Lessons Learned: Avoid the Top 10 Common Tech E&O Pitfalls

1. Inadequate Cybersecurity Measures

Cybersecurity is a latent topic for startups now more than ever, especially since there was a reported 30% increase in cyberattacks in Q2 2024. When it comes to cybersecurity, there’s no limit to how much protection is enough.

For technology services like SaaS, which deal exclusively with digital avenues, cybersecurity measures should be top of mind. However, many might rely on surface-level practices and cyber insurance — this is when the going gets tough.

Not implementing robust security protocols, failing to update software and systems, and lacking proper data encryption practices can be fatal for startups leveraging the cloud and IoT services, and handling sensitive client data. Without such protection, a data breach is practically imminent.

2. Intellectual Property Issues

Startups are all about innovating and bringing novel technology products to their industries, meaning intellectual property (IP) registrations and standards should be followed to a T. As a result of raising the standard or coming up with something completely new, companies might unintentionally infringe upon existing patents or copyrights, fail to protect their own proprietary technology or overlook clear ownership agreements with contractors, employers, technology professionals, and co-founders.

This is when E&O and IP insurance kick in to alleviate the financial and legal fees of these delicate copyright and trademark issues.

3. Contract Oversights

Starting a startup’s engine comes with lots of drafted contracts that define timelines, set conditions, and outline what the project will be like. But not everything goes according to plan once the wheels start turning. It’s on the go that potential contractual faults appear, making it impossible to deliver as promised.

Such faults include missing deadlines, neglecting to include limitation of liability clauses, setting unclear terms and conditions for products or services, and overpromising in general. These are usually the result of rushed planning or making important decisions and changes unadvised.

4. Data Privacy Violations

Building an MVP and getting it out to market is already a huge challenge. Including compliance in the mix adds an extra layer of difficulty, although it’s a highly necessary step on a startup’s way to success. Becoming compliant and adopting data privacy frameworks is crucial to secure investor, partner, and client trust, and builds a company’s credibility from the onset. It also helps avoid hefty fines and penalties for non-compliance.

In the race to excel, tech companies often forget to adhere to rules like GDPR or CCPA depending on the markets they service, mishandle sensitive user data or store it incorrectly, have data breaches and fail to obtain user consent.

5. Software Bugs and Errors

For products and services to reach their final form, they must first go through several iterations — many of which are released to the public and improved on the fly for startups to move their technology business forward. Consequently, some versions make it to the market with critical technology errors such as bugs or vulnerabilities.

SaaS companies are often prone to these errors due to inadequate testing procedures before launching, and poor version control and update management. For vendors hosting another company’s operations and their sensitive data, being extra careful before a launch or system upgrade is essential.

6. Service Disruptions

Another pitfall that makes SaaS companies more vulnerable is service disruptions. When third-party services are vital to a company’s functions, any service disruptions can have catastrophic ramifications for tech companies, from legal and business interruption to financial and reputational. Although software companies are usually equipped to face these obstacles, a lack of robust backups and disaster recovery planning can make matters even worse.

Downtime often arises from insufficient server capacity, causing systems to crash when there’s a traffic spike and even a company’s over-reliability on other third-party services which causes its own services to plummet.

7. Documentation Failures

A product or service can only be used properly if its documentation is clear and accurate. Every product must be accompanied by an initial tutorial or explainer on how to use it — choosing the most appropriate words and expressions to guide users is critical.

When this isn’t the case, technology companies fall short of their promise to deliver positive results, especially when it comes to software and its intricacies and nuances.

This also applies to internal documentation, which carves the path for developers to continue the work of others or fix a product developed by other employees. This lack of continuity can create confusion and lengthen processes unnecessarily.

8. Misrepresentation of Product Capabilities

One of the biggest mistakes tech companies can make is inaccurately marketing its products or technology services, whether that’s exaggerating its features, failing to disclose its limitations, or making unsupported performance claims.

We know cases like Theranos or, more recently, FTX all too well, and the consequences of such misrepresentations are difficult to overcome.

It’s true that only strong products enter and stay in the market, but being truthful about initial drawbacks and areas of improvement is much better than potentially defrauding investors and customers.

9. Project Management Issues

Successful project management comes from good risk management and a clear course of action — this only becomes evident once plans begin to roll out. On the go, flawed management swims to the top when teams can’t meet deadlines, things are moving too fast to control, and scope creep is inevitable.

The fast-paced nature of tech companies means it’s more prone to project management issues than any other company, which also means leaders must be extra careful and meticulous when planning strategies, managing client expectations, and assessing risks.

10. Compliance Oversights

In addition to adhering to general regulations, each industry also requires companies to comply with a set of frameworks — HIPAA in healthcare, ADA in ecommerce, 10DLC in advertising, and so on.

Certain products and services also require specific certifications that attest to their safety and suitability, allowing them to enter the market and enable company credibility and subsequent growth.

Overlooking such regulations can lead to faulty products and dissatisfied customers, resulting in financial loss, reputational damage, lawsuits, and even complete business shutdowns.

Best Practices for Avoiding Tech E&O Pitfalls

These pitfalls remind tech companies that, for growth and success to be possible, you must tick a few essential checkboxes.

To start, build a robust risk management strategy that will help identify potential vulnerabilities, cyber risks, and threats. If you’re looking for high growth, being proactive against potential roadblocks will be your biggest advantage, allowing you to anticipate and mitigate risks before they escalate into costly issues.

• Cybersecurity: Additionally, invest in strong cybersecurity measures and cyber insurance — in today’s aggressive digital landscape, this is non-negotiable, especially for SaaS businesses. Among the steps your tech company can take are implementing robust firewalls, encryption protocols, and multi-factor authentication, and regularly updating systems and software to reduce evolving threats and technology errors.
• Vendors: Your vendors play an important role in company operations too, so you must carefully vet them to ensure they adhere to your security standards. Do this by implementing clear contracts that outline their responsibilities and liabilities.
• Employee Training: This also ties into your tech company’s human element, which you shouldn’t overlook — after all, your employees are at the heart of your operations. Regular training them on security protocols, data handling, and risk awareness is fundamental.
• Regulatory Compliance: Staying compliant with industry regulations is also vital to operating in any market. So stay up to date on relevant laws and standards in your sector and implement internal processes to ensure ongoing compliance (a compliance officer might be necessary, depending on the industry). Plus, proper documentation of your activities can aid in regulatory compliance and also provide valuable evidence in case of claims or onboarding new hires.

And, if all else fails, your insurance company is always there for you — but your business insurance needs are ever-changing. Make sure to review and update your comprehensive coverage regularly, so your policies adequately protect your assets against current and emerging threats. Understanding key terms like retention, which refers to the portion of a loss that an insured party retains before insurance coverage kicks in, is crucial to making informed decisions. What does retention mean in insurance terms?

Insurance Rebuilt, End-to-End

We've supported startups from stealth mode to huge funding rounds.

Get a Custom Quote