the purchase of D&O insurance with stated limits. Investors want to be sure that the company’s risk profile is adequately addressed, and D&O coverage is often a non-negotiable aspect of the total risk plan that investors demand before committing any money to the enterprise.
Whatever stage your business is in, whether you’re actively filling board seats or attracting institutional investment, it may be worthwhile to take a good look at D&O insurance.