Does Your Startup Need D&O Insurance?

There are many misconceptions about the purpose of D&O insurance and the right time to buy this policy, especially when talking about growing startups. One of the most common misconceptions is that startups that do not have a board of directors do not need directors & officers insurance.

Small business D&O insurance policies exist and can be created to fit the exact needs of your startup, regardless of whether you have put together a board of directors or not. The fact is that startups come in all forms and not every startup organizes its leadership and its company structure in the same exact way.

For example, some startups could raise money through friends and family without having to put together a board of directors and raise money in a more traditional way via venture capital firms. Despite the fact that these types of startups are financing themselves in a different way and are organizing themselves less traditionally, that doesn’t mean that they are safe from the many risks that VC-funded startups face.

Even if you don’t have a board of directors in place, your company and its leadership can still be sure for breach of contract, breach of fiduciary duties, failure to comply with regulations and laws, security fraud, and numerous other types of business claims.

Whether considering startup D&O or private company D&O insurance, younger and smaller companies often envision lawsuits filed against directors and officers as some type of huge media events in which large corporations are being sued for millions of dollars because of corporate espionage or some other type of complicated and spectacular crime.

In reality, an incredible number of things that you and your leadership do in your day-to-day business dealings could potentially trigger a lawsuit against your directors and officers. Entering into contracts with partners such as vendors, suppliers, and manufacturers, for example, can lead to such lawsuits.

Even the processes of hiring new employees and pitching your startup’s business plan in an effort to raise funds can lead to a variety of lawsuits that can prove to be both arduous and expensive.

This is why it really is never too early to purchase a D&O policy, simply because you and your directors and officers are exposed to a large variety of potentially expensive risks even in the earliest life cycles of your organization.

D&O insurance is especially important for smaller startups that have yet to become profitable because it enables these types of companies to cover the costs of litigation without having to divert any of their own funds. If you have a good D&O policy in place, the insurer will be able to cover almost all costs related to lawsuits filed against your leadership.

Here’s another reason why purchasing D&O insurance earlier is a great idea: retroactivity.

Imagine your company is going public, which opens it up to a whole new world of risk. If you purchase your D&O coverage early, the retroactivity of the insurance covers all of the activities that led up to the company’s IPO, which could be incredibly important.