How Does D&O Insurance Protect the Founding Team?

Does My Startup Need D&O Insurance?

If you aren’t asking that question, you probably should be. D&O insurance for startups is a must. You are unlikely to find a large enterprise or company that doesn’t have D&O insurance coverage in place. And this applies to every startup that has outside investors and/or a Board of Directors.

D&O insurance is often essential to the growth and longevity of a startup. While you may not have high-powered executives or a big board of directors and stakeholders yet, your goals as a business likely involve reaching such a lofty place. In other words, to reiterate the answer to the question above (“Does my startup need D&O insurance?) is almost always yes. Perhaps the more important question is why. But let’s first take a closer look at the basics of D&O insurance.

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What is D&O Insurance?

To understand why your startup probably needs D&O insurance, we first need to appreciate what exactly D&O insurance covers. Essentially, D&O insurance is coverage for lawsuits and claims made against a company’s directors and officers. If a director or officer makes a decision that leads to claims of mismanagement, breach of contract, breach of fiduciary duty, noncompliance with laws or regulations, or other similar accusations, those individuals are the ones in the crosshairs—not the company itself.

D&O insurance kicks in when these claims occur, covering legal costs, fines, and other expenses related to a claim. In essence, it shields your directors and officers from legal or financial liability, thereby preventing a situation where an executive or board member would be expected to handle costs related to a claim personally. It creates an environment where directors and officers can lead a company and make tough decisions without worrying about gambling their personal finances and assets with every choice.

Why D&O Insurance for Startups?

For startup founders, there is no insurance product better aligned with that vision than directors and officers coverage (D&O). D&O insurance protects founders and their executive teams from risk inherent in making decisions as a leader of a company. Without this type of protection, starting a company, or serving on its board, would entail significantly more personal financial risk than it already does.

How Does D&O Protect the Founding Team?

As a founder, there are other parties (beyond yourself) worth considering – your team and your investors. For both, D&O insurance can protect assets from exposure, especially in the event the company has run out of funds to pay for legal costs and settlements. 

When building out a team, founders may find it difficult to attract top talent without D&O insurance because many leaders will not consider joining your team or board without this financial protection in place.  For example, if your startup takes on debt it can no longer re-pay, the bank may sue the company’s leadership team. In this case, D&O insurance may provide coverage, offering protection for yourself and your executive team and removing the need to dip into company assets to cover legal and settlement costs.

Furthermore, founders will find that most investors require D&O insurance as part of a term sheet for a funding round. Investors require D&O insurance as a means for managing risk across their portfolio of investments. In the event of a claim of fiduciary mis-management, your investors will want this coverage to be in place both to protect their investment (you and your startup) as well as themselves and their firm. 

Startups are known for being fast-paced businesses in which decisions are being made quickly. The most successful ones tend to have decisive leaders who follow their intuition to take advantage of vital business opportunities to stay a step ahead of the competition. Having D&O insurance allows startup leadership to be aggressive and react quickly and decisively without having to worry about the potential risks involved in every move they make. 

There’s certainly no denying that most startup founders have a lot on their plates. As a founder, the risks you decide to take and the risks you decide not to pursue matter. D&O insurance provides a startup’s executives with the protection they need to bravely and decisively lead the company on the path to fast and sustainable growth.

Interested in learning more about D&O insurance and how it can protect your business? Or check out the 5 Common Sources of D&O Liability. There is nothing more important when it comes to protecting your company. Contact the experts at HRO Resources to get started with a quote today.

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