You may not have even realized the potential for loss while polishing up your latest investor pitch deck. The truth is that risks and the potential for loss exist in every business, and your future investors will want to see that you have not only thought through your business risks but also taken the steps to protect against and mitigate them.
No one wants to waste valuable capital on insurance that they don’t need. Understanding how much protection and what type of coverage suits your situation is the best way to protect yourself and your funds.
Who does the business answer to? Generally, a startup will have some degree of responsibility to any employees, customers or individuals entering an office, storefront or other facilities.
Is the business liable for anything? This is where startups must think outside the box and consider all possible claim scenarios, such as physical injury, property damage or financial loss to name a few.
At what point is the startup liable? For example, as soon as a business hires an employee, rents retail or commercial space, products enter the market, contracts on the startup’s behalf are formed, or assurances given to clients and vendors, they are liable.
What are the places the startup may be held liable? Gone are the days of business being done strictly in brick and mortar locations. The internet has opened a wide range of cyber and data-related liability situations on a global scale.
As you can see, the potential for a liability claim starts very early in a company’s existence. Once you have a handle on the types of risks your venture may be exposed to, you can begin to look at the coverages you need.
Understanding the basic types of insurance available should be a best practice for any firm about to kick off fundraising. It’s important to keep in mind as startups grow, the risks associated often increase as well. A policy that was more than adequate a year ago may now leave you open for a potential loss. Reevaluating your insurance every year as your company evolves will ensure that you and your business are protected.
Before you send out the first email to meet with potential investors, every startup should have a general liability policy or business liability insurance. With this coverage, businesses will have protection against claims for property damage or bodily injury arising out of operations, products, and premises. Additionally, there is coverage for personal injury and advertising liability claims such as slander, and copyright infringement. If you are required to sign a contract as a vendor or service provider, you will be required to carry general liability business insurance.
If your business will be providing technology services or products, another important coverage to consider would be professional liability, or you may have heard it call errors and omissions or E&O insurance. This type of policy would provide financial protection from losses associated with the performance of professional duties. General liability typically excluded these types of losses.
Let’s say your startup owns or leases property. You want to secure commercial property insurance to protect your investment. Commercial property insurance protects your buildings, equipment, furniture and inventory in the event of a covered peril such as fire, wind, and hail or vandalism and theft. Depending on the state you operate in, you may want to consider an earthquake or flood policy as most property policies do not cover them.
Another essential coverage business depends on is business interruption insurance. This protects startups losses that may occur from an interruption in business operations. For example, a partial fire forces you to suspend operations while repairs are made, and you lose out on revenue. Business interruption insurance would provide coverage for the loss of income or additional expenses incurred.
Those are considered the basic types of insurance; every business or startup should have. Aside from those coverages, several others could be key to your protection protocol.
For example, once you hire your first employee, you will need workers compensation insurance to protect your employees if they are injured on the job. And to protect yourself and your business, employment practices liability coverage will provide coverage from claims arising out of alleged acts such as discrimination, wrongful termination or harassment.
Of course, since you are seeking investors outside of the business, a director and officers’ policy will be required. D&O insurance is protection from lawsuits brought against the people serving in such capacities and is designed to coincide with corporate indemnification provisions found in the company’s by-laws, certificate of incorporation, indemnification or employment agreements.
When forming a startup each person involved in the initial stages is an integral part of the success of the business, and the sudden loss of one of those key players could be devastating. Key person insurance is for the untimely death or disablement of the founders or key employees. The insurance is payable to the company, and often outside investors will require it.
Startups involved with the manufacturing of a product for sale should obtain product liability coverage. If retailers to the general public are selling your products, it is required that you carry a certain level of coverage. As the manufacturer of the product you are liable for any manufacturing defects that cause bodily injury or property damage.
Lastly, as cybercrime becomes more prevalent no matter the size of the company, you should carry a cyber liability policy. These policies are typically divided into two buckets, first-party liability, and third-party liability. First party liability is often considered crisis management coverage. Third party liability insurance covers obligations owed to others as a result of a cybersecurity incident.
It may seem overwhelming at first and require dedication of limited resources to pay insurance premiums, but the peace of mind afforded by having the most basic of protection in place outweighs the cost of leaving your business exposed. Don’t let a minor slip up dash the chances for significant success as your firm moves through the various stages of raising capital.
Author, Julie Davis, Director of Commercial Insurance at HRO Resources – Julie is passionate about helping firms grow in a smart, sustainable way so they have the best opportunity for success. Over 10 years of C-Suite corporate insurance and risk management, providing corporate insurance and risk management services. Her career includes senior executive roles at global insurance and risk management firms. Experience building insurance and risk management strategies for innovation firms and complex risks for a wide range of industries.
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