I’ve been in the startup game for a while now. Two exits, over 200 angel investments, and a book later, I’ve seen a lot. I’m talking about the good, the bad, and the downright ugly. And let me tell you, one of the ugliest things you can face as a founder is a lawsuit. It’s a distraction you don’t need, and it can be financially devastating.
That’s where Directors and Officers (D&O) insurance comes in. I know, I know, insurance is boring. It’s the last thing you want to think about when you’re trying to build a world-changing company. But trust me on this one, it’s one of the most important things you can do to protect yourself and your company.
What is D&O Insurance, and Why Should You Care?
Think of D&O insurance as a shield for your personal assets. As a founder, you’re making decisions every day that can have a huge impact on your company, your employees, and your investors. And if someone thinks you’ve made a bad decision, they can sue you. Not just the company, but you personally.
That’s a scary thought, right? Your house, your savings, your kids’ college fund—it could all be at risk. D&O insurance protects you from that. It covers the legal fees, settlements, and judgments that can come with a lawsuit.
I remember when I was raising my first round of funding for RemoteTeam. The investors were sharp, and they asked all the tough questions. One of the first things they wanted to know was if we had D&O insurance. We didn’t. I had to scramble to get a policy in place before they would wire the money. It was a stressful experience, and it taught me a valuable lesson: D&O insurance isn’t just a “nice to have,” it’s a “must have.”
When Do You Need D&O Insurance?
The short answer is: as soon as you start taking other people’s money. Whether it’s from angel investors, venture capitalists, or even friends and family, the moment you have outside investors, you have a fiduciary duty to act in their best interests. And if they think you’ve breached that duty, they can sue you.
But it’s not just about investors. You can also be sued by:
- Employees: for things like wrongful termination, discrimination, or harassment.
- Customers: for things like misrepresentation or fraud.
- Competitors: for things like intellectual property theft or unfair business practices.
- Government agencies: for things like regulatory violations.
The list goes on and on. The bottom line is that if you’re a founder, you’re a target. And you need to protect yourself.
How Much D&O Insurance Do You Need?
This is a tough question to answer, because it depends on a lot of factors, like the size of your company, the industry you’re in, and how much money you’ve raised. But as a general rule of thumb, you should have at least $1 million in coverage.
I know what you’re thinking: “A million dollars? I can’t afford that!” But you’d be surprised. For an early-stage startup, a $1 million policy can cost as little as $5,000 a year. That’s a small price to pay for peace of mind.
And as your company grows, you’ll need to increase your coverage. When we were at MovieLaLa, we had a $10 million policy. It sounds like a lot, but when you’re dealing with big media companies and nine-figure valuations, you need that level of protection.
How to Get D&O Insurance
Getting D&O insurance is actually pretty easy. There are a lot of brokers who specialize in working with startups. They can help you find the right policy for your company and your budget.
Here are a few things to keep in mind when you’re shopping for a policy:
- Make sure it covers you personally. This is the most important thing. You want a policy that protects your personal assets, not just the company’s.
- Look for a policy that covers a wide range of risks. You want a policy that covers you for everything from investor lawsuits to employee claims.
- Don’t be afraid to negotiate. Insurance is a competitive market, so don’t be afraid to shop around and get multiple quotes.
The Bottom Line
I know I’ve thrown a lot at you, but I hope I’ve convinced you that D&O insurance is something you need to take seriously. It’s not the most exciting part of being a founder, but it’s one of the most important.
So, if you don’t have D&O insurance, make it a priority to get it. And if you do have it, take a look at your policy and make sure it’s giving you the protection you need.
Because at the end of the day, you can’t build a great company if you’re constantly looking over your shoulder. You need to be able to take risks and make bold decisions. And D&O insurance gives you the freedom to do that.
Frequently Asked Questions
How should I work through this guide?
Don't try to absorb everything in one sitting. Read through once to get the big picture, then go back and work through each section as it becomes relevant to your current challenges. Bookmark it and return to it regularly.
How often is this guide updated?
I revisit and update my guides regularly as I learn new things and as the market evolves. The core principles tend to stay stable, but specific tactics and tools get refreshed based on what's working right now.
Is this guide based on real experience?
Every recommendation in this guide comes from direct experience, either from building and selling my own companies, or from patterns I've observed across 200+ angel investments. I don't write about things I haven't personally tested.
What if I disagree with some of the advice?
Good. That means you're thinking critically, which is exactly what a good founder should do. Take what resonates, test it, and discard what doesn't work for your specific situation. No advice is universal.