May 14th, 2020
Starting a business is challenging. It requires an incredible amount of dedication, work, and capital. It also demands trust, not only from future customers, but also from investors and employees.
It is no secret that startups need some insurance to legitimize their business and to protect what they work so hard to build.
Here is a short guide to what kind of startup business insurance you most likely need, as well as some tips to make your premium dollars work hard for your new company.
Before we can address your startup insurance needs, we must describe what we are referring to as a “startup.” Startups can range in both size and scale, and each stage in the lifespan of your company requires different insurance products.
Here are some common stages:
This is the stage where you are developing your strategy and working on your product. You generally have a shoestring budget and the founders are putting in the majority of the work.
At this point, your most valuable asset is you, the sweat equity in the business, and your ideas.
Your friends and family might be your biggest investors. You might not have your first customer yet. You may be working out of your home.
This is the time where you develop your offering and demonstrate value to your future customers and investors.
At this stage, you need a bare bones insurance program that understands you have a limited budget; your lack of scale means your risks are lower.
The funding stage of a startup is a pivotal time for any business. Whether your funding is coming from an influx of customers, a loan, or new investors, your business is changing rapidly.
You must structure your organization, hire a sales team, potentially hire a sales director, and hire additional people to scale up your offering.
Your risks are changing frequently and you have more responsibilities. Your risks are now spread amongst your shareholders and investors.
You need an efficient insurance program that addresses the evolving nature of your business in a way that protects your company, the shareholders, and your investors.
The growth stage is where things really kick off. You have your team in place and enough capital to scale. It is time to execute on your vision.
At this point, you have invested countless hours and your company is a large portion of your net worth.
You need a tailor-made insurance program and an insurance carrier partner that can scale with you and provide you the flexibility to offer new products or services. This insurance program needs to be broad and encompass a wide variety of risks to protect your massive investment. It also must be adjusted regularly and with greater scrutiny than with the other stages.
General Liability Insurance (CGL) is an insurance contract that pays for bodily injury and property damage that your business causes others during your operations.
For some startups, such as technology-based ones, this is more of a premises liability policy for slips and falls in your office; for others, it could cover more substantial business risks.
Regardless, this coverage is a must-have for every startup. Not only will your landlord require this coverage, but many of your customers and vendors will, too.
Commercial Property Insurance covers the assets that you buy to conduct business. You have or will eventually have a substantial investment in computers, machinery, real estate, equipment, furniture, etc. And if that equipment were to be stolen or lost in a catastrophe, you might not have the cash flow to repurchase everything.
Additionally, Commercial Property Insurance policies have the option of business interruption coverage, which will pay for your lost income while you are out of business due to a covered claim.
Directors & Officers Insurance covers your executive team and board members from personally assuming risk due to business decisions they make in the company.
For example, many Directors & Officers claims happen to startups when investors allege that their money was mishandled, or you convinced them to invest on the merit of metrics and projections that did not happen.
Startups change all the time and not always in a good way, which is why we suggest that founders purchase Directors & Officers liability to protect their personal assets, assets of the other executives, and the business assets from an allegation.
If your startup provides a service, or handles designing, building, or consultation, you need Errors & Omissions Insurance.
Since General Liability Insurance only covers bodily injury or property damage from your operations, you have a coverage gap that does not cover financial harm resulting from your advice and professional services.
Errors & Omissions provides coverage for the professional services that you provide, even if it harms someone in a way that only hurts them financially.
Many startups are technology-based, whether you design the technology yourself or leverage it in your business.
With the use of technology comes some unique risks. After all, there are plenty of ways your business can be compromised due to a data breach, ransomware, social engineering, or cryptojacking.
Cyber Liability is unique in that some policies can provide both third-party and first-party coverage. This means it would not only cover the liability you incur because of the breach (i.e. leaking sensitive employee information), it would also pay to replace any damaged computer systems.
If you are a startup that designs software, we suggest getting a technology E&O policy. This would cover a lawsuit due to a bug or an error in your software that caused a malfunction.
If you have employees, it is required by law that you have workers compensation for your business.
This coverage pays for the medical bills that your employees accrue due to an injury during the scope of employment. It also pays a portion of their normal pay if they can no longer work due to an injury.
Although we can't address specific companies here, we can provide some general examples of what a startup in each phase and various industries would need.
A SaaS company founded three years ago raised funds due to a series of investments. They have 30 employees and their business is growing close to 20% each year.
They don't own any real estate, but they do have a substantial investment in servers and employee computers.
Directors & Officers
This company found an innovative way to manufacture a product more efficiently using a 3-D printer. Apart from the founders, there are no employees that work there.
Besides the time put in the idea, the founders made a substantial investment in a commercial-grade 3-D printer that they use to make their product.
There are currently no customers.
We could keep going on with an unlimited amount of examples, but each startup is unique in the risks that they have and the services they provide. We hope this insight helps you with how insurance coverage can serve you and your business, but we suggest you talk to an insurance professional about your business specifically. Talking to an expert will help you determine what your business actually needs and what the business insurance cost for your startup will be.
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