Start-up founders are generally calculated risk takers. So, why would a founder purchase D&O insurance before funding vs after? There is no right or wrong answer but two common scenarios are outlined below.
A First-Time Founder Once Asked: What Is D&O?
The quick and dirty answer to this question is it protects your startup’s leadership which includes the executive team and board. This coverage is designed to cover claims against the company as well as the individuals in leadership roles against their actions, inaction or decisions. Obviously, there is more to a D&O policy than this, but this is a good base for the conversation.
Are You Looking to Bring on A Key Board Member or Exec?
start-ups are usually looking to attract key executives or key board members to beef up the strength of the team. The goal is to increase the chances of success and ability to fundraise. However, the bigger the name, the greater the chance D&O will be needed ASAP. Often times a key hire will agree to come on board if they get ‘personal protection’ so they can go fundraise (i.e. get D&O).
Are You Going to Raise a Significant Amount of Funding?
Seasoned founders with multiple exits may not even think twice about putting this in place from the beginning. They might use D&O as an indicator of sophistication and managing risk. The clear message it sends to potential investors is 1) there is something worth protecting and 2) the company is serious about protecting the leadership of the company (including potential investors).
Your new VC partner will likely be your newest board member. This also means it will likely be required in your term sheet.
If you are going to raise significant amounts of money, you will most likely need D&O. There is no exact science as to when a startup should purchase D&O, but I have yet to hear someone regret purchasing D&O.
Lumen Insurance Technologies is a tech-focused commercial insurance agency based in Austin, Texas. Lumen is hyper-focused on providing the technology startup ecosystem with quality commercial insurance coverage (e.g. D&O, E&O, Cyber, etc.) following a funding event and beyond.
Check us out on the web at www.lumeninsure.com to find more blog topics, general info, or to get help with finding coverage. Email us at firstname.lastname@example.org if you would like to suggest a topic for future blogs.
Connect with us and stay up to date with news from our client base by following us on LinkedIn, Twitter, and Facebook.