The following is a guest blog post by Charong Chow Head of Content at San Francisco startup Embroker who provides tech-based insurance packages to startups.

D&O insurance, or Directors and Officers insurance, is one of the most misunderstood forms of business insurance.

Particularly for startups and small, growing ventures, D&O insurance is not seen as essential in the same way that other forms of coverage (such as professional liability insurance, business property insurance, and workers compensation insurance) are. In fact, some entrepreneurs don’t even know what D&O insurance is, while those who are familiar with it primarily consider it a form of big business insurance.

However, the truth is that D&O insurance can benefit businesses of all shapes and sizes. In fact, there is an argument to be made that D&O insurance is more important for startups and SMBs. Before we get to that part of the conversation, though, let’s consider what D&O insurance is and who it covers.

Defining D&O Insurance

D&O insurance is a form of business liability insurance. It applies specifically to a company’s executives and board of directors. Say someone files a lawsuit against your organization’s directors or officers. D&O insurance would help cover the costs of legal defense, settlements, or damages related to the litigation. Without D&O insurance in place, it’s possible that your directors or officers would be held personally liable for the lawsuit and any related expenses.

In most cases, the lawsuits and claims that D&O insurance is designed to cover any mistakes that your executives or board members make in leading your company. For instance, if an investor sues your CEO for making misleading claims or promises during the investment stage, D&O insurance would likely cover any expenses related to fighting or settling that claim. Alternatively, if your board of directors failed to recognize a regulatory measure and was fined or sued for incompliance, your D&O policy would kick in to offer protection.

Why D&O Insurance is Important

Think of managers and directors like the lead singers of your band. If they do their jobs right and steer your company to success and prosperity, they get the lion’s share of the recognition. However, if they make mistakes and end up in the crosshairs of litigious groups or individuals, they also shoulder most of the blame and scrutiny. Taking on the leadership role, in other words, is a double-edged sword with the potential to render executives and board leaders more vulnerable than anyone else in your organization.

If you’re running a startup or small business, then you are likely taking one of two routes with your company’s leadership. The first possibility is that the entrepreneurs who built the business take on key executive and leadership roles. This path certainly isn’t uncommon in the startup environment. Mark Zuckerberg, for instance, built Facebook and today serves as its CEO. The second possibility is that you will try to attract experienced people to serve as your officers and directors. This option might be attractive because it brings seasoned veterans into the fold and entrusts them with growing and steering your venture.

In either case, D&O insurance is vital. For the first scenario, coverage is necessary because your executives and/or board members are likely on the inexperienced end of the spectrum. Entrepreneurs may have great ideas for startups and a lot of hunger to succeed, but they only rarely have any business leadership experience. Since inexperienced CEOs are more likely to make mistakes that lead to litigation or incompliance, D&O insurance is especially important to have in place as a safeguard.

If you opt to hire experienced officers and directors to lead your business, D&O insurance takes on a different layer of importance. More experienced executives are less likely to make novice mistakes, which means that breaches of fiduciary duty, investor problems, and other issues that often lead to litigation against company leaders are also less likely. However, most experienced businesspeople are also unwilling to take on leadership positions unless they know that D&O insurance protects them. Otherwise, they are putting themselves, their families, and their personal finances and assets at risk by putting themselves in the line of fire. Said another way, if you want to attract high-level executives, D&O insurance is going to be a prerequisite.

Buying D&O Insurance for a Small Business

Owners of SMBs often assume that they are “too small” to need D&O insurance. However, because small ventures have fewer financial resources than big enterprises, they can often be completely devastated by litigation claims that larger businesses could weather. Said another way, startups and small businesses—especially ones that are rapidly growing and gaining profile—can’t afford to risk the liability of their leaders. As such, having D&O insurance in place is just as important for small companies as it is for big ones, and arguably more so.

Even in situations where claims made against your directors or officers are groundless, being able to make D&O claims and have your insurance company handle the costs of legal defense will save your company from worry and distraction.

In general, new companies will pay between $5,000 and $10,000 a year for D&O insurance. For a business that isn’t turning a profit yet, those figures can look expensive. But look at it this way. Ultimately, D&O insurance is an investment in the future security and growth of your company, and that is always worthwhile.

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Charong Chow is Head of Content at Embroker, which empowers businesses to take the risks that will help them grow. Based in San Francisco, she’s been published in both online and print media and makes a point to takes risks every day.