TL;DR: Once outside capital enters your company, every board-level decision carries personal liability for the people making it. D&O insurance covers directors, officers, and executives against claims of mismanagement, investor misrepresentation, and regulatory violations. Most institutional investors require it before closing a round. Limits should scale with your funding stage, and the policy structure matters as much as the coverage itself.
It’s all too common for a startup founder to find surprises in a term sheet. A funding round will be nearly complete when, somewhere in the investor covenants, you find line items like: “the company shall obtain directors and officers liability coverage within 90 days of closing.” Suddenly, startup insurance isn’t just an abstract future decision but a closing requirement with a hard deadline.
But what is
directors and officers (D&O) liability insurance and what’s the difference between one policy and another? Understanding why it’s required and the consequences of choosing the bare minimum puts you in a much stronger position, especially if you’re trying to bind coverage during diligence.
Quick Facts: Directors and Officers Liability Explained
D&O insurance protects covered individuals and companies by paying legal fees—including defense costs, settlements and judgments—on their behalf.
A D&O claim can reach personal assets of founders, executives and independent directors, regardless of whether the company indemnifies them.
D&O insurance policies protect against a broad set of claimants, which can include investors, employees, vendors, regulators and competitors.
Coverage limits should scale with funding stage; seed-stage companies typically need $1M to $2M, while Series A may require $3M to $5M, and so on.
D&O does not cover every legal exposure that leadership may face; working with an independent insurance agent helps you build coverage that meets your real needs.
What Does D&O Insurance Cover?
Directors & officers insurance (D&O) protects the personal assets of company leadership (and their spouses) against legal claims alleging they committed wrongful acts. Covered claims typically include:
Mismanagement allegations
Breach of fiduciary duty
Misleading statements made to investors
Regulatory violations
More than 1 in 4 private companies have reported experiencing a D&O loss within a three-year period. And only about 23% of those claims come from shareholders. The rest come from employees, vendors, customers, regulators, competitors and other third parties.
You don’t need public shareholders or institutional investors to face a D&O claim. Every hiring decision, vendor relationship, regulatory filing and even pitch deck representation opens founders and executives up to personal financial losses from the earliest days of a company’s life.
Horizontal bar chart showing who actually brings D&O claims against private companies, per the Chubb 2016 Private Company Risk Survey. Customers lead at 54%, followed by vendors and suppliers at 37%, government and regulators at 27%, competitors at 27%, and shareholders at 23%.
The Three D&O Coverage Sides: A, B, and C
Most D&O policies are structured around three insuring agreements, commonly referred to as Sides A, B and C. All three typically share a single combined policy limit.
Side A: Individual Coverage
Side A protects directors and officers directly when the company either cannot or will not indemnify them. The most common scenario is insolvency: if your startup goes bankrupt during a dispute, the company can’t pay your legal costs but Side A can.
But insolvency isn’t the only risk here. Suits alleging breach of duties, equity compensation discrepancies and misrepresentation often name individuals, not just the company itself.
That’s why this is the most consequential coverage in the policy for early-stage founders. It’s a backstop that protects personal assets when the corporate shield fails.
Side B: Company Reimbursement
Side B reimburses the company after it has advanced defense costs on behalf of a covered director or officer. Most D&O claims at private companies go through Side B. The company pays first, and then the policy repays the costs.
Side C: Entity Coverage
Side C covers the company itself when it is named in a lawsuit alongside its directors and officers. Private company D&O policies typically have a broader Side C scope than public company policies. An investor misrepresentation claim that names both the company and its founders, for example, would look to Side C for the company’s legal costs.
How to Choose Between A, B, and C Insurance Coverage
The shared-limit design can create a practical problem: a large Side C settlement reduces what’s available under Side A for individual protection. Startups with larger programs sometimes purchase a separate Side A tower specifically to prevent that issue. The
right insurance agent can assess your company’s actual risk profile and recommend a policy structure best suited to your needs.
When Is D&O Coverage Required? A Breakdown by Funding Stage
D&O insurance is a contractual condition in many Investors’ Rights Agreements, which govern the terms of the investor-company relationship post-close. Though the coverage requirements differ by funding stage, the liability exposure arises much earlier than many founders realize.
Pre-Seed and Seed
D&O coverage isn’t always contractually required at this stage, but that doesn’t mean you don’t need it. Pitch deck representations, verbal commitments to early investors and private placement memoranda all create personal liability for founders before a formal board exists.
A misrepresentation claim tied to a seed-round conversation can surface years after the fact. If you buy coverage now, you also lock in an earlier retroactive date, which makes a difference if a claim ever references decisions made in the earliest days of the company.
Series A
Most institutional VCs require coverage at this stage. The firm putting a partner on your board of directors wants that partner’s personal assets protected before they vote on anything. That’s because board members can be personally named in investor suits, employment disputes and regulatory actions.
