This is a long article so I am just posting the intro paragraph and the summary. If you would like to read the full article follow the link.
From the moment the CEO of a startup signs a Term Sheet offered by a venture capital company, the futures of both entities are inextricably linked at least until the venture firm “cuts the cord” on their investment. In most cases, their large investments grant the lead venture firm full or partial control of the start-up’s Board of Directors, thereby allowing them to install outside directors and also to replace members of the management team for failure to meet specific milestones. This contractual arrangement aligns both companies risk profiles much as a parent company and subsidiary are. As their risk profiles overlap, properly insuring a portfolio company should recognize the overlap and attempt to create a seamless layer of protection much as granting Additional Insured status does to a wholly owned subsidiary. In non-insurance terms, both the venture capital (VC) firm and their portfolio company should be insured by the same agency and if possible by the same carrier with the utmost care that accommodates the unique relationship between these two entities.
SUMMARY Insuring Venture Firms and Their Portfolio Companies–
- Always use specific insurance language in the Term Sheet
- Use one carrier to insure both VC firm and portfolio companies if possible
- Every conduct exclusions needs a severability clause
- Utilize ironclad indemnity agreements for each outside director
- Insist that Insured v. Insured is waived for Employment Practices claims
 Why “Side A” Matters to You, The Ins and Outs of D&O Liability Insurance, February 11 ,2005, Wilson, Sonsini, Goodrich & Rosarti PC, from their web site 1/10/12.