Insurance Considerations for Tech Start-Ups

by Tom Firestine
December 1, 2012

Start-up companies have a lot on their plates and owners are often stretched in many directions with an extremely limited budget. Understandably, insurance is often far down on the list of management priorities. This post will help you discover the business insurance you need and most importantly - at what time you need it.  

Some types of insurance are required by law or by contract, while many others are important simply because they protect a company from financial distress.  Insurance reduces potential liabilities and increases enterprise value - which allows a company continue to grow and thrive.  It also maximizes value as investors perform due diligence.  Working with an expert insurance broker who is familiar with these coverages will help you easily and cost effectively navigate a complicated insurance market.

Below is a list of scenarios your company will face and the insurance it is important to buy at that time.

When Office Space is Leased
A Business Owners Policy covers the basic liability and property damage a small business can incur. Starting at $500 many companies will find themselves signing contracts that require them to provide proof of this coverage even before they have office space to insure.  

Business interuption insurance protects a company during a disaster or covered other event that causes the business to shut down for a period of time. The insurance covers lost profits, fixed costs and expenses to move to a temporary space.

When the First Hire is Made
Illinois requires all businesses with at least one employee, even part time, to purchase Workers Compensation Insurance. If caught operating without it, the fine is $500 a day, with a minimum penalty of $10,000.

As companies staff up most purchase Employment Practices Liability insurance, which covers the costs of defending allegations like discrimination, sexual harassment or failure to promote.

When Investors are Taken On
Before taking money from outside investors it is prudent for management to purchase Directors and Officers insurance.  Directors and Officers insurance protects against allegations of mismanagement and some regulatory proceedings. Because you cannot buy the insurance retroactively it is important to put in place before soliciting investments.

Another policy often requested by investors is Key Man Insurance. This is a life insurance policy placed on behalf of the CEO or other vital team members with hthe company as the beneficiary. This protects the investor's interest and provides funds to bring in a new principal to the company if needed.

When Revenue Comes In
Revenue means clients, their data and services rendered.  A few types of insurance should be considered as you negotiate that first customer.  

Products Liability protects you against lawsuits from over damages caused by your physical products. A company who only provides services or virtural products generally does not need to purchase products liability.

Professional Liability, also called errors and omissions, protects you against lawsuits from clients. It can also be structured to cover things like software copyright infringement, costs from hacking, loss of customer data and some intellectual property allegations.

Network Security and Privacy is often included with professional liability insurance and covers the costs related to responding to a breach of your customers personal information. It can also be structured to cover things like lost revenue from hacking attempts, cyber extortion and public relations costs that come from these issues.

Commercial Crime Insurance will protect your firm against theft from employees, forged documents and electronic theft.

Where are you at?
Calculated Risk Advisors works with tech companies to structure insurance programs that match the needs of their firms no matter where they are at in the cycle.  Whether it is day one of operations, the company has hit seven figure revenue or the time has come to sell the company - CRA has solutions to grow with your firm.  Contact them today to better understand your risks and future costs.

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