Directors and officers (D&O) insurance often isn't top of mind for a small founding team. That usually changes when outside investors arrive. Board members, especially those representing a fund, want to know their personal assets are protected before they sign on.
This guide covers what D&O is, when startups typically need it, and what investors expect to see.
What D&O insurance covers
Directors and officers can be held personally liable for decisions they make on behalf of the company. D&O insurance pays for defence costs, settlements and judgments when they are sued for alleged wrongful acts in that role, such as mismanagement, misrepresentation or breach of duty.
Most D&O policies have three parts:
- Side A covers individual directors and officers when the company can't or won't indemnify them, for example because it is insolvent.
- Side B reimburses the company when it indemnifies its directors and officers.
- Side C, also called entity coverage, covers the company itself for certain claims. For private companies this is usually broader than for public companies.
Many private company policies also bundle employment practices liability (EPL) and fiduciary liability, which are worth considering as your team grows.
Who actually sues startups
Shareholder claims get the attention, but most D&O claims against private companies come from elsewhere:
- Investors who allege they were misled about the company's performance or prospects
- Employees over wrongful dismissal, discrimination or disputes about stock options
- Regulators investigating privacy, securities or employment matters
- Creditors if the company runs into financial trouble
- Competitors and customers alleging unfair practices or misrepresentation
- Acquirers after an M&A deal, over representations made during the sale
Even claims without merit can cost a lot to defend. For an early-stage company, those costs can drain runway quickly.
When startups need D&O
Common triggers include:
- Your first priced round. Investors taking a board seat will usually require D&O as a condition of joining.
- Adding independent directors. Experienced board members rarely join without it.
- Hiring quickly. More employees mean more employment-related exposure.
- Raising debt. Lenders and venture debt providers may ask for it.
- Preparing for an acquisition or IPO. Run-off coverage and a review of your limits become important.
What investors expect
Investors generally look for:
- A limit that fits your stage. Seed-stage companies often start at a lower limit and increase it with later rounds. Your broker can help you benchmark against similar companies.
- Broad Side A protection for individual directors, sometimes with a dedicated excess Side A policy at later stages.
- Board-friendly wording, such as a severability clause so one person's misconduct doesn't remove coverage for the others.
- Coverage confirmed before closing, often with a certificate or binder delivered as part of the deal.
D&O is claims-made
D&O policies respond to claims made while the policy is in force, not when the alleged wrongful act happened. A gap in coverage or a late purchase can leave earlier decisions uninsured. Buying before you need it, and renewing without lapses, matters.
How Summit can help
We place D&O for Canadian startups and scaling technology companies, often alongside cyber and technology E&O. We can help you align coverage with your round timeline, answer investor questions and adjust your program as the business grows. If you're scaling quickly, our mid-market team can help structure larger programs.