D&O Insurance for Startups. Do I need it?
Good question, and if you are a high-growth startup then the answer is probably a big yes!
That includes tech-focused firms in software development, fintech, biotech, web 3.0, Crypto, etc.
Any funded startup seriously needs to consider this protection.
Why D&O Insurance for Startups?
Well for a few reasons.
First, you’re likely to raise funds from friends, family, and outside investors.
Those investors have expectations based on the statements you’ve made about your new firm.
Miss those expectations and there’s the possibility of lawsuits alleging mismanagement, miscommunications, or other wrongful act.
Second, these types of lawsuits typically name the founder, owners, and other decision-makers in the firm for these acts.
Without D&O protection these leaders’ personal assets are at risk. Other business insurance policies don’t cover these types of claims.
Third, these types of claims are expensive to defend against and can easily run into six figures, again, just for defense. Without D&O Insurance this could wipe out company assets and quickly bankrupt a firm.
Fourth, investors aren’t the only ones who bring action against leaders.
Others who commonly are plaintiffs in D&O actions include Employees, Competitors, Creditors, & Government Regulators.
So, What is D&O Insurance?
D&O is often a misunderstood form of business insurance due to its unique coverage form. In a very basic sense D&O insurance is the personal net worth insurance protecting you, your firm’s leadership, and the entity from poor decision-making claims.
Common allegations under a D&O claim or lawsuit are mismanagement, breach of duty, failure to comply with laws and regulations, misappropriation, etc.
The crux of a D&O lawsuit is that a third party has suffered financial harm due to your firm’s leadership and they elect to take legal action.
As I’ve mentioned, this puts your founders, officers, directors, advisors, and other company leaders at risk.
D&O insurance includes the costs of defending you in a lawsuit as well, even if the grounds of that suit are baseless.
Many times I’ll speak to a founder about D&O insurance and they’ll say something like – we’d never get sued, we’re very careful about decision-making, we have checks and balances in our firm and we’re very friendly with our investors.
This is all true – until it isn’t.
And when the tides turn and you get that angry disgruntled investor lawsuit you’ll be happy you purchased D&O protection and don’t have to write a $30,000 retainer check just to respond to those allegations.
What Else Do You Need?
When startups purchase D&O Insurance they’ll often add Employment Practice Liability Insurance or EPLI to their policy as well.
EPLI protects the firm and leaders from employment-related claims like wrongful termination, discrimination, harassment, hostile work environment, etc.
Later if the company adds a 401k-type plan then we’d recommend the addition of Fiduciary Liability as well.
What does D&O Insurance for Startups Cost?
I can give you a rough estimate that most startups are paying between $5,000 to $10,000 a year for a $1 million limit of D&O insurance.
Slightly more when EPLI is included.
Keep in mind this is a rough estimate. pricing is based on several factors like your particular industry vertical, asset size, revenue, number of employees, geography, etc.
Firms in the Cannabis and Crypto space for example will pay significantly more due to the claims experience in those industries.
How do you get D&O Insurance?
There are two main channels to buy D&O protection today.
The first is working with an independent broker, like me, who represents a wide variety of D&O insurers and can help you make the best decision based on the wide variety of choices we have access to.
The second channel is working with a direct-to-consumer market and commonly today those are tech-enabled firms that claim that they can get this policy done faster and easier for you. Some as fast as 5 minutes. And that’s great.
My concerns here with the direct-to-buyer model is
Who is the expert helping you make the buying decision?
Are you getting any choices, or are you buying just that seller’s one product?
If you have a claim, who is your advocate going to be?
And lastly, and this is a big one – several direct D&O sellers are selling a non-rated insurance company’s product.
Meaning there’s no rating agency testifying to the financial strength or ability of that insurer? It’s something we just won’t do.
Yes, my opinion here is of course biased, but working with an independent broker like me usually means better results, more choices and options, and an expert relationship that you can rely on after the sale.
To get started let’s have a conversation.
I hope you found value in this post!
