The United States is the largest tech market globally with presumed market size of $1.6 Trillion in 2019. Disruption is a fact of life here and startups come and go at a dizzying pace. In fact, the industry has the highest failure rate too, estimated at 63% in 2018. So, for those looking to enter this high-stakes game, it’s of utmost significance to be aware of the possible risks and mitigations. In that context, here’s a note on the insurance cover you should consider to protect the business.
Types of Insurance to Consider
The initial years of business are extremely crucial and this is also when start-ups are exposed to a wide range of risks. While buying insurance coverage, tech start-ups need to focus on some specific considerations at this stage. As the start-up grows, new employees will come in and the products and services portfolio will expand. The coverage requirements may shift with the age and stage of the tech start-up.
The first is the discovery stage of the tech start-ups that involves self-funding or funding through friends and family. There are very few employees at this stage. At this stage, the plans must include general insurance, business property insurance, errors and omissions insurance, and cyber liability insurance.
Moving forward, start-ups enter the efficiency stage. Many firms raise funds by this stage and begin to actively recruit employees. The products/services are start to make an impact in the market. In addition to the insurance coverage listed above, start-ups must also consider include worker’s compensation, directors and officers insurance, and key man insurance at this stage.
After finishing several rounds of funding or gaining market acceptance, the start-up enters the scale stage. By this stage, a formal HR department is in place and the customer base continues to expand. Employment practices liability insurance would become a key cover at this stage along with all the other types of cover.
Key Insurance Coverage
Apart from the basic (and legally mandated) insurance coverage, some types of protection could prove essential for startups. Three such insurance coverage types are listed here.
The first in the list is the Errors & Omissions Insurance. It is the liability insurance that protects the start-up and its employees against claims filed by the clients in response to unsatisfactory work or errors. In the tech industry, it is often seen that the clients come with changes in the original set of requirements. Also, client satisfaction is not easy to achieve due to abundant disruptions with the latest technologies and digital innovations. As a result, a tech start-up may not be able to satisfactorily deliver the product/service promised to the client despite their well-meaning efforts. The client may accuse the organization of unprofessional service and behavior. E&O Insurance protects the startup in such situations.
That apart, technology is ever-changing. In that scenario, mistakes and errors could always occur. These could be due to mistakes by human resources or technical faults. These mistakes could impact critical systems and processes at the client’s end. E&O provides coverage against financial loss in such situations. It is, therefore, also referred to as Professional Liability Insurance and holds major value for the tech start-ups.
Directors & Officers Insurance protects the founders and officers against claims, such as theft, fraud, misconduct, and similar accuses. These claims may come from clients, existing employees, ex-employees, vendors, competitors, or any other stakeholder. It is also one of the pre-requisites investors look for before they decide to invest in a company.
A lot of the tech world is in the public eye, as are the officers of the companies that drive the tech vision forward. It’s not unusual for these people to attract the wrong kind of attention and the lawsuits that follow. It’s also true that many startup founders are extremely young and inexperienced in professional culture. The archetypal personality type is the hard-driving, passionate, socially awkward founder. It’s not beyond the realm of possibility for such people to find themselves in trouble for issues related to their startup or otherwise. Tech start-ups can be adversely impacted by such lawsuits and it can have an extremely negative impact on the business continuity and revenues if not dealt with properly. For instance, a competitor firm may file a lawsuit regarding the violation of Intellectual Property by the start-up following the hiring of a person from that company. The competitor may adopt such an approach to tarnish the reputation of the tech start-up and slow down the work progress so that it can launch the product first in the market. D&O Insurance is a boon to effectively tackle such grim circumstances.
Cyber Liability Insurance
This insurance type covers financial losses that may occur as an impact of cyberattacks and cybercrime. The losses caused by the company directly come under the first-part coverage and the ones resulting from the inability to act are covered under third-party coverage.
Cybersecurity is a major concern for business firms and tech start-ups can be exposed to the issues, such as data breaches, malware attacks, hacking issues, etc. This could be due to the lack of security infrastructure and knowledge. The start-ups usually involve numerous online activities and cloud infrastructure which may cause several security vulnerabilities to be present. Cyber liability insurance is necessary to protect against any cybercrime or incident.
Tech start-ups must evaluate and explore the insurance coverage needs based on the specific circumstances that govern their operations. The nature of business, the number of employees, funding status, and the launch of the product/service are a few aspects that must be considered while selecting the insurance cover. This is an exciting, ever-evolving landscape and it’s important to be prepared always.