In the following guest post, Darren Boomfield, Account Executive at Cogitate, takes a look that the director and officer liability and insurance considerations that can arise when companies participate in venture capital funding. My thanks to Darren for allowing me to publish his article on this site. Here is Darren’s article.
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Venture capital firms have become highly sophisticated at underwriting product risk, market risk, and execution risk. Governance risk, however, is still too often treated as a problem to solve later.
That gap matters – because once institutional capital is raised, the liability profile of a startup changes immediately, whether leadership recognizes it or not.
VC funding changes the liability equation overnight
The moment a company raises venture capital, several things happen at once:
- Cash appears on the balance sheet
- Fiduciary duties expand
- Directors and officers become higher-value litigation targets
- Employment, equity, and disclosure decisions carry legal consequences
Importantly, that capital is no longer just “runway.” It can become a source of recovery in the event of a claim.
Without appropriate D&O and management liability coverage in place, plaintiffs do not need to wait for scale. The company – and potentially its leadership – is exposed immediately.
Personal liability is not theoretical
In early-stage companies, founders often assume that any lawsuit will be limited to the entity. In practice, that is frequently not the case.
Claims involving employment practices, equity compensation disputes, alleged misrepresentations, or breaches of fiduciary duty regularly name individuals, including founders, officers, and sometimes functional leaders with decision-making authority (for example, sales or operations directors involved in compensation structures or disclosures).
When no D&O coverage is in place, defense costs and potential settlements can fall directly on individuals – not because of intentional misconduct, but because governance infrastructure lagged growth.
Equity compensation creates real fiduciary exposure
Many startups do not maintain a formal ESOP in the technical sense. Instead, they rely on employee option agreements with common structures:
- four-year vesting schedules
- one-year cliffs
- monthly vesting thereafter
From a liability standpoint, these arrangements still create employee expectations tied to company valuation and future liquidity.
Disputes often arise when:
- valuations are poorly supported or inconsistently communicated
- funding rounds are framed internally as validation of company value
- employees make career decisions based on perceived upside
- disclosures around dilution, liquidation preferences, or downside risk are incomplete
When expectations and outcomes diverge, claims can follow – particularly when employees believe they were misled, even unintentionally.
Valuations and disclosures matter more than founders realize
Inflated or poorly contextualized funding announcements can become problematic long after the press release fades.
Employees frequently interpret venture raises as confirmation of company health, validation of equity value, and increased likelihood of liquidity. If later outcomes contradict those impressions, plaintiffs may argue that material information was misrepresented or omitted – especially if internal communications were overly optimistic or imprecise.
These disputes rarely hinge on fraud. They more often center on expectation management, disclosure discipline, and documentation.
When governance failures make a company effectively “uninsurable”
There is another risk founders and investors often underestimate: at a certain point, governance issues can materially limit a company’s ability to obtain insurance at all.
Startups that accumulate:
- a history of employment-related claims or lawsuits
- repeated disputes tied to equity compensation
- unusually high employee turnover
- inconsistent documentation or internal controls
may find that insurers are unwilling to quote coverage on reasonable terms – or at any terms.
From an underwriting perspective, these signals suggest elevated frequency risk and weak governance. Once that perception sets in, it can be difficult to reverse quickly.
This matters because insurance is not just a financial backstop. It is also a market signal.
Later-stage investors, strategic partners, and enterprise customers increasingly expect companies to carry higher limits of D&O and related management liability coverage. In many cases, coverage is contractually required to close financings or commercial agreements.
A company that has treated insurance purely as a cost center – delaying placement, minimizing limits, or avoiding third-party oversight – may discover that those decisions have long-term consequences. The inability to secure coverage later can become a barrier to capital, partnerships, or customer trust.
Engaging experienced third parties early – insurers, brokers, and advisors – often serves as an informal governance checkpoint. These stakeholders surface issues founders may not see and help address them before they harden into underwriting red flags.
Ignoring that expertise in the name of short-term cost savings can quietly close doors that are difficult to reopen.
Why insurance timing matters
Management liability insurance is often purchased reactively, after growth or ahead of a major event. From a claims perspective, that is frequently too late.
Placing D&O coverage at or before institutional funding:
- forces governance conversations early
- aligns coverage with board composition and authority
- protects both the entity and individual decision-makers
Insurance cannot fix governance failures, but the underwriting process itself often identifies gaps while they are still manageable.
A case for investor-driven governance standards
There is a strong argument that governance readiness should be treated as a core component of venture diligence, not an operational afterthought.
At a minimum, institutional investors could require:
- D&O and related management liability coverage upon funding
- clear ownership of HR and administrative functions (internal or outsourced)
- standardized equity compensation processes
- defensible valuation practices and disclosure discipline
These are not bureaucratic hurdles. They are risk containment mechanisms.
The takeaway
Once venture capital enters the picture, startups are no longer operating in a low-stakes environment. Cash on the balance sheet, equity compensation, and leadership decisions create real exposure – for both the company and individuals.
Governance and insurance are not symptoms of maturity. They are safeguards against the kinds of claims, reputational damage, and downstream constraints that can derail promising companies long before product or market failure ever does.
Treating insurance as a strategic tool rather than a discretionary expense is often the difference between a company that scales cleanly and one that finds its future options quietly limited.
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Darren Bloomfield is a Founding Account Executive at Cogitate, a core systems software provider for insurance carriers and delegated authority MGAs. He previously worked as a D&O underwriter, where he focused on management liability, governance risk, and claims exposure for private and venture-backed companies. Darren now works at the intersection of insurance operations, technology, and go-to-market strategy.