Why Venture Capital Firms are Purchasing D&O Insurance

VC Firms Can Protect Against Management Liability Exposures

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Venture Capital and Private Equity firms face a wide range of management liability and D&O exposures, including:
  1. Board representation
  2. Fund management
  3. Employment Practices Liability
  4. Deal evaluation
  1. Claims from portfolio firms
  2. Fiduciary exposures
  3. Suits by shareholders of portfolio firms
With today’s emphasis on corporate transparency and accountability, an organization’s directors and officers face a countless number of exposures. A D&O policy protects against management liability exposures within your portfolio firms.
1. Board Representation Exposures - Claims filed against portfolio company board members can originate from various sources: company, competitors, suppliers, vendors, governmental/regulatory agencies, company employees and management as well as other board members.
2. Fund Management Exposures - Investors expect due diligence, good faith, loyalty, care, and other fiduciary duties from general partners. Lawsuits can be filed when it appears that any of these responsibilities have been breached.
3. Employment Practices Exposures - Employment-related claims rear their ugly heads. Members of the portfolio company’s management team may have been replaced post-deal, creating potential claims for wrongful termination. These claims can also implicate the “controlling” investors or venture capital firms and their representatives.
4. Deal Evaluation Exposures - When a prospective deal collapses, portfolio companies assert allegations seeking damages from lost financing opportunities and the misuse of their proprietary and confidential information, i.e., the portfolio company was “strung along” by the venture capital firm.
5. Suits by shareholders of portfolio firms. Shareholder Lawsuits: When a private company’s number of shareholders (without Board representation) grows, the risk that a disgruntled shareholder will file suit against the directors and officers also grows. D&O insurance is designed to respond to this risk.
6. Fiduciary Exposures - Claims for a breach of fiduciary duties are an exposure that venture firms should review. Examples of such claims include: Alleged fraudulent inducement of the investors to enter into a partnership agreement. Causing a company to enter contracts or take actions detrimental to certain classes of investors.
7. Suits by Partners or Shareholders of Portfolio Firms - Venture Capital firms are subject to wide variety of claims involving violations of federal and state securities laws. These claims typically allege that the venture capital firm made fraudulent statements, misrepresentations, or omissions of material facts in connection with the purchase or sale of securities.
There is no such thing as a “standard” D&O policy. It’s important to review any gaps in your current D&O insurance policy with an expert.