Startup Equity & Securities Claims

Venture Capital Insurance Hidden Exposures

When startups offer equity as compensation, they are entering securities territory.  As valuations rise, and especially when companies face downturns, misrepresentation claims tied to employee equity are emerging as a high-risk litigation trend.

These lawsuits don’t just impact the company - they will name board members, including VCs with active roles or board seats.  Without proper risk management and tailored D&O coverage, these exposures are personal.

The New Litigation Trends that Impact Venture Capital Insurance

As valuations climb and liquidity timelines stretch, employees begin scrutinizing the value of their equity. That scrutiny turns to legal action when:

• Companies go through down rounds, distressed M&A, or wind-downs;

• Equity is diluted, repriced, or rendered worthless;

• And internal messaging around “upside” starts to look more like misrepresentation.

We’re seeing a clear trend: securities-based lawsuits brought by former employees who claim they were misled about the value of their options or RSUs. And these claims don’t stop at the company - they often name individual board members, including VCs with active oversight or compensation roles.

The Legal Theory: Misrepresentation, Fraud, and Fiduciary Breach

Employees granted equity are not accredited investors. Yet they are often handed offer letters, internal decks, or verbal assurances that portray stock options as a sure path to wealth - without any mention of:

• Dilution mechanics

• Liquidation preferences or waterfall structures

• The speculative nature of private company equity

This disconnect creates fertile ground for securities fraud and misrepresentation claims, especially under state Blue Sky laws and federal Rule 10b-5.

These claims argue that companies and their leadership failed to disclose material risks, effectively treating employees as sophisticated investors - while withholding the very information those investors would have needed to make an informed decision.

Why This Risk Is Personal - Especially for VCs

These lawsuits aren’t just a corporate liability. They are increasingly naming individual directors, especially venture partners who:

• Sit on compensation committees

• Approve equity grants

• Participate in exit or financing discussions

• Oversee internal communications to employees

In many cases, plaintiffs argue that these directors had a duty to ensure fair and transparent disclosures, especially when they encouraged or approved messaging that promoted equity upside.

D&O Insurance: Often Inadequate, Sometimes Useless

Most D&O policies don’t automatically cover securities claims tied to employee equity. And even when they do, coverage may be lost due to:

• Fraud exclusions or prior knowledge clauses

• Employment-related exclusions if the claim is tied to hiring or compensation

• Narrow definitions of what constitutes a “claim” or “wrongful act”

Worse, these policies are often never reviewed for the unique blend of securities, employment, and board governance exposures that arise in these cases.

The Real-World Impact: Reputational and Financial

For VC firms, these claims create cascading risk:

• Reputational damage when failed exits lead to employee lawsuits

• Direct financial liability if Side A coverage is denied or exhausted

• Fund-level exposure if partners are named and indemnification is unavailable

This isn’t theoretical. These lawsuits are happening. Boards are being blindsided. And in many cases, coverage gaps are only discovered when it's already too late.

If You’re On a Board, You Need to Hear This:

If your company promotes the upside of equity, it must also disclose the downside.If your firm takes a board seat, it inherits disclosure and fiduciary obligations - and with them, personal liability.

Upward Risk Management

At Upward Risk Management, we specialize in protecting venture-backed boards from precisely this kind of exposure.

We’ve designed coverage structures for companies navigating:

• Complex cap tables

• Secondary sales

• Tender offers

• Exit scenarios with challenging waterfall dynamics

And we’ve placed custom securities and Side A coverage designed for the realities of startup litigation.

Want Peace of Mind?

Let us review your current D&O program.We’ll identify gaps, assess your securities exposure, and structure coverage that protects your board - not just your balance sheet.

Reach out for a confidential review.

Because the only thing worse than a lawsuit… is learning you’re not covered.