Top Tips for Insuring Your Startup or Small Business

This article was contributed by Sean X.

Getting a startup off the ground can be incredibly hard. In fact, about 90% of startups fail in the first year. And it’s understandable why.

Most startups are founded to focus on creating real innovation through disruptive ideas and technology. However, what typically happens is that startup founders are then faced with a myriad of unforeseen challenges and risks.

Property damage, cyber attacks, data breaches, product issues, discrimination and harassment issues, and contract disputes are all possible and potentially costly risks a startup faces.

However, having the right insurance products in place allows growing companies to manage these unpredicted risks and avoid financial losses that could potentially cripple or kill your business.

Many startups incorrectly view insurance as a luxury and not a necessity.

For them, insurance is something that they can leave for later, a matter to focus down the line in the company’s lifecycle.

However, this is a VERY risky approach to take. Almost any business, no matter how big or small, that wants to ensure sustainable growth should look into securing the right coverage.

Why Get Business Insurance?

Certainly, many founders accept that starting and growing a company is a risky proposition, and they are willing to accept these risks as a fact of life. However, what they tend to overlook is that there’s a way to mitigate the majority of those risks.

This can be done through building the right risk management program and transferring a large portion of that risk away from the business and themselves. Building a risk management policy can be seen as making an investment in your business, utilizing insurance to create longevity.

Using insurance policies to transfer the financial burden of these risks to the insurance carrier can help startup founders make decisions confidently, make the startup more attractive to partners and investors and help to attract top-tier talent.  Additionally, it’s important to scale your insurance as your company grows, so it can keep up with your leadership, employees, products, and revenue.

However, getting commercial insurance is a fairly abrasive and difficult proposition in general. And it’s a lot harder and tedious for startups. Many traditional insurance companies don’t understand the specific needs of startups and don’t have custom-made, dedicated offerings for startups.

In order to help startups who are looking to get insured, we’ll cover what policies startups actually need by the stage of the business lifecycle, how the cost of insurance is calculated, break down a few unexpected benefits of insurance and help you ensure you are properly covered.

Deciding on Insurance for Your Startup

Before making the decision to buy insurance, due diligence needs to go into the process of deciding on what type of business insurance you need but also how and from whom to get it.

Here are a few questions you need to ask before securing coverage:

• What type of insurance best fits your startup?
• How much coverage is enough?
• How much should you pay for insurance?
• Most importantly, who can you consult to help you decide on the above questions?

All of these questions are important, and this is why we plan to answer them in this guide.

What Insurance Do Startups and Growth Companies Need?

There are numerous factors that determine what coverage you’ll need to properly protect your startup, with the most common being:

1. The nature of your work and your business model,
2. How much and how rapidly you plan to grow your business,
3. How much revenue you are projecting in the next 12 months,
4. The nature and quantity of contractual relationships you plan to have.

Let’s break down the policies your startups will typically need as they move through growth stages.

Insurance for Seed Stage Startups, Before They Get Customers

• General Liability & Property/BOP (Business Owner Policy): A basic policy that most small businesses need to secure first. It will protect your physical assets such as computers and furniture from potential losses. General liability will also cover your legal expenses and settlement monies if you are held liable for bodily injury and property damage to others if they happen on your property. General liability will typically be considered a requirement to secure a lease on a property or sign contracts with potential partners.
• Workers’ Compensation: If your employees get hurt while working, worker’s comp will cover their medical expenses and lost wages. Depending where your business is based, this type of insurance may be compulsory. The good news is that most startups operate in a fairly low-risk manner (i.e. office jobs), so you won’t have to pay much to be properly insured.

Insurance for Seed Stage Startups, That Already Have Customers

• Errors & Omissions (E&O): Startups that provide professional services or advise third parties will need to invest into E&O coverage. Additionally, software products are also seen as a service from an insurance standpoint, so many tech companies will need to carry it as well. E&O would come in to protect you against claims that allege that your services or advice lead to financial damages to third parties. Your customers and partners will typically consider this policy a requirement.
• Cyber Liability: A strong cyber policy will allow you to transfer the risks of a data breach or cyber attack to your insurance carrier. These costs typically include both settlement and legal costs, but computer forensics, credit monitoring, costs to notify your users of a breach and the costs needed to handle the PR implications. This policy will also include third party coverage to protect you against lawsuits if your customers or partners have suffered financial losses due to the attack.

