8 Reasons to Buy D&O Insurance –
1. Attracting New Directors: D&O insurance makes board seats more attractive.
2. Investor Requirements: Some venture capital and private equity firms require that their portfolio companies purchase D&O insurance as a condition of the firm’s investment.
3. 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.
4. 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 can help with these expenses.
5. 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.
6. 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.
7. 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.
8. IPO, Direct Listing, and De-SPAC Considerations: If your company is considering going public, think about placing D&O insurance while still private. By doing so, you can build relationships 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.
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