If you are like most startup founders, you want to conserve cash as much as possible. It is quite common for insurance to be purchased solely to meet a contractual requirement, such as a lease agreement, a financing round or a customer requirement. However, it would be prudent to proactively understand your biggest risks, and then consciously decide whether to purchase startup insurance or take the risk and delay the purchase.
Listed below are the typical phases of a startup’s lifecycle, and some thoughts on what types of startup insurance to consider.
Phase 1: Ideation and research phase
Most startups will generally “self-insure” at this point. That is, not purchase insurance since the risk is relatively low. You might consider a basic insurance policy if you want to be safe.
Phase 2: Small team and early sales
As soon as you have a product in-market (whether or not you are generating revenue), your risk level significantly increases. There is a chance your product injures someone (e.g., a short-circuit of a hardware device), so you should protect yourself against this. A General Liability policy will typically cover physical products causing bodily injury or physical damage, and also for customers visiting your office and getting injured.
If you have a software offering, you should consider Errors & Omissions insurance in case your software results in a loss for a customer. For instance, if you offer an accounting software which miscalculates taxes for all your customers, you could be sued for any resulting damages.
Phase 3: Growing sales, lots of customer data
At this point, your sales have hopefully increased and you are gathering lots of valuable customer data. Your big risk now becomes a cyber attack taking down your systems, or loss of customer data. Cyber Insurance becomes critical at this point to protect your company and your customers in case of a breach.
At the same time, you should consider increasing your insurance limits for your General Liability and Errors & Omissions policies.
Phase 4: Raised venture funding
At this point, you probably have a board of directors. Almost all outside directors will require you to have Directors & Officers insurance in place. This protects them in case the company gets drawn into certain types of lawsuits. Directors will want to make sure there is sufficient insurance to hire top-notch lawyers to defend them in case of a lawsuit!
Onwards and upwards!
As you grow and expand, you can look at a variety of insurance products to cover specific risks. Contact your insurance provider for suggestions.
Zensurance is Canada’s leading online commercial insurance broker. We offer a full range of insurance products to small businesses, with a particular focus on digitizing businesses and technology startups. We understand what it is to work with new technology, and know the most common risks of which you should be aware. Based on that (and a lot of analytics), we recommend the ideal insurance coverage for your business.