The D&o Insurance Startups Secret Nobody Talks About

Introduction

This guide focuses on d&o insurance startups: the moment you seat your first outside director, governance risk shifts and D&O coverage becomes a core protection. It explains when to buy D&O, how to structure Side A, Side B, and Side C, and practical steps to negotiate favorable terms without overpaying. For founders and executives, this is about safeguarding leadership, investors, and employees from avoidable risk while signaling governance maturity. Practical templates are available in the board meeting templates and startup governance guide: board meeting templates and startup governance guide. Tools like ImBoard.ai can help centralize minutes and approvals to keep coverage auditable and ready for underwriters.

When should you buy D&O?

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D&O insurance should be in place to protect non‑founder directors and officers who rely on contractual indemnification. The primary trigger is the appointment of an outside or independent director. A priced term sheet with a professional investor is a practical second trigger—buy before close. If a claim lands between signing and closing, you’ll be negotiating from a weak position unless you have binding coverage.

Key triggers and sequencing

• First outside director appointment triggers immediate D&O binding consideration.
• A priced term sheet with investors commonly requires D&O coverage before closing.
• Indemnification agreements should be approved before board votes to seat a director.

Best practice: approve indemnification agreements first, minute the indemnification, and authorize binding coverage. This sequencing matters for enforceability if litigation emerges during a financing process.

Buy at first outside director: a board-first roadmap

Think board‑first, not broker‑first. Finalize indemnification agreements as step one and add D&O coverage as financing closes or as you seat the independent director. Minute authorization to bind D&O, selected limits, and defense counsel parameters. If you recruit an outside director before a term sheet, bind a modest limit now and plan to upgrade at Series A. This approach protects directors, satisfies investors, and avoids premium inflation.

Some startups rely on tools like ImBoard.ai to centralize minutes, indemnification agreements, and delegated authorities so binding coverage is auditable and easy to present to underwriters. Use the RAPID decision model to speed approvals without chaos: Recommend (CFO/GC), Agree (CEO), Perform (CFO), Input (Chair/Lead Independent), Decide (Board). Write RAPID roles into the resolution to eliminate last‑minute confusion about who may bind coverage. Don’t let your broker draft minutes; have counsel draft minutes and let the broker confirm technical endorsements.

Pitfall: binding coverage without a clear board delegation to a named officer. Carriers will check for delegated authority during claims and can deny coverage when authority is unclear.

D&O purchasing map by board life cycle

• Independent/outside director confirmed: bind D&O with Side A/Side B/Side C, minute indemnification, coverage limits, and defense counsel selection; attach the indemnification agreement form to the minutes.
• Priced term sheet signed: confirm limits meet investor expectations and price a Side A DIC if needed.
• Foreign subsidiary formed: verify local D&O requirements; minute authority to procure local placement and cross‑reference governance checklist.
• Headcount milestones: 25–50 employees raise EPLI risk and deserve attention; 100+ employees require documented claims handling protocols and potential policy upgrades.

Example minute entry:
“Resolved: Company to bind D&O insurance at $2M aggregate limit with Side A/B/C, retention $X, authority delegated to CEO/CFO to finalize with approved broker. Board to review adequacy at Series A closing.”

Real-world note: a Series A SaaS formed a UK subsidiary and appointed a local director without a local‑admitted policy, causing mid‑incident coverage gaps and higher costs. A pre‑authorized local coverage plan would have avoided the scramble.

How to tailor Side A, Side B, and Side C

D&O coverage splits into three buckets:

• Side B reimburses the company when it indemnifies directors and officers.
• Side C covers the entity for securities claims and related exposures.
• Side A protects individuals directly when indemnification is unavailable or the company cannot indemnify.

For private startups pre‑IPO, Side B and Side C cover most routine exposures; Side A serves as a backstop when indemnification fails or insolvency looms. Ensure the policy’s insured persons definition includes directors, officers, and named observers, and consider endorsements for informal advisors if needed.

When to add Side A DIC: add Side A DIC when independent directors request it, when the company has material debt, or when runway could jeopardize indemnification. DIC can drop down in certain circumstances and may pay without a retention depending on wording—confirm retention and terms in the quote.

Investor observers vs advisors: investors named as observers can be insured if explicitly listed or endorsed. Informal advisors usually aren’t covered unless there’s a formal agreement and endorsement.

Pitfall: assuming DIC is only for IPO‑stage companies. Debt covenants and cash pressure make DIC relevant earlier.

Which clauses actually save money in a claim?

The right policy language can matter more than large limits. Four clauses significantly change outcomes:

• Priority‑of‑payments: ensures Side A is paid before Side B and Side C.
• Severability: strong severability prevents one insured’s misconduct from voiding coverage for others; ensure triggers align with adjudication outcomes.
• Hammer clause (settlement clause): seek a soft hammer like an 80/20 or 70/30 split and require insurer consultation with panel counsel.
• Insured vs insured carve‑outs: negotiate carve‑outs for derivative claims, whistleblower claims, former directors/officers to preserve defense and indemnity for internal disputes.

Negotiation script: “Our board needs explicit priority‑of‑payments, robust severability, insured vs insured carve‑outs (derivative/whistleblower), and a soft hammer at 80/20. Please confirm endorsements and wording before binding.”

