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While directors and officers insurance is normally associated with large, publicly-traded corporations that risk being sued by their shareholders for mismanagement, it's still applicable to small tech startups. D&O insurance protects you from lawsuits that accuse one of your employees of mismanagement — these lawsuits can come from either your own employees or from your clients. To learn more about D&O insurance and why it's useful for a tech startup to carry, read on.

What Is Directors and Officers Insurance?

D&O insurance is a form of liability insurance that protects you from lawsuits alleging that one of your employees has engaged in mismanagement. While the name implies that this coverage only protects directors and officers, it applies to everyone in your business who has worked in a managerial role — your project managers working on an application, for example, would be covered by this form of insurance.

If you're ever sued by one of your employees or by another business, D&O insurance will pay the costs associated with mounting a legal defense in court. If you lose the court case, then D&O insurance will pay the damages. You're not ever required to pay anything from your own startup's funds in order to defend yourself or lose a court case whenever you're covered by D&O insurance.

Why Is Directors and Officers Insurance Important for a Tech Startup to Carry?

D&O insurance protects against two common scenarios that tech startups face. The first is breach of contract that resulted from mismanagement. For example, a client may sue you if they've hired you to develop a smartphone app and you either don't deliver the app on time or it doesn't meet their needs. They will allege that the project manager (or other executives in your business) who was tasked with overseeing creating the application failed to manage it adequately. D&O insurance will cover you in this case, preventing you from having to pay any legal fees associated with defending the breach of contract lawsuit.

The second scenario that tech startups commonly face is intellectual property theft. One of your managers may be sued by a former employer if their former employer thinks they've used their intellectual property in order to develop one of your applications. While your manager's former employer may be completely wrong, mounting a legal defense against accusations of intellectual property theft is expensive. D&O insurance will cover you in this case, so it's a good form of coverage for tech startups to have.

Overall, D&O insurance helps protect tech startups from the high costs associated with defending yourself from lawsuits that are common in this industry. Ideally, you should get directors and officers insurance as soon as possible when you're forming a tech startup — it's inexpensive when your company is small, and it will provide coverage for any decisions made by your managers while your company grows.