Eric founded a developer tools company in Kirkland, raised a Series A, and built it to forty employees. A larger software company offered to buy it. The letter of intent was signed, due diligence was underway, and closing was set for sixty days out.
Eric's personal wealth advisor, who works with Trella on the personal side, suggested a review of the company's insurance before closing. Eric's reply: "Doesn't the buyer take care of that?"
What he asked for
Whether there was anything insurance-related to handle before closing.
What the review found
The company's D&O would end at closing. A directors and officers policy covers claims made while it is in force. When the company is acquired, its policy typically goes into runoff or terminates under a change of control provision. The buyer's policy covers the buyer's directors going forward, not the former board for decisions made before the sale.
Claims from a sale come after closing. Minority shareholders who think the price was too low, former employees whose options were treated differently than they expected, or a buyer who later alleges the company's representations were inaccurate: these claims arrive months or years after closing.
The purchase agreement required a tail. The draft merger agreement included a covenant requiring the company to buy a six-year D&O tail, but nobody had priced it or included it in the closing costs.
EPLI and cyber needed the same attention. Employment claims from the integration, and a security incident discovered after closing that started before it, raise the same timing problem for employment practices liability and cyber liability.
What we put in place
We priced and negotiated a six-year D&O runoff policy covering the former directors and officers for claims arising from acts before closing, including claims connected to the transaction itself. We confirmed the tail's terms with deal counsel so it matched the merger agreement's covenant, and added the cost to the closing funds flow.
We negotiated extended reporting periods on the EPLI and cyber policies, coordinated with the buyer's broker so there was no gap between the company's coverage ending and the buyer's program picking up.
On the personal side, Eric's liquidity event raised his own liability exposure overnight, which Trella Insurance addressed with a larger personal umbrella.
Why it mattered
Fourteen months after closing, a small early investor sued the former board, alleging the company had been sold too cheaply and that Eric had negotiated a retention package that benefited him at other shareholders' expense. The runoff policy responded and paid for the defense. Without it, Eric and the other former directors would have defended themselves personally.
If you are selling a company
- Ask your broker to price a D&O tail as soon as the letter of intent is signed
- Check the merger agreement for insurance covenants and budget for them
- Arrange extended reporting for EPLI and cyber too
- Plan your personal coverage for the liquidity event
See how we work with technology companies. For the founder's side after an exit, see the equity-wealthy household's insurance guide. Or get a free policy review before closing.