SVB crisis signals founders need for D&O
Willy Sundjaja
The last week has been a roller coaster ride for tech founders, employees, investors, and executives impacted by the failure of Silicon Valley Bank… at the mercy of the markets, the media, and the federal government, and initially with many more questions than answers. After the Federal Reserve, Treasury, and FDIC guaranteed depositors were protected in full, a collective sigh of relief was breathed by bank depositors and everyone in their orbit.
What seems to be a narrow escape, for now, offers a critical opportunity to learn—about one of the least appreciated and most critical lines of protection in the insurance industry. Had no one stepped in, D&O (Directors & Officers) insurance would be helping protect many executives from both professional and personal financial ruin.
What does D&O protect?
D&O insurance is a must-have coverage for tech founders, VCs, and directors and officers. D&O specifically provides “a type of liability insurance covering directors and officers for claims made against them while serving on a board of directors and/or as an officer.” Policies function “as ‘management errors and omissions liability insurance,’ covering claims resulting from managerial decisions that have adverse financial consequences.”
Founders like those who placed their assets with SVB have numerous duties and obligations, such as:
fiduciary responsibility to stockholders
obligations to pay their employees or keep employees in good standing in their roles
responsibility to provide services for prepaid revenues that they receive from customers
The failure to continue to meet these obligations due to a bank’s insolvency would open up founders to lawsuits. If the Federal Reserve had not come to the rescue in the 11th hour, many more businesses likely would have had founders struggling to meet their obligations.
It is not unusual in D&O claims to have litigious parties pursue the personal wealth of directors and officers. Anzen’s Directors & Officers Liability Coverage protects the personal assets of the founders and their spouses, VCs, and board members, from the liabilities that exist as founders run their company. Directors & Officers Liability insurance also protects the company for defense costs and indemnification to the Founders.
In addition, D&O insurance extends the coverage not only for the founders, directors, and officers, but also for the entity organization itself. This is particularly important especially in a bankruptcy case when the company has all of their cash assets tied up, such as with the SVB situation.
Could a Founder really get sued over a bank failure?
The short answer is… of course. You can get sued over anything. Whether a suit can be brought successfully is up to the courts, but there is precedent for a corporate officer to be held personally liable for failure to pay wages. Kevin LaCroix of The D&O Diary gives a thorough account of a case in California in a June 2022 decision where an Appellate Court ruled against a corporate officer.
You don’t want to take your chances with the courts, so working with your insurance broker to ensure you have adequate D&O protection is critical. Your insurance broker will help you find a reputable carrier with solid risk management and prevention services who will show up when you need them.
Failure to pay an employee on time can trigger a certain coverage in your Employment Practices Liability Insurance (EPLI), so it is an insurance purchasing best practice to think of your D&O as part of your comprehensive Executive Liability, or Management Liability, product suite. These coverages function best together.
Proactive prevention for the future
As an underwriter, I cannot stress enough the importance of reviewing your own D&O policy, and ensuring you are adequately covered by your D&O and EPLI insurance. Additionally, Anzen’s own CEO and Founder Max Bruner shared his recommendations for Founders in the immediate aftermath. Here’s what he had to say:
Have a cash runway: don’t learn the hard way the way many have—expect a several month slowdown in VC financing and do what you can to find an extra three months or more of runway than you had planned last week.
Diversify your accounts: be aware of what is covered and what is not under the FDIC for each account.
Have at least two banking partners with active accounts. Don’t concentrate all funds in one sector specific bank.
Be certain that your payroll provider is diversified in their treasury management.
Know what a sweep account is—the pros and cons—and know that you can control your funds and have appropriate short-term liquidity if invested in securities.
Although we are not out of the woods yet, we can take a moment and appreciate that the outcome of the events of the past week were not far worse, and strengthen our approach to D&O risk management for the future.
