Directors and Officers (D&O) insurance protects the personal assets of your startup's leadership when they face lawsuits alleging wrongful acts in their management capacity. For founders navigating fundraising rounds, board formations, and rapid growth, understanding how much D&O coverage you actually need isn't just a compliance checkbox—it's a critical financial decision that could determine whether a single lawsuit derails your company's trajectory.
The short answer to what amount of D&O insurance a startup needs: it depends on your stage, investor requirements, and risk profile. Pre-seed companies might operate safely with $1 million in coverage, while Series B startups typically need $5 million or more. But choosing the right limit involves more than matching a number to your funding round. You need to understand what D&O actually covers, when the need becomes urgent, and what triggers should prompt you to increase your limits.
This guide breaks down D&O insurance limits by startup stage, explains the legal costs that eat into your coverage, and identifies the specific moments when purchasing or upgrading your policy becomes essential. Whether you're a first-time founder or scaling toward an exit, getting this decision right protects both your company and your personal financial future.
What D&O Insurance Covers
D&O insurance provides three distinct types of protection, commonly called Side A, Side B, and Side C coverage. Understanding these components helps you evaluate whether your policy limits are adequate for your startup's specific situation.
Side A coverage protects individual directors and officers directly when the company cannot or will not indemnify them. This is your personal safety net—if your startup goes bankrupt and a lawsuit names you personally, Side A pays for your defense and any settlements. Side B coverage reimburses your company when it does indemnify its directors and officers, essentially protecting your corporate balance sheet. Side C coverage, also called entity coverage, protects the company itself against securities claims.
For startups, the most common D&O claims include allegations of misrepresentation to investors, breach of fiduciary duty, failure to comply with employment laws, and intellectual property disputes involving former employers. A single employment practices claim can easily generate $150,000 to $500,000 in defense costs alone—before any settlement. Securities claims stemming from fundraising activities often run into the millions.
- Side A: Direct protection for directors and officers when company can't indemnify
- Side B: Reimburses company for indemnification costs
- Side C: Protects the company entity against securities claims
- Common claims: investor misrepresentation, fiduciary duty breaches, employment violations, IP disputes
When You Need D&O Insurance
Not every startup needs D&O insurance from day one, but certain milestones make it essential rather than optional. The moment you take outside investment, add independent board members, or sign contracts requiring D&O coverage, you've crossed the threshold where operating without this protection creates unacceptable risk.
Institutional investors almost universally require D&O insurance as a condition of funding. VCs sitting on your board need assurance that their personal assets won't be exposed if something goes wrong. Even angel investors increasingly ask about D&O coverage during due diligence. Beyond investor requirements, the act of raising money itself increases your exposure—securities claims related to fundraising representations are among the most expensive D&O claims startups face.
Board composition also drives timing. Once you have outside directors—people who aren't founders or employees—D&O insurance becomes a practical necessity. Quality board members won't serve without it. They're lending you their expertise and reputation; expecting them to also risk their personal assets is unreasonable and will limit your ability to recruit experienced advisors.
Recommended D&O Limits by Startup Stage
Your funding stage serves as a useful starting point for determining appropriate D&O limits, though your specific circumstances may warrant adjustments. These recommendations reflect industry standards and the typical risk profiles associated with each growth phase.
Pre-Seed / Bootstrapped: $1M - $2M
At this stage, $1 million to $2 million in coverage typically provides adequate protection. Your exposure is relatively limited—you likely have a small team, minimal assets, and haven't made the kind of public representations that generate major securities claims. However, don't underestimate this phase. Employment claims and founder disputes can still generate six-figure legal bills.
Seed Stage: $2M
Series A startups should carry $2 million in D&O coverage. You've now made formal representations to institutional investors, likely added outside board members, and are scaling your team rapidly. Each of these factors increases your claims exposure. The legal costs of defending even a frivolous lawsuit at this stage can consume a $1 million policy quickly.
Series A: $2M - $3M
Multiple institutional investors and active board oversight increase fiduciary duty exposure. Team scaling raises employment practices liability. Higher stakes make the company a more attractive litigation target.
