One of the major products we provide for our clients is Directors and Officers Insurance. Admittedly 90% of our D&O clients sought us out because their investors required them to get coverage. Don’t be mistaken, though…startups need D&O insurance regardless of the investor situation.
Case in point: the Snapchat lawsuit. Here’s a quick rundown of what’s going on:
Reggie Brown brought a lawsuit against Snapchat’s co-founders Evan Speigel and Bobby Murphy in June. The complaint alleges that Brown, the former classmate of the co-founders, came up with the basic idea of timed / self-deleting messages and helped start the company. Some of the original filings for the lawsuit include emails from Speigel where he claims to have created the app with two of his friends, indicating that Brown may be on to something here. That bit of information came out in the latest filing on October 23rd. Brown also joined Snapchat’s investors as defendants in that same filing. With $60 million in previous funding and a prospective $200 million round looming, Brown could walk away from the court room quite comfortably.
We’re sure that Snapchat’s investors required D&O coverage to be in place after the first round of funding. They were clearly justified with that requirement. The D&O policy would kick in to pay for this lawsuit and related costs that the company or its investors would otherwise have to bear. But what if the complaint was filed before the first round was even closed? It sets up for a scenario where both company assets and the co-founders’ personal assets are totally exposed and investors get cold feet due to the pending lawsuit.
Having a D&O policy in place right away prevents this situation and gives investors confidence to continue with their due diligence process. You can learn more about why startups need D&O insurance here.