Does Your Startup Need D&O Insurance?
Directors and Officers insurance isn’t just for huge, high-profile public companies. Your startup or privately-held company can and should have this coverage.
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Get a QuoteDirectors and Officers insurance isn’t just for huge, high-profile public companies. Your startup or privately-held company can and should get the same protection if it has leaders and stakeholders who interact with customers, employees, investors, competitors, and government agencies.
In fact, a smaller operation is far more vulnerable to financial devastation from litigation fees than a larger company with more money and resources.
Below are some reasons why you might small business directors and officers insurance coverage as part of your startup or private company’s insurance-buying decision process.
Why Your Startup Might Need D&O
You’ve got a brand new startup with a low profile — don’t think it’s exempt from legal troubles. Inexperienced executives are more likely to make novice mistakes such as:
- Making unrealistic promises to investors, breach of fiduciary duty, etc.
- Overlooking minor statutes in a highly regulated field
- Making uneducated HR mistakes
If your startup is venture-backed, investors may require D&O insurance as a means of protecting their investment. D&O protection also helps incentivize potential new hires, especially candidates mindful enough to expect it. This could mean the difference between hiring an average executive and hiring an experienced, top-rated leader.
D&O insurance could protect you and your colleagues from personal losses as you get your bearings. Unsavory lawsuits and legal costs can run in the six or seven digits, potentially crushing your business (and your dreams). Are you equipped to withstand that burden?
New companies usually start at $1 million of liability coverage per year, which will run you between $5k to $10k annually.
Keep in mind that the actual price of coverage is virtually impossible to estimate without knowing some key details about your business, such as anticipated revenue, number of employees and officers, the risk level of your industry, among others.
Pricing is also often influenced by your fundraising stage, how much capital you’ve raised, and the overall risk profile of your operations. As your startup grows, D&O costs may change alongside your revenue, team size, and leadership structure.
When Should Your Startup Buy D&O Insurance?
There are a lot of misconceptions about D&O insurance, especially when it comes to startups. One of the most common is the idea that a company without a board of directors does not need directors and officers insurance.
In reality, small business D&O policies can be tailored to fit the needs of a startup whether or not a formal board of directors is in place. Startups do not all follow the same path, and not every company builds its leadership structure in the same way.
For example, some startups raise money through friends and family before raising more traditionally via venture capital firms. Even if a company is less formal in its early stages, that does not mean it is protected from the same types of risks that more established or venture-backed startups face.
Even without a formal board, a company and its leadership can still be sued for breach of contract, breach of fiduciary duty, failure to comply with regulations, securities-related claims, and other business disputes. Claims can also arise from investor communications, hiring decisions, regulatory issues, or agreements with vendors and partners. In other words, D&O exposure can begin well before a startup looks like a traditional company with a large executive team.
Many smaller companies imagine D&O lawsuits as rare, high-profile cases involving major public corporations. In practice, everyday business activity can trigger claims against founders, executives, and company leaders. Fundraising, hiring, entering contracts, and making statements to investors can all create liability.
That is why it is often wise to purchase D&O coverage early. Startups and their leaders can face expensive claims in the earliest stages of the company’s life, and those costs can be especially difficult for businesses that are not yet profitable. A strong D&O policy can help protect the company and its leadership from having to absorb major legal expenses directly.
There is another reason early coverage can matter: retroactive protection. If your company later reaches a major milestone like an IPO, earlier coverage may help protect the activities that led up to the company’s IPO, which can be extremely valuable if a claim reaches back to earlier leadership decisions or disclosures.
Why Your Private Company Might Need D&O
Reasons for D&O coverage for private companies overlap with those for startups; it helps protect you from a wide variety of litigation, it attracts talent, and it provides a buffer from potentially devastating legal fees.
Surprisingly, private companies are almost as likely to face litigation losses as public ones.
Directors and officers of private companies are also liable in unique ways. Private companies tend to have executives who are involved with business activity on many levels, which puts them in a wider variety of situations where they’re accountable.
Also, private business execs often have a large amount of their personal wealth invested in the company. A huge loss for an executive could be a huge loss for the company and vice versa.
Board members without liability coverage could suffer major losses for themselves, their businesses, and their families.
The Cost of D&O for Established Private Companies
Because they vary in size, the potential range of premiums cost is larger for established private companies than it is for startups.
A mid-sized company may expect to pay roughly $14,000 to $20,000 per year for $3 million in coverage. Talk to your broker for the effect of specific risks on pricing.
When Should Established Private Companies Buy D&O insurance?
Like a startup, an established private company might use certain benchmarks to determine the timing for buying coverage (i.e. hiring talent, growth, changing locations, etc.).
Just keep in mind the bottom line: the larger your network, the more vulnerable your board members are to plaintiffs.
D&O coverage should also be revisited as your company grows. Major milestones such as fundraising rounds, rapid hiring, revenue growth, expansion into new markets, or adding senior leadership can all change your risk profile and may be good times to review whether your limits and coverage structure still fit the business.
Gone are the days when D&O was restricted to large, public companies. With the cost of premiums down, it’s pretty rare to see established private companies without D&O insurance. Nowadays, no business is immune from executive liability.
Now that you have a better understanding of D&O insurance, you may be wondering how all of this affects your business and where to go from here. If you need more help or information, you can reach out to our team of expert brokers.
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