Real-world example: a Series B fintech faced a derivative suit after a down round and lacked a robust insured vs insured carve‑out; defense was delayed while coverage was disputed. An endorsement fix improved outcomes at renewal, but earlier action would have helped.

Budget and limits: what boards will accept

Boards want a defensible limit tied to stage and headcount, with retention aligned to cash flow. Use the ICE framework to prioritize add‑ons and limits:

• Impact: how much downside does the feature mitigate?
• Confidence: how likely is the risk?
• Ease: how hard is implementation?

Quick budget guidance by stage (approximate, varies by market):

• Pre‑Seed/Seed (10–40 FTE): modest limits, low five‑figure annual premiums for well‑governed startups.
• Series A (40–100 FTE): higher limits, mid five‑figure premiums.
• Series B (75–200 FTE): materially higher limits, mid-to-high five‑figure premiums.

Pitfalls: overbuying at Seed to look mature, then forcing reductions at Series A; erratic programs hurt underwriting. Also avoid very low retentions that invite nuisance claims or very high retentions that strain cash during real incidents.

Note: premium and limit ranges vary by indu

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stry, jurisdiction, and broker placement. Use at least two brokers/markets for quotes.

How D&O interacts with EPLI, Cyber, and Tech E&O

D&O covers governance decisions and alleged missteps; EPLI handles employment claims; Cyber covers data incidents; Tech E&O covers product failures and professional service exposures. Show underwriters a clear incident routing map to avoid misalignment.

Incident routing examples:

• Investor dispute: D&O responds first (Side C for securities claims; Side B for indemnification; Side A if indemnification is impossible).
• Layoff backlash: EPLI responds first; D&O may be implicated if derivative claims arise.
• Ransomware: Cyber leads; D&O may be implicated for oversight failures.
• Botched client implementation: Tech E&O leads; D&O may respond if investor claims arise.

Best practice: create a one-page incident routing cheat sheet for executives to preserve coverage and reduce insurer disputes. International subsidiaries add complexity; obtain a countr

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y‑by‑country matrix and minimize gaps with local placements where required.

Two traps to avoid: coverage exclusions that undermine a robust D&O program and missing local‑admitted policies for foreign subsidiaries.

Make the decision this week: a 5-step playbook for CEOs

1. Confirm timing: appointing an independent director or signing a priced term sheet creates an immediate D&O buy window.
2. Approve indemnification agreements: finalize the form, record in minutes, and circulate to directors.
3. Build a crisp submission for underwriters: latest financials, cap table, org chart, board minutes excerpts, governance artifacts (COI policy, DOA), and a short risk narrative. Use a board portal or ImBoard.ai to attach specimen policies and speed signoff.
4. Quote smart: request Side A/B/C with essential endorsements, price a Side A DIC option, and run quotes at two limit levels (e.g., $2M and $5M). Confirm panel counsel and confirm endorsement wording before binding.
5. Minute the decision: record limits and retention, delegate binding authority to a named officer, and schedule a review at the next financing or headcount milestone.

If you want a one-page underwriting memo template to hand your broker, leverage governance documents from your governance guide or board portal.

FAQ

Q: When is the absolute earliest a startup should buy D&O insurance? A: The earliest practical trigger is the appointment of the first outside or independent director; indemnification promises create coverage needs that a policy should back.

Q: How much D&O limit should a Seed‑stage startup buy? A: Typical Seed targets are around $1M–$2M aggregate for 10–40 employees, adjusted for sector and jurisdiction.

Q: What is Side A DIC and when do I need it? A: Side A DIC protects individual directors and officers when indemnification is unavailable. Consider it when independent directors request it, when debt is material, or when runway threatens indemnification.

Q: Does D&O cover employment claims or data breaches? A: Generally no; EPLI handles employment claims and Cyber handles data incidents. D&O can be implicated secondarily in certain disputes.

Q: Can investor observers be insured under D&O policies? A: Yes, if explicitly named or endorsed. Informal advisors typically aren’t covered without a formal agreement and endorsement.

Q: What contract clauses should I negotiate to avoid coverage fights? A: Prioritize payments to Side A, robust severability, insured vs insured carve‑outs, and a soft hammer (e.g., 80/20). Obtain endorsements before binding.

Q: How should we budget for D&O as headcount grows? A: Increase limits with milestones: 25–50 employees emphasize EPLI add‑ons, 40–100 employees raise D&O limits, and Series B requires substantially higher coverage.

Q: What happens if we form a foreign subsidiary? A: Local law may require a local‑admitted policy; minute authority to procure local coverage and maintain a country matrix in your governance checklist.

Glossary

• Fiduciary duty: The legal obligation of board members to act in the company’s best interests.
• Side A DIC: Standalone coverage for individual directors and officers when the company cannot indemnify.
• Side B: Reimbursement coverage when the company indemnifies directors and officers.
• Side C: Entity coverage for securities and related claims against the company.
• Severability: Provisions ensuring one insured’s conduct doesn’t void others’ coverage.
• Priority‑of‑payments: Order of payment among Side A, B, and C in a claim.
• Insured vs insured carve‑outs: Endorsements that limit exclusions for internal disputes.
• EPLI: Employment Practices Liability Insurance.
• Crowd-inclusion terms: Coverage expansions that may apply to specific roles (e.g., observers, advisors) under endorsements.