What Founders Need to Know About Insurance Before They FundraiseYou have the idea. You have the drive. Now you just need the capital. Before you get too far ahead of yourself, there’s one more thing to consider – startup insurance. Fundraising brings new risk exposures and regulations, so make sure you’re covered.
D&O Insurance Provides Powerful Protection for Startups
D&O insurance isn’t just for public companies. Yes, public companies need D&O insurance, but lean startups can also benefit from coverage. With certain types of fundraising, such as angel investors, you may be required to secure D&O insurance for your startup. With other types of fundraising, such as relying on the support of friends and family, D&O insurance may not be required, but it can still be a smart idea.
The reality is that startups face numerous obstacles. Even if your company succeeds, you’ll likely face ups and downs along the way. Startups also tend to receive a lot of scrutiny, especially once they take on investors, and allegations of misrepresentation or breach of fiduciary duty are possible. D&O insurance provides coverage so you can fundraise with confidence. It also shows your investors that you’re serious about managing risks.
Securing D&O Early Enables Continuous Coverage
Startup founders have a lot going on, and they often have tight budgets, so D&O insurance may not be a priority. You may be thinking that you can also buy coverage later, once your company is a little more established – but this strategy can lead to a major coverage gap.
D&O insurance works on a claims-made basis. As such, claims are covered if they are reported while the policy is active, but only if the incident occurred after the retroactive date. It’s the retroactive date that catches some founders by surprise and leads to uncovered claims.
The retroactive date is typically the first date of continuous coverage. Let’s say you buy D&O insurance effective January 1, 2026. This is also your retroactive date. You receive notice of a claim in February 2027, but you’re not too worried because your D&O policy is still active, so you assume you have coverage. However, the lawsuit is over statements you made in December 2025. That’s before your retroactive date, so the claim isn’t covered.
To avoid coverage gaps like this, it’s important to secure D&O insurance early and to maintain continuous coverage from that point on. If you’re planning to start fundraising activity in the future, consider securing D&O insurance first.
D&O Insurance Should Be Customized to Your Needs
D&O insurance can provide valuable coverage for startup companies, but if you’re ever hit with a lawsuit, your coverage will come down to the details in your policy.
The question isn’t just whether or not you have D&O insurance – it’s whether you have coverage designed for your risks. In addition to looking at your limits and deductibles, also consider your endorsements and exclusions, as well as what triggers a claim. Whether you’re using angel investors, Regulation D fundraising, or investments from family and friends, make sure you have adequate coverage for your risks.
You May Need Other Types of Coverage Too
D&O gets a lot of attention because it provides important protection but is often misunderstood by startup founders. However, it’s not the only type of insurance coverage your company may need.
Exactly which other types of insurance you need will depend on the details of your startup. Commercial general liability insurance and commercial auto insurance provide fundamental coverage for businesses in most industries.
If you have employees, you’ll probably need workers’ compensation, and it’s also smart to consider employment practices liability insurance for lawsuits involving things like discrimination, harassment or wrongful termination.
Cyber insurance is increasingly important for businesses in all industries. If you collect or store data, or if you use computer systems for your operations, you have cyber risks. For tech companies, tech E&O insurance is also important. Startups in other industries may also need E&O, or professional liability, insurance designed for their risks.
Are You Covering Your Risks?
It doesn’t take much to derail a startup’s success. An unexpected loss or lawsuit could throw a wrench in your operations before you have a chance to get your company off the ground. A carefully designed insurance program can protect your startup during this vulnerable time, while also showing investors that you’re doing your due diligence to control risks.
Heffernan Insurance Brokers can help you understand your startup’s risks and coverage options. Learn more.
