D&O Insurance When You’re Raising Investment

A funding round brings new directors, new scrutiny and usually a contractual requirement to hold D&O. Here is what founders should sort out before completion.

Why a fundraise changes the D&O picture

Before external investment, a founder-led board mostly answers to itself. After a round closes, the same decisions are made under new scrutiny: investors with information rights, a shareholders’ agreement with consent matters and veto rights, board minutes that will be read carefully if things go wrong, and a company that is now spending other people’s money at pace. None of that means claims become likely — but it means that when a dispute does arise, there are more parties with standing, more documents recording who decided what, and more value at stake.

Directors’ and officers’ insurance exists for exactly this environment: it protects the individuals on the board against claims arising from their decisions and duties, with legal defence costs at its core. If you are earlier in the journey and mapping which covers arrive at which stage, the startup insurance roadmap sets out the wider sequence; this page focuses on the fundraise moment itself.

Investor directors joining the board

Most institutional rounds put an investor-appointed director on the board, and often an observer besides. From the company’s side, that person is a full director with the same duties and the same exposure as the founders — and they will expect the company’s D&O policy to protect them from the day of appointment. Checking that the policy picks up newly appointed directors automatically, and that its limit is credible for the post-round scale of the business, is a standard piece of round hygiene.

From the investor’s side, their appointee is serving on an outside board on the firm’s behalf, which raises the question of how the fund’s own protection and the portfolio company’s policy interact — whose policy responds first, and what happens if the company’s cover is exhausted or the company cannot indemnify. That interaction is a topic in its own right; we cover it in outside directorships and D&O. The short version: the portfolio company’s D&O policy is normally expected to be the first line of protection for the investor director, which is one reason investors care so much that it exists and is adequate.

The firm boundary: warranties are not D&O territory

Investment agreements almost always contain warranties — statements about the company’s affairs given by the company and often by founders personally. If a warranty proves untrue and the investor claims for it, that is a contractual claim under the investment agreement.

Draw the line clearly: D&O insurance is not designed to pay warranty claims. D&O responds to claims against directors for alleged wrongful acts in their capacity as directors; a warranty claim is the enforcement of a contractual promise, and contractual liability of this kind sits outside what D&O policies are built to cover. The insurance product that addresses warranty exposure is warranty and indemnity (W&I) insurance — a separate, transaction-specific product placed around a deal, more common on larger transactions and acquisitions than on early-stage rounds. Whether W&I is available or proportionate for your round is a deal-by-deal question for your advisers; the point that matters here is that buying D&O does not deal with the warranties, and giving warranties does not make D&O respond to them. Founders should understand both facts before signing.

As an illustrative scenario only: a founder who assumes the company’s new D&O policy stands behind the personal warranties they gave in the investment agreement would discover the gap only when a warranty claim arrived — the worst possible moment. No real deal is described; the scenario exists purely to mark the boundary.

Why investors require D&O — and make it a condition

It is common for the investment agreement or a completion checklist to require the company to hold D&O cover, often from completion and at a limit the investor regards as sensible. The reasons are practical:

• Protecting their appointee. The investor director’s first line of defence is the company’s policy, so the investor wants it in place before their partner takes the seat.
• Protecting the asset. A claim against uninsured founders distracts management, drains company resources through indemnification, and can destabilise the business the investor has just funded.
• Governance signalling. Requiring D&O is part of the same professionalisation package as audited accounts and board reporting — evidence the company is being run like a business worth backing.

Treat the requirement as a floor, not a ceiling: the limit an investor specifies is a negotiating convention, not a tailored assessment of your board’s exposure. It is worth asking, with your broker, what limit actually fits the company’s size, sector and litigation environment.

Getting it done without slowing the round

D&O for a funding company is usually quick to arrange, but a few practicalities help: start before the completion pressure peaks, so cover incepts on or before the date the agreement requires; disclose the round itself to insurers, since the company’s changed capital structure and scale are material to the risk; and revisit the limit at each subsequent round rather than letting the Series A decision fossilise. If the company is likely to acquire, expand overseas or take on regulated activities post-round, say so — those plans shape which wording and insurer fit.

Apex is an independent Bristol-based broker, authorised and regulated by the Financial Conduct Authority (FRN 724952). We arrange D&O for companies at and after the point of investment, we know what investor completion requirements tend to look like, and we will tell you clearly where D&O ends and where transaction covers like W&I begin.

Frequently asked questions

The term sheet requires D&O “to a level acceptable to the investor” — what does that mean in practice?

It means agreeing a limit and wording the investor is comfortable with before completion. In practice the investor or their lawyers often indicate an expected limit; your broker can then place cover at or above it and provide evidence of insurance for the completion checklist. Build in enough lead time for the proposal form and any insurer questions.

Do founders’ personal warranty caps interact with D&O at all?

The negotiated caps and limitations on founder warranties are a matter for the investment agreement and your lawyers — they define the contractual exposure. D&O does not cover that contractual exposure either way, so the warranty package should be negotiated on the assumption that it stands on its own. Where warranty risk needs insuring, W&I insurance is the relevant product and is placed separately around the transaction.

Should the company or the investor pay for the investor director’s cover?

Convention is that the company buys and pays for a D&O policy covering the whole board, investor appointees included, and the investment documents usually assume as much. The investor’s fund may carry its own protection for its appointees as a second line, but that is the fund’s affair; the company’s job is to hold a credible policy that covers every director from the day they join.

Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority (FRN 724952). This page is general information, not advice on your specific circumstances.