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Believe it or not, a significant portion of young startups think that they can continue growing without insurance & that they do not need to buy insurance policies until they have scaled significantly. Many perceive insurance as a luxury, not a necessity. Insurance for startups is something that does not cross many founders mind.
However, any startup that’s looking to enable sustainable growth should strongly consider purchasing the right coverage based on their specific needs & unique risk profile. Using an insurance product to transfer risk to 3rd-parties can make the business more resilient when misfortune strikes. It can also help make the business more attractive to partners, venture-capital firms, & other third parties that can help the business grow.
However, getting the right insurance coverage at the right price can be a challenge with many questions that you don’t necessarily know the answer to:
- What are your startup’s insurance needs?
- How much coverage do you actually need?
- What policies should you look into?
- Who do you need to consult before buying?
These are the questions that we are going to try and answer in the following guide:
Why Do Startups Need Insurance?
To put it simply, insurance is all about transferring risk. Employing a good risk management policy is a crucial step for your company that can safeguard the future of your business. In that sense, insurance should be seen as an investment & not just another necessary expense.
A quality insurance program can also help your company grow. For instance, most venture capital firms will require a seat on the startup’s board of directors if they plan on investing in the company & they want to see that you have purchased an insurance policy that’s going to protect them & their assets. Additionally, having the right coverage in place prior to the process of searching for investors & raising funds showcases the financial stability & long-term planning capabilities of your leadership.
Another important risk to consider is the fact that the leaders of your startup can be personally exposed to risk for their decisions. The right D&O policy will allow them to focus on making the right calls to grow your startup without the fear of their personal assets being exposed.
Insurance Policies Startups Need
Different startups need different coverages. There are many factors driving the need & cost of your coverage. The most common factors that drive coverage decisions are the nature of your product/service, your business model, growth rate, & projected revenue.
When it comes to determining which insurance policies your startup needs, it is imperative to communicate the nature of your work, growth plans, & internal risks with your broker. It’s also a very good idea to work with a broker that specializes in startups that can help you an insurance program tailored to your startup and make sure that you have the right coverage at the best price.
Here’s the breakdown of policies that startups generally need:
Directors & Officers Insurance:
D&O insurance protects your board of directors as well & other organizational leaders if they are exposed to liability claims for their managerial decisions. This policy will also cover the startup itself, covering both potential settlements & legal costs.
If you’re looking to raise funding & secure the backing of a venture capital firm, they will likely request a seat on your board of directors, thus making D&O insurance a requirement for funding. Additionally, you want the best leaders & experts to join your organization when you’re looking to fill your startup’s leadership roles. The strength of your D&O insurance can be a powerful recruiting tool for getting the best leaders & executives to commit to your company.
Employment Practices Liability (EPLI) Insurance:
As soon as you start adding staff, it’s good to start thinking about purchasing EPLI insurance. EPLI insurance protects your startup from employment-related lawsuits such as sexual harassment, discrimination, wrongful termination, failure to promote, and more. EPLI and D&O insurance policies are often combined to create what is referred to as a “management liability policy.”
Errors & Omissions (E&O) Insurance:
E&O protects against claims of financial damages from the services or advice you have provided to your customers & clients. As the technology sector continues to grow, software as a service (SaaS), web development, payment processors, & any other companies handling sensitive data will increasingly require an E&O policy to protect against potentially messy & expensive litigation.
Workers’ Compensation Insurance:
Workers’ comp will cover the costs of medical care & lost wages if your employees are injured in the workplace. Don’t forget that most states require workers’ compensation coverage for any company that has hired staff.
Cyber Insurance:
If you store your clients’ personal information Online, your company could be held liable in the event of a data breach or hacking attack. Cyber insurance protects from the perils of running an Online business, such as data breaches, cyber thefts, & email scam attempts. This coverage will help you not only pay legal fees, but also data recovery costs & the costs of investigating a data breach or hack.
Fiduciary Liability Insurance:
Fiduciary liability insurance protects your business & employees from the risk of mismanaging employee benefits plans such as a 401(k) plans, & the legal liability arising out of their role as fiduciaries. As soon as your startup starts providing employee benefit plans, it’s a good idea to look into fiduciary liability insurance.
Key Person Insurance:
Key person or leader insurance is in it’s simplest form a life insurance policy taken out on a business partner/owner, important executive, or a critical employee whose death or disability would adversely affect the startup. Key person insurance will allow your company to recover from the death or disability of a key contributor by covering the losses thus incurred & the cost of finding & training a replacement.
No startup founder wants to think about insurance, but it’s an incredibly important part of any business’s sustainable growth strategy. Insurance can be a great financial tool to allow your startup to become more durable & protected from huge financial loss, giving you peace of mind when making tough decisions & taking away many of the variables that can slow or completely stop your company’s growth.
