Founders tend to think about directors and officers (D&O) insurance at one specific moment: when a lead investor's term sheet or financing documents require it before closing. But D&O matters well beyond satisfying a term sheet. It protects the people running the company, and their personal assets, when they're sued over business decisions. This guide covers how D&O works for early-stage and venture-backed companies. For a general overview, see our directors and officers insurance page.
What D&O insurance covers
D&O insurance covers claims alleging wrongful acts by directors and officers in their roles. Wrongful acts typically include alleged errors, misstatements, misleading statements, neglect or breach of duty. Coverage generally pays defense costs, settlements and judgments, subject to exclusions and limits.
Side A, Side B and Side C
- Side A protects individual directors and officers when the company can't indemnify them, for example, because of insolvency or legal restrictions.
- Side B reimburses the company when it does indemnify its directors and officers.
- Side C (entity coverage) protects the company itself, usually for securities claims for public companies. For private companies, entity coverage is often broader.
Some boards also buy a separate Side A DIC (difference in conditions) policy for extra protection for individuals.
Who sues startups?
Claims against private companies can come from:
- Investors alleging misrepresentation during fundraising
- Co-founders in disputes over equity, control or departures
- Acquirers after an acquisition, alleging misstatements
- Competitors alleging unfair practices
- Customers or vendors alleging misrepresentation
- Regulators investigating the company or its leaders
- Creditors if the company becomes insolvent
When startups typically buy D&O
- When raising institutional money: Many venture investors require D&O as a condition of taking a board seat.
- When adding outside directors: Independent directors often ask for coverage before joining.
- Before an acquisition or IPO: Coverage needs change significantly at these stages.
- When the company faces higher risk: regulated industries, consumer products, or rapid growth.
Typical exclusions
- Fraud and intentional misconduct, often only after a final adjudication
- Personal profit or illegal remuneration
- Bodily injury and property damage (covered under general liability)
- Prior and pending litigation before the policy began
- Insured vs. insured claims, such as the company suing its own officers, with exceptions
- Employment practices claims, unless EPLI is included. See our EPLI guide.
- Professional services errors, which belong under E&O. See professional liability.
Key terms founders should understand
Claims-made coverage
D&O is usually written on a claims-made basis. The claim must be made while the policy is active. A lapse can leave a gap. Ask about the retroactive date and continuity.
Change in control and run-off
When a company is acquired, coverage usually ends for new wrongful acts. A run-off or tail policy, commonly six years, covers claims later made about the pre-acquisition period. Acquisition agreements often address this.
Defense costs inside limits
Defense costs usually reduce your available limits. A long lawsuit can use up a lot of coverage.
Allocation
When a claim involves both covered and uncovered parties or issues, the policy may allocate costs. Look for favorable allocation language.
Severability
Make sure one person's misconduct doesn't void coverage for others.
Founders' personal exposure
Founders sometimes assume that forming a corporation or LLC fully protects their personal assets. Entity structure helps, but directors and officers can still be named personally in lawsuits alleging breach of fiduciary duty, misrepresentation or other wrongful acts. Company bylaws and indemnification agreements may promise to cover these costs, but that promise is only as good as the company's ability to pay. That's where Side A matters most, especially if the company runs short of cash.
Review your indemnification agreements with counsel, and make sure your D&O policy's definition of "insured persons" includes founders, officers, directors, board observers if needed, and, where appropriate, employees named in a claim.
How much coverage?
There's no universal answer. Limits depend on funding stage, board composition, investor requirements, industry and risk profile. Your investors and counsel may have expectations. A broker can show options. Avoid choosing limits based only on cost.
Related coverage startups often need
- EPLI: for wrongful termination, discrimination and harassment claims. See our California EPLI wage-and-hour guide.
- Cyber liability: for data breaches and ransomware. See cyber liability insurance.
- Technology E&O: for errors in software or services.
- Fiduciary liability: for benefit plan claims.
- Commercial umbrella: for higher general liability and auto limits. See follow-form vs. standalone umbrella.
Many insurers package D&O, EPLI, fiduciary and crime coverage in a single management liability policy for private companies.
Questions to ask before you buy
- Does entity coverage apply beyond securities claims?
- How are investor claims handled?
- Are prior acts covered?
- What are the insured vs. insured exceptions?
- How are defense costs and allocation handled?
- What's the run-off option on acquisition?
- Do investor representatives on the board have coverage?
Legal and governance resources
Startup checklist
- ☐ Check whether investors require D&O at closing
- ☐ Understand Side A, B and C coverage
- ☐ Review exclusions, claims-made terms and run-off
- ☐ Consider EPLI, cyber and E&O
- ☐ Revisit coverage before each funding round, acquisition or IPO
Contact Alishahi Insurance or call (877) 711-4545.
Frequently asked questions
Do startups need D&O insurance?
Many do, especially once they raise institutional money or add outside directors. Investors often require it.
What is Side A coverage?
Coverage for individual directors and officers when the company can't indemnify them.
Does D&O cover employment claims?
Usually not unless EPLI is included. Many startups buy EPLI separately or as part of a management liability package.
What happens to D&O coverage when a startup is acquired?
Coverage generally ends for new acts, and a run-off or tail policy can cover later claims about the pre-acquisition period.
Is D&O claims-made?
Usually yes. The claim must be made while the policy is in force.
Alishahi Insurance · 439 N Canon Dr, Penthouse, Beverly Hills, CA 90210 · (877) 711-4545 · CA License #4348151. General information only. This isn't legal, tax or financial advice or a coverage determination. Coverage depends on policy language and underwriting, and rules vary by state.