D&O Insurance for Tech Startups
You may be a founder of a startup or a serial founder and you’re thinking about some of these issues regarding D&O Insurance for Tech startups
Why do I need D&O Insurance?
When should I purchase D&O Insurance?
How much D&O insurance should I purchase?
I’m going to answer those questions, coming right up
Hi, I’m Gordon Coyle and I specialize in working with startups in a variety of fields, but technology has been one of my greatest interests for years. This includes firms in software, app development, eCommerce, biotech, fintech, and more.
So maybe a good place to start is answering
What is D&O Insurance?
D&O or Directors & Officers Liability Insurance protects a company’s decision-makers from claims and lawsuits which allege certain wrongful acts in managing the company.
Claims can come from shareholders, investors, lenders, regulators, competitors, and others. The striking thing about these types of lawsuits is that they will name the company leader or leaders personally – that means you and your leadership team’s personal assets are at risk.
Often Employment Practice Liability insurance is blended in with a D&O policy to protect the firm and decision-makers from wrongful employment acts as well.
What do these types of lawsuits allege?
Here are a few examples:
- Making statements to investors may not be realistic, or maybe misleading about the company’s actual performance.
- Breach of contract claims from dissatisfied customers.
- Failure to comply with, or disregard regulatory matters.
- Claims from employees alleging wrongful employment acts such as discrimination, wrongful termination, harassment, and more.
This leads me to the next question of why D&O Insurance for Tech startups needed?
The answer is that the types of claims I just mentioned can be EXTREMELY expensive to defend against and defense is one of the key coverages that a D&O policy provides.
Now, a lot of founders may think: “I’ll never do anything wrong. I won’t make misleading statements, harass an employee, or fail to comply with regulatory statutes, etc.” And that’s great.
But allegations of wrongdoing can arise whether true or not and you’ll need to defend yourself from these claims.
Without D&O insurance you’re paying for those claims out of your own pockets or diverting valuable funding intended for your product to pay for defense costs.
Aside from the claim aspects of why you need D&O insurance, there are other reasons, such as:
D&O is critical to attracting board talent. The influential people you want on your board will not take a seat at your table unless you already have D&O insurance in place.
These advisors know the potential risks and want to protect their own net worth, so they will demand protection.
In addition to attracting board talent, potential investors will also want to make sure you have this protection in place before they will consider investing, and having D&O insurance in force before approaching investors signals that you are serious and prepared.
Lastly, if you believe you will go public in the future, having a solid D&O program in place from Day One will help your IPO process.
When Should a Startup Purchase D&O Insurance?
That’s a good question, and some of the answers above indicate that the earlier you invest in this protection, the better off you’ll be.
In my experience, once a startup gets through its organizational founding is the right time to consider coverage.
One of the key factors that make me say that is the fact that D&O insurance is a claims-made policy and while many insurers will provide coverage for acts prior to the inception of their policy, some will not, so purchasing coverage early stage makes sense.
How much D&O Insurance for Tech startups should purchase?
I would recommend a minimum limit of $1M but also look at higher limits as options. Most startups begin somewhere between the $1M and $3M limit, and a lot of that is dictated by their budgets and perceived risks.
I’m going to talk about pricing in just a moment, but there are some industries and situations where a startup’s first D&O purchase will be higher than the norm.
Rapid growth, rapid capital raising, and certain industries such as startups in the FinTech space are generally looking at higher limits at inception.
How much does startup D&O for Tech startups cost?
Okay, we’re getting to the question that’s probably really on your mind. how much is this going to cost me?
Generally speaking, we’re seeing startup D&O insurance for a $1M limit run in the range of $5,000 to $10,000.
Certain sectors which have higher risk profiles will pay more than this range. Those sectors include FinTech, Healthcare related, Cannabis, and Crypto.
For limits, higher limits, a $2M policy may be in the range of $9,500 to $19,000, and so on. As you increase the limits of coverage pricing is not exponential, rather the cost per million goes down.
Other Insurance Considerations for a Tech Startup
In addition to D&O insurance Tech Startups need to consider the following types of insurance as well:
Business Owners Insurance or a BOP Policy – to cover the basic business insurance needs of property and general liability
Tech E&O Insurance – Tech E&O Insurance covers your firm from claims which may arise alleging that errors, glitches, or problems with your product or service caused financial damages to a third party.
Cyber Insurance – Of course. Cyber is a major threat to firms of all sizes and types, and startups are not immune from cyber claims which can be costly.
Key Person Insurance – while this is not a form of insurance I sell, I do have excellent partners that do, Key person is vital life and disability insurance protecting key persons in your firm. Without those key people, your firm could suffer financial and reputational damages.
Wrap It Up
Okay, so that wraps up a discussion on D&O Insurance for Tech Startups, and really all types of startups.
If you are looking for an expert insurance broker that will help guide you through these issues and work with you to understand your risks and how to make the best buying decisions, I hope you’ll consider working with me.
Give me a call, drop me an email. When we chat, I promise no hard-core selling or gimmicks, just some conversation around how I can help your startup get up and off the ground.