Just released: How to raise venture capital in 2023


Why Startups Need Insurance


Key Takeaways

Carl Niedbala - Founder Shield
Carl Niedbala

COO & Co-Founder

While this list is definitely not exhaustive, I wanted to briefly shed some light on a couple of the reasons why startups need insurance and should look into coverage options regardless of where they are in their life cycle.

1. To strike a balance

“Risk-averse” is probably the last phrase anyone would use to describe the startup community. The whole point of getting into this game is to disrupt, right? And that’s a beautiful thing. It’s what pushes society forward and generally improves the human experience.

It’s truly astonishing how much risk retention a startup can embrace. I understand this is an extreme example, but PayPal flagrantly disregarded approximately 40 state and federal laws at the outset of its operations! Yet, in doing so, they completely revolutionized the purchasing experience. When you’re challenging entire industries and disrupting the status quo, it’s inevitable that something might go awry, leading to potential legal repercussions. While it may not necessarily involve federal or state regulators, you’ll still find yourself mired in a daunting abyss of time-consuming paperwork and legal expenses.

When things go awry, most startups will fold depending on their current revenue-generation abilities and where they are in the funding cycle. This is because they simply don’t have the cash to defend themselves. Most startups also don’t realize that even if the claims brought against them are totally absurd and have no chance of success, they still have to pay their lawyers to deal with it! The beauty of having insurance is that these legal fees (and most other related expenses) are covered by a good policy.

2. To attract investors

Obviously, institutional investors are not risk-averse either, but they do work very hard to control and mitigate risk as much as possible when making investments. That’s basically their entire reason for doing due diligence on your company. One characteristic that can attract investors or tip the scale in a potential deal is how well the company recognizes the necessity of risk management. Founders that think far enough ahead to purchase insurance demonstrate effective ways to control risk, which makes them appear more legitimate to investors. This shows a certain level of sophistication and foresight, both qualities that are required if an awesome idea is going to grow into a flourishing company.

3. To keep investors happy

As I just mentioned, its not necessarily all about the idea…investors do everything in their power to eliminate risk from the equation. One of the ways in which they do this is by requiring companies to get certain types of insurance coverage. In fact, a representation requiring Directors and Officers insurance is essentially a boilerplate term for institutional rounds these days because it directly protects the VC. But depending on the type of company, you may be required to have Errors and Omissions, Property, and General Liability coverage as well.

4. To keep customers happy

Your investors won’t be the only ones demanding proof of insurance. Many of your customers will demand it too, particularly if you’re in the B2B space. And when I say B2B, I really mean that as generally as possible. It doesn’t matter if you’re selling tablet-based software to hospital outpatient programs, a novelty product to SkyMall, or your consulting expertise to advertising firms…more often than not, your customers are going to want some kind of liability coverage in place. And while we’re on the subject…when you start hiring and want to move into that nice new office, your landlord will require proof of insurance too!

Additionally, retention meaning in insurance is an important aspect to consider. Insurance companies often aim to retain their customers, as it is more cost-effective than acquiring new ones. Retention strategies involve providing excellent customer service, personalized coverage options, and competitive premiums to keep policyholders satisfied and loyal.

5. It’s illegal not to have it!

While that statement isn’t entirely true, it is true about Worker’s Compensation coverage. One of the most common misconceptions about insurance in the startup world is that you don’t need worker’s comp coverage until you have “employees.” Founders usually go by the title “founder” or “co-founder” and tend to think that the management-focused title actually changes things. In reality, “employees” for WC purposes include anyone on the payroll. So if you’re taking salary, you need worker’s comp!

I know that insurance is probably the last thing on most founders’ minds. I mean, you’re building a company here. You can’t be bothered with this nonsense! But the reality is this: if all goes well, one day you’re going to be a super legit company that’s constantly hiring and expanding. People sue companies with momentum and visibility. The more customers you get, the more orders you process, the more employees on-boarded, the more room for screw-ups.

It’s important to prepare for these things early on so you’re not caught off-guard when your company takes off.

[This post was previously posted on wework‘s blog fullstart.  You can see the original article here.]

To learn more, you can always reach out to a member of our team by phone 646.854.1058 or email info@foundershield.com at any time. Or create an account here to get a quote that will protect you and keep your investors happy!

Related Articles

D&O insurance
April 25 • Directors & Officers

D&O Insurance Pricing Trends 2023

The D&O insurance market was hard-hit in 2021, but 2022 brought some relief that overflowed into 2023. Let’s talk about the trends unfolding and what we can expect in the future.

June 4 • Directors & Officers

The Value of D&O Insurance for Crypto Companies

Crypto companies must battle a slew of risks amid a volatile market. Let’s discuss what exposures leaders face and why D&O insurance is vital.

January 28 • Directors & OfficersThought Leadership

D&O Insurance Pricing Trends 2022

The D&O insurance market has experienced some unique action this past year. Let’s review recent happenings and our predictions for 2022.

DO Update
December 1 • Directors & Officers

Risk Management Insights: Q3 2021—D&O Insurance Updates

With Q3 2021 wrapped up, let’s review a few critical D&O insurance trends that emerged and what updates public and late-stage companies can expect in Q4.

risk retention groups
November 10 • Errors & OmissionsRisk Management

What Are Risk Retention Groups & What’s Their Role?

Risk retention groups provide affordable and customized solutions for groups facing similar liabilities. Will it work for you?

October 26 • Directors & OfficersRisk Management

What’s the Role of a Commercial Insurance Broker?

A commercial insurance broker plays a vital role in finding the best coverage for your company—but what exactly is that role? Let’s discuss.