Most institutional investors set a minimum limit range and require the policy to be bound within 60 to 90 days of closing. Some term sheets name preferred carriers or require A-rated insurers.
Series B and Beyond
At these stages, investor composition grows more complex. While that’s great for business, having multiple classes of investors means multiple sets of governance expectations, and each new investor is a potential claimant.
Later-stage investors and strategic partners increasingly treat D&O program reviews as a formal diligence step. A program that satisfied a Series A investor may not stand up to Series B scrutiny.
Board Observers Carry Risk, Too
Board observers, who attend board meetings and receive company information without holding a voting seat, can still be named in governance-related claims. Experienced independent directors and VC-appointed observers frequently require D&O to be in place before accepting a role. If your program isn’t bound before board formation, you may find yourself unable to recruit the directors your next investor requires.
How D&O Limits Should Scale with Your Funding Stage
D&O insurance coverage requirements by startup funding stage, showing typical limit ranges and common investor requirements from pre-seed through Series B and beyond.
| Stage | Typical limits | Investor requirement | Primary exposure |
|---|---|---|---|
| Pre-seed | $1M – $2M | Not always required; some investors include customary coverage language | Pitch deck representations, early investor communications, PPM liability |
| Seed | $1M – $2M | Increasingly expected; board formation is the key trigger | Governance decisions, early employee disputes, founder conduct claims |
| Series A | $3M – $5M | Required by most institutional VCs; policy bound within 60–90 days of close | Board governance disputes, investor misrepresentation, employment claims at scale |
| Series B+ | $5M – $10M+ | Required; program review often part of formal diligence; separate Side A tower common | Multi-class investor disputes, regulatory scrutiny, complex board governance |
| Pre-IPO | $50M – $100M+ | Stacked coverage towers; underwriting driven by S-1 disclosures and sector | Securities liability, SEC scrutiny, public shareholder class actions |
Limit ranges are general benchmarks, not guarantees. Actual requirements vary by investor, sector, and company risk profile.
Limits are frequently inadequate because founders treat investor minimums as a ceiling rather than a floor. The minimum that satisfies a term sheet requirement and the limit that actually covers a real claim are often very different numbers.
Here’s a broad example of how this might scale:
Pre-seed and seed: $1M to $2M is often a reasonable starting point. The governance structure is lean, and claims exposure is primarily driven by early investor communications and founder conduct.
Series A: $3M to $5M is commonly what investors require to close the round, but you should think about what would actually cover a real claim. A single contested investor misrepresentation suit can exhaust $3M in defense costs alone before a settlement is reached. If the shared policy limit covers Sides A, B and C, an entity-level claim can quickly deplete what's available for individual director protection.
Series B and beyond: Requires $5M to $10M or more, and limit-setting at this stage becomes a structural question. With multiple investor classes at the table, the risk of a large entity-level claim drawing down individual coverage is meaningful enough that some programs add a separate Side A tower. Pre-IPO programs can reach $50M to $100M+ across stacked towers.
What D&O Insurance Doesn’t Cover
D&O may be essential coverage, but it’s just as important to understand its exclusions. If you assume D&O covers all leadership-related legal exposure, you’re likely to find out otherwise at the worst possible time.
Intentional fraud and criminal acts are excluded, though defense costs are typically advanced while a fraud claim is being contested. If a final adjudication establishes the misconduct, the carrier can claw back those costs.
Bodily injury and property damage belong under general liability insurance, not D&O. A workplace injury, a damaged vendor shipment or a slip-and-fall at your office are all general liability claims.
Professional services failures are an errors & omissions matter. D&O covers how the company was governed, not what the product or service did. For example, if your software causes a customer’s operations to fail and they sue, that claim would fall under your Tech E&O policy.
Employment-related claims at the organization level, including wrongful termination, discrimination and harassment, generally fall under Employment Practices Liability insurance (EPLI). However, some D&O policies provide coverage for employment-related claims at the individual level.
The insured-vs.-insured exclusion means claims brought by one director or officer against another are generally excluded. Carve-backs exist for whistleblower actions, bankruptcy trustee claims and derivative suits not solicited by an insured, so verify which of these your policy includes.
Because D&O, EPLI, Tech E&O and
cyber liability all address adjacent but distinct risk categories, a gap in one policy can create unintended pressure on another. Structuring these policies together, rather than buying them separately and assuming they’ll coordinate, is critical.
Build the Program Before You Need It
D&O insurance lets founders, executives and board members make critical decisions without risking personal financial ruin for being wrong. Companies that treat it as a governance tool, rather than a compliance hurdle, build programs they can actually depend on when something goes wrong. Those who wait for a term sheet requirement typically end up with whatever coverage can be bound quickly, under time pressure at the minimum limits an investor will accept.
If you're closing a round, forming a board or reviewing whether your current program matches where your company actually is, Pepper, Johnstone & Company works with venture-backed companies at every stage. Request a quote online or call 866-381-5821 to speak with an advisor.