Series B: $5M
By Series B and beyond, $5 million becomes the appropriate minimum. Your company has significant assets worth protecting, multiple investor classes with potentially competing interests, a larger employee base generating employment practices exposure, and the increased visibility that attracts plaintiff attorneys.
Series C and Beyond: $5M - $10M+
Companies approaching IPO or acquisition often carry $10 million or more. Pre-IPO or pre-acquisition positioning demands robust protection. High visibility attracts plaintiff attention. Board now includes experienced directors who expect institutional-grade coverage. Potential securities claims could reach eight figures.
How Legal Costs Affect Your D&O Limits
One of the most common mistakes startups make with D&O insurance is underestimating how quickly legal defense costs consume policy limits. D&O policies are typically "wasting" or "eroding" policies, meaning defense costs reduce your available coverage. A $2 million policy doesn't give you $2 million for settlements—it gives you $2 million total for defense plus settlements.
Litigation defense costs in D&O cases routinely run $500 to $1,000 per hour for specialized attorneys. A straightforward employment claim might generate $100,000 to $300,000 in defense costs. Complex securities litigation can easily exceed $1 million in legal fees before reaching trial. If your policy limit is $2 million and defense costs hit $1.5 million, you have only $500,000 remaining for any settlement or judgment.
This erosion effect means your true protection is often significantly less than your stated policy limit. When evaluating coverage amounts, assume that 30-50% of your limit may go toward defense costs in a serious claim. A $3 million policy might effectively provide only $1.5 to $2 million in settlement capacity after legal fees.
- Defense costs typically reduce available coverage (wasting/eroding policies)
- Employment claims: $100,000-$300,000 in defense costs
- Securities litigation: Often exceeds $1 million in legal fees
- Plan for 30-50% of limits consumed by defense costs in serious claims
Key Triggers to Buy or Increase D&O Coverage
Certain events should prompt immediate action on your D&O insurance—either purchasing your first policy or increasing existing limits. Missing these triggers can leave you exposed at precisely the moments when claims become most likely.
Fundraising is the most obvious trigger. Purchase D&O insurance before closing any priced equity round. Investors will likely require it, and the representations you make during fundraising create immediate exposure. Don't wait until the term sheet arrives—get quotes early so coverage requirements don't delay your close.
Adding outside board members requires D&O coverage to be in place before they officially join. Experienced directors will verify coverage before accepting a board seat. If you're recruiting a high-profile advisor or independent director, inadequate D&O limits might cost you that relationship.
Rapid employee growth increases employment practices liability significantly. When you cross 25, 50, or 100 employees, reassess your limits. Each new hire represents potential claims around discrimination, wrongful termination, or harassment. Geographic expansion—especially internationally—adds regulatory complexity that further elevates risk.
M&A activity —whether you're acquiring or being acquired—demands careful D&O review. Acquisition targets often face claims from former shareholders alleging inadequate sale prices. Acquirers may inherit unknown liabilities. Extended reporting period ("tail") coverage becomes critical during ownership transitions.
- Closing any priced equity round (seed, Series A, etc.)
- Adding independent or outside board members
- Crossing employee thresholds: 25, 50, 100+ employees
- Expanding into new states or international markets
- Beginning M&A discussions as buyer or target
- Receiving regulatory inquiries or pre-litigation demands
- Significant revenue growth or entering new business lines
Get the Right D&O Coverage for Your Startup
Getting D&O insurance right means matching your coverage to your actual risk—not overpaying for protection you don't need or leaving dangerous gaps in your coverage. At Anchor Insurance, we specialize in helping startups navigate these decisions with straightforward guidance based on your specific stage and circumstances. Our team understands the startup journey because we've insured companies from pre-seed through IPO. Ready to find out what D&O coverage your startup actually needs? Get a quote in minutes, or schedule a call with our startup insurance specialists to discuss your situation. We'll help you build a protection strategy that grows with your company—so you can focus on building your business instead of worrying about what-ifs.