Are you an investor in startups? Here's why all the companies you invest in need a D&O Policy

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Image source: Shutterstock
Image source: Shutterstock

New Delhi : Our country is not only the birthplace of various religions and cultures but also the home to numerous successful startups. In fact, it is just behind the U.S when it comes to startups, as 7,127 startup businesses have been set up in our country over the last few years.

It's great that our country is thriving with ideas which have eventually opened the gates for multiple investors to invest in these startups. If you are an investor, you would always perform a background check on the company you want to invest in. But wait a minute - do you also check the risk factors associated with the directors and officers in these companies?

Startups’ operations are far more vulnerable to financial devastation due to litgation fees than a well-established company with more resources and money available.

One of the key things to look for before investing in a start-up is whether they have director’s liability insurance. Here are a few reasons that explain why you should only invest in startups that have directors liability insurance:

Provides Protection Against Various Litigations

A startup is more prone to face losses related to lawsuits. Sometimes these litigations not only hurt the board members who manage critical business decisions but also affect the investors.

If you think you should invest in an organization that does not have the director’s liability insurance, think again. Let’s say you invest in a startup and one of its executives has allegations of misconduct or breach of fiduciary duties due to lack of experience against them. That will not only lead to litigation against the company but can also cause financial loss. As an investor, you may lose your money in the worst case.

However, you are safe when the startup has invested in directors and officer’s insurance. It will cover the claims raised by a stakeholder and keep the financial setbacks at bay.

Reimbursement of Legal Costs

The startup company that you have invested in could face losses upto six or seven figures in no time. D&O lawsuits can knock on the door at any moment without offering a hint. This can be the result of allegations of financial mismanagement, wrongful acts,

or errors in judgment. All the money you have invested in that company might get wiped out in lawyer’s fees and other legal expenses.

Directors’ liability insurance helps in avoiding such situations. As per the policy limits, all expenses related to the lawsuit will be covered by the insurer. Investing in a firm that has its directors and officers insured by such a policy implies a lower risk of losing your investments.

Easy to Attract More Investors

Investing in start-ups is highly beneficial. For further growth, these companies need more funding, which ultimately requires more investors to pool in their money.

However, companies that have a director’s liability insurance in place find it easier to attract more investors. It is because the investors who want to join the board might see this as an attractive benefit.

The overall growth of the company also means that you will get higher returns for the money you have invested in it.

As a startup investor, you expect your investments to yield good returns through the growth of the company you’ve invested in. If its directors and officers are protected under a D&O insurance policy, they need not worry about getting their personal

liabilities confiscated or paying for the legal costs involved. Tax liabilities, civil fines and other penalties will also be covered as per the policy terms.