Insurance for Startups & Growth Stage

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A Complete Guide to Startup Insurance

We wrote this guide to help you, the reader, understand both the basics of startup insurance as well as some more advanced considerations.

Our hope is that you walk away from this article a more empowered buyer, with a better understanding of the risk you can transfer to other parties via the proper insurance program and risk management plan.

Why Do Startups Need Insurance?

Many startups perceive insurance as a luxury, something that they will look into once they feel that they are much further along in the company’s lifecycle. However, this is not the right approach to take. Any business, small or large, that is serious about sustainable growth should not postpone the process of purchasing the right coverage.

Certainly, risk is involved in the process of starting and growing a company. What many founders tend to look past is that building a risk management program is the best, most immediate way to transfer a large portion of that risk away from the business and themselves.

The startup ecosystem is incredibly diverse, meaning that no two startups, regardless of the state of growth in which they currently find themselves, require the same exact type of coverage.

For example, startups that work in software development and build Software as a Service (SaaS) products will have to protect themselves most from client lawsuits alleging professional liability or negligence if their products don’t work as promised.

E-commerce and on-demand (marketplace) startups have entirely different needs and will need to focus their risk management efforts toward keeping their customer data out of the hands of cybercriminals.

Then there are cutting-edge tech startups working in industries such as biotechnology, cleantech, or fintech that face constantly changing and often unclear regulatory requirements that can be very risky to maneuver who needed to focus on compliance first and foremost.

And let’s not forget startups that are working in still-emerging industries such as commercial drone operators or cannabis entrepreneurs who need the expert guidance of a broker who is incredibly familiar with their industry in order to get the right coverage.

Using insurance policies as a risk transfer can help the founders make the business more attractive to partners, potential investors, and other third parties whose collaboration will likely be needed in order to help put the business on a healthy and stable growth trajectory.

Thoughtful diligence needs to go into the process of not only deciding on the type of business insurance your startup needs but also how and from which channels to procure the insurance.

  • What type of insurance best fits your startup?
  • What is the appropriate amount of coverage?
  • What is a fair value for insurance?
  • Who should you consult before buying?

All of these questions need answering, which is exactly what this guide plans on doing.

How Startup Insurance Aids Growth

Insurance scales with your leadership, employees, and company’s ability to grow.

Building a risk management policy is akin to making an investment into your business, utilizing insurance to create longevity. Here’s how having the right insurance plan and risk management policies in place can accelerate your startup’s growth:

Attracting Investors: Having insurance in place prior to one’s fundraising showcases the founding members’ ability to think long term and the propensity to put company longevity first. Having the right insurance policy can often help investors during the diligence process and will strengthen a company’s chances of landing the right financing partners.

Attracting Top Talent: The best candidates don’t only care about money, they want great benefits as well. If you are not offering proper health insurance and other modern employee benefit coverage for your staff, you are going to miss out on the most talented candidates.

Building Customer Relationships: Building trust between your business and its customers is critical, especially for startups who work in the B2B (business to business) space. Oftentimes, customers will mandate insurance requirements and request proof of insurance prior to signing a contract.

What Insurance Policies Do Startups Need?

When it comes to determining which commercial insurance policies your startup needs, it is imperative to communicate your business model, growth plans, and internal risks with your broker. This will allow your broker to tailor an insurance program to your business and anticipate needs as your company approaches new stages of growth.

Generally, a broker with expertise in startup insurance will outline a program that includes the following:

Directors & Officers Insurance: If you are looking to raise money, most institutional investors, such as venture capital firms, will stipulate as part of the term sheet that a proper D&O policy must be in place before the financing is complete. When creating your Board of Directors, savvy board members will ask about the adequacy of your D&O insurance. D&O insurance protects your board of directors as well as the leaders of your organization if named in lawsuits alleging a breach of fiduciary duties. This policy will also extend coverage to the business entity itself. Settlements, as well as costly legal expenses, are both covered under a D&O policy.

Employment Practices Liability Insurance: As soon as your business starts hiring, you need to start thinking about EPL insurance. EPLI can protect your company from employment-related lawsuits such as sexual harassment, discrimination (gender, religion, pregnancy, age, etc.), wrongful termination, failure to promote, and more. Often EPLI is combined with D&O insurance to create what is often known as a “management liability policy.

Technology Errors & Omissions Insurance: Any startup that provides professional services and consulting to others based on professional expertise should consider E&O insurance. E&O protects against claims that allege damages arising from technology services you have provided and your customers and partners will typically require it. As the technology sector continues to grow, businesses categorized as software as a service (SaaS), web development, payment process, and anything else handling sensitive data will increasingly require a technology E&O policy.

Cyber Liability Insurance: In 2019, every company that has an online presence should have a cyber liability policy. If you store customer credit card information, Social Security numbers, or any other personal information online, cyber insurance adds a layer of protection in the event of a data breach or software outage. Cyber insurance policies can protect from the perils associated with being an online business, such as data breaches, cyber thefts, and phishing attempts. Cyber liability and tech E&O are often combined to create broader coverage for tech companies.

Fiduciary Liability Insurance: If your company offers employee benefits such as health insurance, 401(k)s, and stock options, then you probably have a person or a team of employees that are responsible for overseeing these benefits. Fiduciary liability insurance protects your company and your employees if someone responsible for these benefits makes a mistake for which they can be held liable. Fiduciary insurance shields your business from claims of mismanagement and the legal liability arising out of their role as fiduciaries. It will cover all associated defense costs in claims of errors and a breach of fiduciary duty.

Additional Policies to Consider

While the above-mentioned package of policies does give venture-funded startups excellent protection on some of the most important fronts, there are still several other policies that most startups should consider purchasing in addition to the critical policies we’ve already highlighted.

