Why Angel Investors should influence their funded start-ups to buy a D&O Liability Insurance Policy?

Angel investors want their start-ups to succeed and what better way to ensure success than by influencing start-ups to invest in a D & O policy for their directors?

Start-ups are gaining popularity in India with more and more millennials getting the desired funding for their business ideas. Angel investor, venture capitalists, investment companies, etc. fund potential business models and a start-up is born. In their nascent stage, start-ups need good capital, talented labour and full-fledged marketing to blossom into a profitable business. Amidst the financial crunch which start-ups usually face in their development stages, what would happen if the directors or key officers of the enterprise are served a legal notice for possible errors?

Directors and officers form the top level of management of start-ups. They are responsible for making the start-up a success by taking up different types of executive roles. They design the framework within which the start-up is expected to operate, take product and services related decisions, decide on the best marketing techniques and also review the performance of the organization. During the course of their everyday duties, they might make mistakes in discharging their duties. Either unintentionally or due to negligence on the part of directors and officers, an error might be committed which might later on result in a lawsuit on them.

In case of a lawsuit or financial liability which directors and officers face due to any errors in discharging their fiduciary duties, such employees of a start-up face considerable financial losses. If a director is asked to compensate an aggrieved third party for any type of mistake committed, the director’s personal wealth stands to be depleted. Since errors are a part of being human, a precaution is needed to protect the director’s and officer’s personal wealth in case of any liabilities that they face due to the nature of their duties. This is where a directors and officers and liability insurance policy comes into the picture. Let’s understand what the policy is all about –

What is D & O Policy?

A directors and officers liability policy covers the financial liability which directors and officers of a start-up might face if they inadvertently commit any mistake in the course of discharging their duties. The policy covers the cost of possible lawsuit as well as any compensation payable by the directors and officers to an aggrieved third party. The third party can be employees of the organisation, stakeholders, customers, creditors or even the Government.

(Know how the premium of the policy is computed)

Why is a directors liability insurance policy needed for a start-up?

As mentioned above, start-ups are in a delicate financial position in their incubation stages. In this stage any financial setback, either suffered by the company or its directors and officers would be a disaster. A directors and officers liability policy helps in protecting in any financial liability suffered by the top executives of the start-up. Here are some reasons why angel investors should promote a directors and officers liability insurance policy in the start-ups that they fund –

To protect the directors and officers of the start-up from financial stress

A start-up has to comply with various laws and regulations in its operations. If the directors and officers of the enterprise commit any mistake which was unintentional or which occurred due to negligence of any law, they might face severe repercussions from vendors, stakeholders, legal authorities and even the employees of the company. In case any notice is served on directors and officers, they might be exposed to the financial threat of paying for the litigation costs incurred in a lawsuit or to compensate any third party for the financial loss suffered. This financial threat leads to financial stress and directors and officers might not be able to handle it. A D & O policy would help directors and officers face the financial implication of their actions without any stress because the policy would provide coverage against them.

To attract talent

The success of a start-up also depends on the talent and efficiency of its employees, directors and officers included. If the directors and officers are experienced and qualified, they can take the start-up to new heights with their strategic intelligence. However, to attract such talented employees, start-ups need not only a fat pay-check but value added benefits too. When the start-up invests in a D & O liability insurance policy, potential employees can be assured of financial support in case of any liability that they suffer in the course of their duties. They can, therefore, be lured to join the enterprise. Thus, with a D & O policy in place, start-ups can recruit qualified directors and officers for business success.

To mitigate financial strain

If the start-up agrees to meet the costs of the liabilities faced by its directors and officers, a D & O liability insurance policy would provide financial cushion to the company to meet any financial repercussions of its directors’ actions. Since start-ups don’t have deep pockets, they need the coverage to mitigate the financial strain that they can suffer in case of any liability.

(Read more on why a D & O policy is a must)

Angel investors have a financial stake in the success of the start-up that they fund. Thus, they should influence their start-ups to invest in a directors and officers liability insurance policy for a complete financial protection. The policy would safeguard the financial liability faced by directors and officers of the start-up and motivate them to discharge their duties without fear.

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