Does my startup need D&O insurance?

If you aren’t asking that question, you probably should be. D&O insurance—with the “D&O” standing for “Directors and Officers”—is a form of liability insurance that many businesses carry. You are unlikely to find a large enterprise or corporation that doesn’t have D&O insurance coverage in place. As an entrepreneur, though, having D&O coverage might seem like a luxury you can’t afford yet—especially since you might not even have any directors or officers to speak of yet!

However, 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, the answer to the question above (“Does my startup need D&O insurance?) is almost always yes. Perhaps the more important question is why.

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. Executives, board members, and other high-ranking business officials have a lot of power within a company, but they also face a lot of scrutiny. 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.

The Importance of D&O Insurance for Startups

As a startup founder, your first impulse might be to adopt something along the lines of the “It couldn’t happen to me” mindset. Certainly, bigger corporations with more money in their coffers and more headline-worthy business decisions will be bigger targets for lawsuits and overall scrutiny. The more visible a company is, the more it has to watch its back. However, big corporations with their big coffers also have an advantage that your startup doesn’t: they have the cash and resources to handle lawsuits and legal claims. In other words, between paying for D&O insurance and paying to fight or settle a lawsuit, the former option is always going to be the more affordable path.

If you and your fellow co-founders are serving as the directors and officers of your startup, then having D&O insurance can give you the peace of mind to operate your business fearlessly and agilely. The stereotypical perception of a startup is a fast-paced environment where decisions are made quickly. Quick, decisive leadership is often vital in the startup space, as it allows new companies to pursue key opportunities as they come, adapt to overcome new challenges, and stay ahead of the curve. However, it also sometimes means that startup leaders aren’t considering the potential risks of every decision they make. This factor often leads to more mistakes, which can bring about the kind of legal speed bumps that D&O insurance is there to cover.

The other big reason to have D&O insurance is that, if you want to grow your business, you essentially have no choice. Are you looking for investors or venture capitalists to back your brand? If these people buy into your company, they will want to own stake and be involved on the board. To protect themselves, investors will stipulate that you must have D&O insurance before they give you a dime or sign on the dotted line. Similarly, if you are looking to hire a new CEO to steer your company toward success, that person is going to have the experience and foresight to demand the protection that D&O insurance provides.

Conclusion

In the simplest of terms, running a business is about making one difficult decision after another. Being able to make those big decisions quickly and decisively is why CEOs and business owners get paid the big bucks. However, being in that hot seat is also risky. There is always the chance that the decision you make will be the wrong one, and even small mistakes in business can snowball into significant legal issues. Perhaps you are courting investors or trying to attract a big-name industry executive to your team, or maybe you are just trying to grow into the CEO role in your own right. Either way, the leaders of your startup need to be protected, and D&O insurance is the only thing that can provide the protection you need.