Contrary to what some cannabis start-up companies often believe, D&O protection is available, and not necessarily on a deal-or-no-deal basis. The key to obtaining coverage is to thoroughly spell out the company’s mission and be sensitive to the red flags that can scuttle the process.
To begin with, start the search for D&O protection as quickly as possible — so there is time to alleviate any concerns expressed by underwriters. For example, an offer of coverage may be tied to an adjustment of company bylaws — easier to do early in the game.
Make certain to describe operations in exacting detail — it can make a difference. Without enough substantiation, a company could be labeled as being more at risk from, say, farming or dispensing activities than it actually is.
At the same time, be candid with company financials. All parties should know future funding will be achieved, what commitments are already in place, and what steps have been taken to patch any earlier financial setbacks.
Address any and all bankruptcy concerns raised during underwriting. Cannabis companies can’t take advantage of federal bankruptcy protections, so avoiding bankruptcy exclusions is critical. There may be other regulatory exclusions to D&O coverage, and it’s clear that everyone must agree on their definition, their applicability, and their trigger events.
Be willing to ease in. In some cases the cost for full-side D&O protection may seem prohibitive for a micro-cap company. If that’s the case, a Side A-only policy may be a temporary alternative that still allows the company to hire top talent, knowing their directors will be personally protected. Executives are already taking a risk when they leave traditional industries for the cannabis sector, and putting their personal assets at risk is usually a deal-breaker. This option, of course, does nothing for the company’s own balance sheet assets, but it can be half the price of full-side coverage.