Some other types of insurance policies most startups need include:

Business Owners Policy (BOP): Growth stage startups with less than 100 employees are usually able to purchase a business owners policy (BOP) which includes general liability insurance, commercial property insurance, and business interruption insurance. If your startup has an office, these coverages will help protect you from possible claims arising from third-party property damage and bodily injuries and can offer financial support for fixing or replacing damaged property and equipment.

Workers Compensation Insurance: Workers comp is required coverage for most businesses in every U.S. state but Texas. It covers employee injuries, rehabilitation costs, lost wages, and legal costs in the case of an employee claim related to a workplace injury.

Key Person Insurance: If there is a key individual in your company that is vital to the success of your organization, a leader without whom the business would greatly suffer both financially and reputationally, key person insurance should be considered. A key person policy is basically a life insurance policy for a person in your startup who is virtually irreplaceable.

Commercial Crime Insurance: A commercial crime policy will reimburse your startup if money, securities, or any other tangible property is lost as the result of a criminal act. It covers crimes such as employee theft, robbery, wire transfer fraud, and more.

What Does Startup Insurance Cost?

No two startups are the same, which means that not every startup needs the exact same coverage. This also means that there is no one price that all growth startups pay when purchasing insurance. There are several key factors that insurers take into consideration when calculating premiums for startups, including the following:

Size

How many employees do you have? How big is your office? Do you have multiple offices? Do you own company vehicles? The greater the size of your startup, the more you’re going to be pay to insure it properly.

Industry

The industry that you are a part of can greatly influence your insurance costs, depending on how much risk is involved in the particular niche in which your startup operates.

Type of Business

The types of products and services your startup offers can also affect the price of insurance. For example, a startup that provides a cloud computing solution and must protect the data of thousands of other companies will pay much more for cyber liability insurance than a startup that sells hardware.

To get a better understanding of how much you can expect to pay for key business insurance policies based on your revenue and growth stage, check out our 2021 benchmarking report featuring detailed data based on the purchasing decisions of more than 2,000 tech startups.

Recommended Coverage for High-Growth Startups

The more your startup grows, the more complex your insurance needs will become. Here’s a quick look at how a high-growth startup’s most basic coverage needs can evolve over various phases of growth:

number 1 icon First Employee Hire: Workers Compensation Insurance

  • Required by individual states
  • Covers medical expenses and lost wages incurred by employees injured while working
  • Cost: $500-$2,500

number 2 icon Operations Begin: Commercial General Liability Insurance

  • Protects your business as it grows
  • Covers lawsuits claiming bodily injury or property damage from your product or operations
  • Provides coverage for personal and advertising injury, such as libel and slander
  • Cost: $500-$3,000

number 3 icon You’ve Got Office Space: Commercial Property Insurance

  • Often required for lease agreements
  • Covers replacement costs for business property (i.e. computers, furniture) damaged or lost in events such as fires or thefts
  • Cost: $500-$3,000

number 4 icon You’re Up and Running: Errors & Omissions Insurance

  • Needed by most tech companies, required by some clients
  • Covers third-party lawsuits claiming financial injury due to the failure of your product or service to perform as intended
  • Cost: $500-$3,000

number 5 icon You’ve Got Data: Cyber Liability Insurance

  • Access to personal data (addresses, emails, names, etc.) brings new risk
  • Covers a wide range of claims, including financial injuries due to data loss, DDoS attacks, or virus transmission in a security breach
  • Cost: $1,500-$7,500

number 6 icon Funding Round Closed: Directors & Officers Insurance

  • Required within 60 days post-closing on a round of funding
  • Covers lawsuits brought against a director, officer, or the company for financial injury as a result of mismanagement
  • Cost: $3,500-$10,000

number 7 icon You’ve Gone Global: Foreign Package

  • International offices or travel bring new risks
  • Extends many existing coverages to foreign operations such as general, auto, and employment practices liability
  • Cost: $2,500-$7,500

Evolving Insurance for Startups

Embroker’s vision is to empower business leaders to take the risks that will allow their businesses to thrive. For startup founders, there is no insurance product better aligned with that vision than directors and officers coverage (D&O).

D&O protects founders and their executive teams from the risk inherent in making decisions as a company leader. Without this type of protection, starting a company, or serving on its board would entail significantly more personal financial risk than it already does.

Before Embroker, the insurance market for startups left much to be desired, too many intermediaries taking a cut, which resulted in opaque pricing, an application process that required sharing sensitive and time-sucking documents like projected financials and updated cap tables, and a timeline that took weeks.

We’ve built an entirely new, more evolved way for startup founders to protect themselves and their businesses by purchasing D&O, as well as employment practices liability, fiduciary liability, and tech errors & omissions including cyber liability coverage.

Coverage can be found in minutes and at stellar prices. In addition, we help our clients with all lines of P&C as well as employee benefits and key person insurance.

Embroker’s Startup Insurance Package

Our Embroker Startup Package provides market-leading coverage and is fully backed by Munich Re, one of the world’s leading reinsurers. 

This insurance package is custom-made for venture-backed companies. We protect startup companies that have received seed or Stage A funding and growth-stage companies that have received Stage B or C funding, meaning a minimum of $50 million of funding.

You can include directors & Officers (D&O), technology errors & omissions incl. cyber liability, as well as employment practices liability insurance (EPLI). You can also add fiduciary liability insurance to the package if necessary.

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“Fantastic service and competitive pricing! They helped us obtain the right coverage and pricing, with fantastic turnaround time. We worked with two other brokers before, and Embroker was definitely much better.”

Christian Anstett

Doppler Technologies, Inc.

Don’t Just Take Our Word for It!

With a Net Promoter Score (NPS) of 70+ Embroker is the highest rated business insurance company in the market.

NPS Score 2020

17
Insurance Industry
71
Embroker

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