As a company gears up for an IPO, executives should keep two critical realities in mind. First, actions taken during the pre-IPO phase often carry long-term risks that may result in lawsuits—even years down the line. Second, these legal risks can expose executives to personal liability, regardless of whether they’re still with the company when claims arise.
Pre-IPO Coverage Offers Long-Term Protection
Picture this: You’re a seasoned executive who is offered a leadership role at a company preparing to go public. The opportunity is compelling, but the risks are real. If the company later encounters financial trouble or declares bankruptcy, litigation could follow—and you might be named in the lawsuit, even after your departure.
Before accepting the role, ask if the company currently carries pre-IPO Directors & Officers (D&O) insurance or is willing to secure it. This specialized coverage helps mitigate personal liability by locking in lower premiums, setting a retroactive date to include pre-IPO actions, and offering up to six years of tail coverage. For executives, it’s a powerful layer of protection—and peace of mind—that lasts well beyond their tenure.
A Look at SEC Action and Lawsuits
When companies go public, it’s an exciting time. Leaders envision great things for the company and their shareholders. No one ever sets out to fail, but nevertheless failure is quite common.
Consider the following cases:
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On September 13, 2024, the SEC announced charges against Zymergen Inc. The company raised approximately $530 million through an IPO in April 2021 and then fired for bankruptcy in 2023. The SEC alleges that the company mislead IPO investors regarding its overall market potential and revenue prospects. The company claimed in had a $1 billion electronics distribution market opportunity for its only commercially available product, but the SEC says this estimate was based on flawed and unreasonable assumptions. Zymergen has agreed to pay a $30 million civil penalty.
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A class-action lawsuit has been filed against BioAge Labs, according to Hagens Berman Shareholder Advocates. The lawsuit alleges that the company misled investors regarding the safety and prospects of a key drug candidate before its IPO in September 2024. The IPO raised $227.7 million. Just months later, in December 2024, the company announced that it was halting the trial for the drug because some participants were experiencing elevated liver enzymes.
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Instacart investors have filed a class action lawsuit, according to Grocery Dive. Instacart had an offering price of $30, but the share price dropped below this several days later. The complaint alleges that Instacart overstated its prospects and downplayed its risks, causing investors who bought in the first days of trading to lose money.
Executives Face Personal Liability
The Grocery Dive article notes that the class action against Instacart names the founder, executives and board members as defendants.
This is not unusual. Directors and officers are frequently named in D&O lawsuits, and they can be held liable for any alleged wrongdoings that they committed while serving the company, such as allegedly making misleading statements to investors.
Before an IPO, executives need to create excitement to entice investors, but they have to walk a thin line in order to avoid misrepresenting the facts. If they are overly optimistic and the company does not perform as hoped, investors may pursue legal action.
Don’t Let a Deal Gone Wrong Put Your Personal Assets at Risk
When high-stakes deals fall apart, executives are often the ones targeted. Without proper Directors & Officers (D&O) insurance, their personal assets—including stock awards and cash compensation—could be on the line.
In fact, when a company can’t fulfill the terms of a settlement, plaintiffs may try to recover losses by pursuing the personal assets of its directors and officers. That’s why the right D&O insurance isn’t just a nice-to-have—it’s a vital safeguard. It can mean the difference between walking away protected or facing devastating financial consequences.
For directors and officers who resign or transition out of a company, it’s also essential to have access to standalone D&O coverage. This allows individuals to independently secure protection for up to six years—a small investment for long-term peace of mind.
Preparing for an IPO?
NSI Insurance Group can help you put the right protections in place. Get a quote today and make sure your leadership team is covered—no matter what the future holds.
