A flop in every sense of the word, the Fyre Festival could be aptly named the “festival that never was” as it was called off just hours before its official start. Widely publicized as a luxurious, exclusive festival featuring top musical acts in the Bahamas, the actual result was anything but. Owing to their lack of experience and bad judgment, the co-founders worked backwards in planning the festival. They created the idea, sold tickets, promoted the event, and only then focused on the marketing and talent. In the end they were ill-prepared and concert goers, including some who had paid up to $250,000 for ticket packages, were met with substandard and even dangerous conditions at the site. Rather than enjoying a line-up of famous musicians, exotic villa accommodations, yachts, and gourmet food, the bands canceled and attendees arrived to tents containing wet bedding and unappealing cheese sandwiches. Many were stranded at the airport while trying to leave the supposed “private tropical paradise.”
In theory, it all sounded pretty great. At one point, the festival drew interest from a number of eager investors, including Comcast Ventures, the investment arm of Comcast Corp., which had considered investing as much as $25 million before becoming wary of the deal and backing away entirely. Other investors have been added as defendants to a class-action Fyre Festival lawsuit alleging fraud and breach of contract.
Unprotected without the proper insurance, the festival’s co-founders now find themselves vulnerable against several lawsuits from investors, including a $100 million one led by a celebrity lawyer. The Fyre Festival lawsuit’s investigators claim there were signs early on that the festival would implode on many levels, alleging that the co-founders provided false documents to two individuals to try to secure a $1.2 million investment in Fyre Media for a festival they promised to be “life changing” but in truth became nothing short of disastrous. A co-founder also allegedly claimed he made millions in revenue from 2016-2017, but he’d actually earned under $60,000 from approximately 60 artist bookings.
The fiasco is an example of why it is crucial that companies purchase Directors and Officers insurance. Raising capital is a process that requires a measured approach in order to accurately set the expectations of your investors. There is so much at stake, and any inaccuracies in representing your financial position can result in devastating consequences for your business and personal assets, making you liable for even the smallest missteps. It’s essential to safeguard your company against these risks by purchasing D&O insurance.
Here’s what Directors and Officers insurance covers:
- Directors, officers, leadership and employees for monetary judgments and settlements for negligence or breach of duty, loyalty or care to the organization
- Claims made for civil, criminal, judicial, administrative and regulatory or arbitration proceedings and investigations
- Breach of fiduciary duty, failure to exercise due care and employment-related suits that allege harassment, discrimination or wrongful termination
It’s entirely appropriate to place raising capital in a risk category. Assume that you’ll hit snags – small and large - along the way. As is often the case with start-ups, growth happens quickly and, as exciting as it is, if you lack an adequate number of employees or experience to keep up with it, you may find yourself in over your head. D&O insurance will cover you in the event of lawsuits brought by shareholders, investors or other stakeholders involved in raising capital. Such lawsuits might claim, for example, that:
- The timing wasn’t right when you raised capital, due to such factors as a volatile market or your company’s position
- The claimant’s stock or ownership percentage were diluted when you brought other investors into the business
- You didn’t deliver on the promise to increase profitability with the new capital
Additionally, when you take on debt or assume a loan to raise capital, insurance underwriters will expect you to produce a repayment schedule in order to qualify for competitive interest rates. If for some reason, you can’t keep up with the payments, you’ll need to develop a plan to repay the debt, or risk bankruptcy.
Before raising capital, talk to your broker about the right coverage to protect your business from the financial impact of lawsuits by shareholders, investors or other stakeholders. Download, Own Your Business Risk, The Insurance You Need to Make Bold Moves to understand the right coverage you need at each business milestone.