Growing private companies often get to a point where they need to take a more serious look at their directors and officers (D&O) insurance program. What is that point? If you can answer yes to any of the following questions, then you’re probably already there:
- Are you a large private company with complex risks?
- Have you grown the company to a size that makes you more interesting to regulators and plaintiffs?
- Are you facing Series C or D rounds of funding?
- Are you within a couple years of your IPO?
- Is your company valued at $50 million or more?
D&O insurance responds when your company’s directors and officers are involved in a lawsuit and named personally in their capacity as your directors or officers.
However, there are several additional benefits for private companies that come with having a robust D&O insurance plan. Let’s look at eight benefits now.
- Attracting new directors: D&O insurance makes board seats more attractive.
- Venture capital requirements: Some venture capital firms require that their portfolio companies purchase D&O insurance as a condition of the firm’s investment.
- Emerging risks: The risk landscape can change rapidly. For example, risks associated with secondary sales platforms for private company stock are fairly new. D&O insurance can help mitigate some of these risks.
- Regulatory exposures: Private companies are subject to government regulation. Paying the cost of an attorney to defend an officer or director against a government enforcement action is expensive. Depending on the circumstances, D&O insurance policies can help with these expenses.
- Bankruptcy: When a corporation is insolvent, only D&O insurance stands between creditor and/or trustee suits and the personal assets of the directors and officers.
- Mergers & acquisitions: If you’re considering M&A, it’s best to purchase D&O insurance as soon as possible (ideally before you are in discussions to be acquired.) Current directors and officers will want to be indemnified if they are sued after the deal closes. An acquiring company may be unwilling to do this. D&O insurance can provide a helpful backstop.
- Shareholder lawsuits: When a private company’s number of shareholders (without board representation) grows, the risk that a disgruntled shareholder will file suit against the directors and officers also grows. D&O insurance is designed to respond to this risk.
- IPO considerations: If your company is considering going public, think about placing D&O insurance while still private. By doing so, you can build a relationship with public company insurers and avoid having to make any warranty statement for at least the first layer of insurance the company intends to rely on after going public.
Each year, Woodruff Sawyer publishes a guide for private companies to navigate the complexities of D&O insurance.
In our 2018 guide, you will learn:
- What exactly is D&O insurance
- Key D&O insurance exclusions
- How to structure your D&O insurance program
- How to choose limits
- How D&O changes on your path to an IPO
- Things to look for when choosing a broker
If you have questions on how to protect your directors and officers during your next phase of growth, I encourage you to contact Woodruff Sawyer.
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