Seven Reasons Why Growing Technology Firms Need D&O Insurance Coverage

The region between Toronto and Kitchener-Waterloo, Ontario, is "an extraordinary hub" for innovation "at the cutting edge of the global economy," according to Prime Minister Justin Trudeau. Indeed, Silicon Valley North is a booming hotbed, dotted with established technology companies such as OpenText, Desire2Learn and Google Canada, and also fast-growing startups.

For would-be tech entrepreneurs, corporate governance and future litigation are not top-of-mind, but forgoing Directors' and Officers' (D&O) coverage could have devastating consequences that damage future success.

If you don't have a D&O insurance policy in place, here are seven reasons why it's time to secure one now.

From garage to greatness: D&O insurance protections as your technology firm begins

As a tech entrepreneur, acquiring a D&O policy establishes the company as legitimate and demonstrates proper corporate governance, prior to the time when third-party investors express interest. When you are proactive in acquiring a D&O policy, you now have more credibility as the owner of a technology business, instead of simply as a tech entrepreneur.

With your now-established organization, you may start drawing more attention from multiple venture capital (VC) firms. There could be several rounds of funding, which raises potential shareholder issues. For example, the shareholders who got in early — which may include the company founder — could push a specific agenda; but as you continue to raise capital with multiple funding rounds, the early investors stake can become diluted. With new shareholders as the majority owners, interests may diverge and lead to an oppression remedy brought by minority shareholders.

A D&O insurance policy may also attract solid, reputable board members to join your technology firm. Independent directors will want these protections because they could be held personally liable for the decisions of your firm's CEO. No accomplished professional will consider a seat on your board without this coverage in place. One needs to look no further than Theranos in the U.S. as an example of why independent directors need this type of coverage.

It's also important to have D&O in place for many of the same reasons you would choose to incorporate your business, including personal liability protection. In Canada, corporations — even fledgling tech startups — can't just walk away from their financial obligations. If your company goes bankrupt, you still have statutory liabilities, such as unpaid wages, vacation time or GST (goods and services tax), and the government could come after you for those obligations.

Some forms, including those at CNA, include asset and liberty protection costs, which provide seize costs expenses that protect your firm's executives.

No longer a start-up? What D&O protections your tech firm needs

After your technology firm grows, your larger workforce may expose you to employment practices liability, including wrongful dismissal or sexual harassment. In addition, your competitors could sue you for poaching their talent, including situations in which these new hires bring proprietary data to your firm. For example, did you recently hire a new executive and this person brought sales contacts acquired from his or her previous company? That's a risk that may result in a lawsuit. Additionally, if you expand into the U.S., there's even greater potential for risk from your employment practices. It's attractive to want to expand into California, but did you know that that state has a reputation for awarding the highest EPL settlements — often costing in the seven figures?

And if you want to take your tech firm public, there are risks with an IPO that need D&O insurance protection. The price paid for an unsuccessful IPO can cost millions to defend or resolve. If you opt to tap into the U.S. capital markets, Canadian companies publicly listed on the NYSE or NASDAQ are exposed to a greater liability in shareholder lawsuits than those companies listed on the Toronto Stock Exchange due to the additional impact of U.S. laws and regulations.

Now, if your technology company has become so successful that you are looking to either acquire another firm or selling your own, litigation around merger & acquisitions (M&A) will be a risk you need to cover with D&O protections. If your firm rapidly purchases other companies, you expose your company not only to the liabilities of those companies, but also the threat of lawsuits from former and current shareholders. It's important to be strategic when choosing an insurance carrier that can handle your technology firm's growing D&O exposures. Click here to learn more about CNA Canada's Management Liability insurance, including Directors' & Officers coverage.