Insurance for Series A Startups:

• Directors & Officers (D&O): A crucial coverage that would respond to protect the company and the personal assets of your executives and directors from lawsuits alleging breach of fiduciary duty, misrepresentation, or errors and omissions. The policy will cover both the defence costs and court-ordered settlements. Once you start raising money, most venture capital (VC) investors will require this policy as part of the financing agreement.  Most VCs serve on the startup’s board of directors and they want to know that their assets are secure. Additionally, when recruiting for your board of directors, board members will definitely inquire about your D&O coverage and a strong policy will be a great incentive for them to join.
• Employment Practices Liability (EPLI): This policy would serve to protect your business from potential employment-related claims such as discrimination, harassment, and wrongful termination. The more employees you have the more you’ll need a strong EPLI coverage. Additionally, if you’re employees have face-to-face interactions with your clients you can include coverage for harassment or discrimination to third parties.
• Fiduciary Liability: A fiduciary policy will protect your business if you’re held liable for claims of mismanaging any employee benefit plans, such as 401(k) plans or health benefits. As soon as you have any employee benefit plans in place, you will want to look into a fiduciary liability policy.
• Key Person Insurance: Key person, also known as “key leader” or “key man” insurance, is basically a life insurance policy taken out on an individual who is critical to the success of your business. Key person insurance will ensure that your company is insulated from the financial losses of a key person’s death or disability.  This insurance policy will cover both losses and replacement costs to ensure that your startup survives such a tragic event.

Additional Considerations for Later Stage Startups (Series B, Series C, etc)

Foreign Commercial Package: A highly specialized policy that extends the startups existing coverage to foreign operations. These policies will extend the standard policies such as general liability, property, and foreign voluntary workers’ compensation. They can also be written as to include kidnap and ransom and business travel accident coverage.

Commercial Crime Policy: Crime insurance will cover your startup from crime-related losses of money, securities, or property that other products just won’t respond to. This would include situations such as if you’re a victim of a fraud or employee theft. Criminal acts committed by both insiders and by third parties can cause serious losses to your startup. The policy has two types of coverage: first party and third party. First-party coverage would protect your business from losses and third-party coverage would respond to cover the losses other businesses or entities that your employees may cause.

Additional Benefits of Insurance

At its core insurance is all about protecting your business. However, there are many unseen benefits of securing the right policies that may not be immediately apparent to you.

Let’s break down the 3 most obvious benefits:

Attracting Investors and Partners: Having insurance secured prior to starting fundraising will prove to the investors that you’re focused on long term success and are prepared to whether any potential problems. Investors will definitely do their due diligence and if they see that you have a good risk management program it will strengthen your chances of landing the right financing partners.

Attracting Top-Tier Talent: When building a startup talent is crucial. The very best candidates won’t only look at the money on offer, they’ll want a good benefits program as well. If you offer a good health care package and other modern employee benefit programs to potential hires, you’ll get a huge recruiting boost. Additionally, executives can be held personally liable for damages for the decisions they make – they will want to know that their assets will be protected even if they make a mistake while serving as the leadership of your company.

Strengthening Customer Relations: Creating trust between your business and your consumers is crucial. This holds especially true for startups that operate in B2B space. Having insurance will protect your clients if your product fails and causes damages or if their personal information that they’ve provided you with is compromised by cyber attacks. Some customers will also have specific insurance requirements and will request proof of insurance prior to signing a contract. Additionally, many enterprise clients will have boiler-plate contracts that stipulate a certain amount of coverage and limits as required before they’ll want to work with you.

How Much Does Startup Insurance Cost?

It can be hard to determine how much your startup will have to pay for insurance without consulting with a broker. It’s been a long-standing problem of traditional insurance underwriting that pricing procedures have been fairly opaque and insurance quotes have taken a long time.

This has been slowly changing with the advent of insurtech companies, and today there are ways to get quotes in minutes online.

Let’s breakdown the main factors that we know affect the cost of your insurance:

• Size – The bigger the company, the more they’ll have to pay in premiums. But how is the size of a startup quantified? Typically, underwriters will take the number of employees and a 12-month projected revenue as the main factors. For early-stage startups that can’t provide enough information to project revenue, insurers will look at the physical business location or payroll.
• Location, Location, Location – Startups in highly urban areas will have to pay more for their coverage rather than those located in less populated areas. Additionally, certain areas have a high risk of natural disasters occurring, which will increase the price of insurance. Since each area has a separate set of legal characteristics, they can end up affecting your insurance as well.
• Claims History – This is pretty straightforward – if you’ve had a prior history of claims, you’ll have to pay more for insurance. For insurers, prior experience is an indicator of future events, and they will price the coverage accordingly.
• Funding – The amount of venture funding you’ve secured will affect your premium. Working with recognized investors with good standing will mean that many insurers will give you huge insurance discounts, trusting their judgment of your company.
• Personal Identification Stored – If you store a lot of personal customer information on your systems, you’ll have to pay more for cyber coverage.

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About the author: Marketing mastermind and agent of change, Sean X has been looking into the future where brands, technology, and media intersect—and manipulating the present to get there—for more than two decades. Sean is currently CMO at Embroker, a digital insurance company reinventing how businesses ensure they can take the risks they need to grow.