Startup business insurance protects your company, investors, board, property, and customers from lawsuits. Think of insurance as an investment in your business designed to cover the financial cost of unforeseen liabilities and business losses. It is a way to help transfer the financial risks of running a competitive startup from you and your company to another entity. In the event that something does go wrong, you can file a claim, and your insurance provider takes it from there.

Why Startups Need Insurance

It’s a smart business move that signals to potential customers, employees, partners, investors, and board members that you take risk seriously. Having insurance in place from the start can:

• Ensure compliance — compliance with jurisdictional legal requirements helps to avoid penalties and legal issues aka wasted time, money, and focus. This puts you and your  team in a better position to operate smoothly without regulatory interruptions.
• Speed up negotiations- many require insurance in place before they will work with you.. In the fast-paced world of startups, that can mean the difference between making the deal or getting passed over for a more prepared competitor. This might explain why roughly two-thirds of repeat founders start purchasing insurance policies at the formation of their startups.
• Expand your organization — offering employee-related coverage helps to attract and retain top talent, foster a positive work environment, and enhance loyalty and productivity. A motivated and secure team can create a flywheel effect, contributing to higher efficiency, innovation, and overall business growth.

What Kind of Insurance Do I Need?

The best insurance coverage should be tailored to fit your company. As your business grows and evolves, so do your insurance needs. When you hit certain milestones, you’ll need different types of insurance.

Purchasing insurance in anticipation of these changes is an effective way to keep your company protected and running smoothly. For example, if you plan to release your product soon, it makes sense to have Errors & Omissions insurance in place before launch to protect your company in case of downtime that affects your customers and disrupts their business.

Essential policies to get started

Here are some general coverages that many investors, financial institutions, landlords, or customers require before doing business with you:

• ‍Directors and Officers
• ‍Crime‍
• Key Person‍
• Errors and Omissions‍
• Cyber‍
• Employment Practices Liability‍
• Workers’ Compensation‍
• General Liability‍
• Business Personal Property

What Is the First Insurance Policy I Should Buy?

General Liability Insurance is a good place to start. A General Liability policy pays out for injuries or damages that may occur at your office, and absorbs the cost of defending against or settling those claims. 

Business Property Insurance is used to replace damaged or stolen office equipment. For example, if your employee’s laptop was stolen, Business Property Insurance can help you to replace it quickly.

What Insurance Should I Have Once I Start Hiring Employees?

While requirements vary widely, all 50 states require you to have Workers’ Compensation insurance in place to pay for on-the-job injuries. 

You should also have:

• An Employment Practices Liability policy to fund your defense against legal action by employees, such as claims of wrongful termination or wage-disputes. 
• Fiduciary Liability Insurance, if you are offering benefits, like a 401(k)in case an employee sues because they believe you and the company mishandled those funds.

Crime Insurance covers the cost of a crime committed by an employee to your company. A few common use cases covered by this policy include: if an employee steals sensitive client data, embezzles money, or otherwise commits criminal acts related to your business.

What Kind of Insurance Do I Need to Protect  My Company from Product or Service Mishaps?

Once you begin selling your product or service, you should have Errors and Omissions (E&O) Insurance. If a customer believes that a bug in your software caused them to lose money, they can sue you for damages.

Cyber Insurance covers you for hacking and data-breach related losses. 

Common coverages include:

• Data breach coverage
• Privacy breach coverage
• Restoration costs
• Cybercrime
• Business interruption coverage

When looking at these types of coverage, it’s important to understand the difference between first party to third party coverages, as well as "sublimits." 

Tip: When purchasing a cyber policy, conduct an internal evaluation on how much customer information your company stores and what type of information is being stored so you can better understand your organization's biggest blind spots to ensure you’re covered.

What Is Directors & Officers Insurance?

Potential investors and board members will want to make sure their assets are protected from a stakeholders' claim of company mismanagement or claims for non-compliance to regulatory guidelines. In fact, many D&O lawsuits come from regulatory non-compliance. Directors & Officers (D&O) Insurance provides legal defense against covered claims. Without D&O in place, investors are reluctant to invest in your company.

What If I Need More Coverage?

As a founder, you often know if you have unique risk exposures, whether you’re a D2C brand that needs coverage for inventory, or a frontier tech company that needs product liability coverage for your rocket or drone. An insurance advisor can answer your questions and help you get the unique coverage you need.

But What If I Did Nothing Wrong?

Whether or not a wrongful termination allegation or claim of corporate malfeasance is true, proving that in court can still be very costly. Additionally, if a competitor files a lawsuit, they’d rather see you scrambling to pay for an attorney than continuing to focus on providing a better product. Even if you take every cyber security measure possible, that doesn’t mean a hacker can’t compromise your system. No founder wants to use their fundraising dollars to pay out of pocket for these types of claims instead of investing in the growth of their company.

Is It Worth the Cost? 

Yes. It’s easy to underestimate the financial impact of unforeseen events but the numbers speak for themself. 

A study released in June 2023 found that 61% of SMBs in the US and UK were successfully hit by a cyberattack in the past year even as a separate recent survey showed just 37% were concerned they could be the victim of a cyberattack in the next 12 months. And, as difficult as it is for most people to imagine the need to defend against a lawsuit brought by an employee, again the statistics show that over five years, nearly 40% of US companies do end up with an employment-related lawsuit. 

Insurance transfers some of the financial risk of running a company from you to your insurer. It not only provides peace of mind to your customers, investors, employees, and board members, but allows you to accomplish what you set out to do: run an effective and competitive company.

Comprehensive Solutions for Startups, the Vouch Way

With Vouch in your corner, securing the right insurance coverage becomes streamlined and manageable, empowering you to make informed decisions and ensuring your protection as you grow. Explore innovative alternatives to traditional insurance specifically tailored to your startup's unique needs. With just a few clicks, receive coverage recommendations based on your business stage and industry.