Business Insurance Is More Than Just a Backstop

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By Carl Niedbala
| Startups & Entrepreneurship

It’s easy to see insurance as a simple add-on when a startup is just getting off the ground.  Buying business insurance is not a priority compared to objectives like building a minimum viable product, acquiring users, generating revenue, or finding investors.

offense

Business Insurance Is Your Offensive Strategy

Most founders think of buying insurance as a “check the box” move to mitigate some basic risk.  If/when something goes awry, you essentially have a multimillion dollar line of credit to cover legal fees, damages, property/data restoration costs, etc.

However, there are a couple ways purchasing business insurance can be used not just as a defense, but also on the offensive.  Here’s how:

1. Investors

Early stage institutional investors don’t usually have a reputation of being exceptionally risk-averse, but they do like to control and mitigate risk where they can. This is why the due diligence phase can be pretty onerous.

During the due diligence phase, investors usually look into the legal, regulatory, and compliance risks the potential investment faces and the risk management controls in place.  Startups that proactively purchase insurance can have an edge with prospective investors because they show a certain level of sophistication and experience, which are good indicators of an ability to execute.

As soon as the round of funding is closed, insurance will be required 99% of the time regardless. Directors and Officers insurance is essentially a boilerplate requirement for institutional rounds in recent years.  D&O protects the personal assets of the Directors and Officers - including the VC(s) that will be taking board seats - if they’re named in a lawsuit against the company. Key Man insurance - a life insurance policy that pays out to the company if a founder dies - is also usually required as well.

2. Partners

Investors aren’t the only ones that require proof of insurance.  Companies in B2B SaaS, E-commerce, Manufacturing, or Internet of Things (for a few examples) will almost always see some hefty contractual insurance requirements from clients, vendors, suppliers, and/or retailers.  Corporate lawyers are continually tightening up the language on these contracts.  It doesn’t matter what you’re selling--tablet-based software, consumer goods through a major retailer, consulting or technical expertise -- more often than not, proof of insurance will be required. Landlords will require proof of insurance when moving into the new office as well.  Generally speaking, standard contractual insurance requirements include General Liability, E&O, and Cyber Liability coverage.

At Founder Shield, we’ve seen a fair share of partnership deals come down to the wire because the company was totally caught off-guard by insurance requirements.  You can easily prevent this headache by taking 15 minutes and applying for your company’s business insurance coverage.

 

If you'd like to work with a lawyer from Priori Legal's vetted network on this matter, submit a request for free today.

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