A Guide to Insuring Your Tech Startup

In 1975, Steve Jobs and his friend Steve Wozniak walked into Jobs’ parents’ garage. They were developing a tech startup with the intention of building a “computer for the rest of us”. The $1350 in capital was generated by selling Jobs’ Volkswagen microbus and Wozniak’s Hewlett-Packard calculator. The Apple I wasn’t a hit. But it sold enough to allow the developers to come up with a new design. The Apple II made $3 million in its first year.

Today, Apple is the first U.S. publicly traded company to reach $1 trillion.

Apple is the epitome of a tech startup success story. Of course, not all startups will experience this. In fact, some will fail almost immediately.

According to UK startup experts, 99% of tech startups across the pond will go under within a year. With 9 out of 10 US startups facing the same demise, it can be assumed that the percentage is similar for US tech startups.

Tech is a unique industry. Whether a startup is trying to get a new product or service to the public, there are several reasons why they can fail. Maybe they grew too slow or grew too fast. A common reason is lack of funding. Or maybe the founder didn’t have a business mindset.

But one reason we see tech startups fail, especially those that are further along in the development process, is because of unforeseen costs involving litigation, product loss, or other serious incidents.

We’ve gathered a few true tech startup stories to prove our point. Without tech startup insurance, all it takes is a split second to erase all your hard work.

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True Tech Startup Nightmares

When apps go bad

Earlier this year, Under Armour, the fitness company behind MyFitnessPal, admitted a data breach linked to their app had affected as many as 150 million users. The app is used to track food and nutrition and luckily compromising data wasn’t available to hackers, such as social security numbers or credit card information. For Under Armour, a loss in consumer confidence soon followed. It can be argued that the tech company’s size is what prevented their demise.

With a smaller or newer tech startup, an app failure like this could be the start of a quick and irreversible disaster. Data Breach Insurance would help a startup determine the extent of the breach, recover data if possible, and, in some policies, help to reverse the public damage done.

Undetected and unwanted visitors

But it’s not just about apps. Data breaches can happen whenever and wherever data is stored.

In May of 2014, eBay found itself victim to an extensive data breach that affected all of its 145 million users at the time. Hackers were able to access the company’s network undetected for 229 days, resulting in the exposure of users’ names, addresses, dates of birth, and passwords. Luckily, financial information wasn’t compromised.

The company said the data breach did result in a decline in user activity, but revenue remained in line with analyst expectations. Imagine if the same data breach happened to a much smaller tech company. If the company wasn’t making profits yet, the loss in user activity could be devastating.

Employee accusations

It’s hard to feel sympathy for giant companies when they’re ordered to pay millions in damages in the courtroom. For example, Samsung has had its share of lawsuits brought on by smaller tech companies claiming they’ve stolen intellectual property.

But then there are the smaller companies hit with lawsuits, like Novatech. The company was sued by its former human resources director, Hayley Shelton, for gender discrimination. While we agree this is a serious accusation, it doesn’t matter (from a financial vantage point) if Ms. Shelton was or wasn’t harassed. The cost of defense alone can put a company out of business. This is why a Business Owners Policy is a necessity. An Umbrella Policy is also a good idea as it will cover any excess litigation costs.

If you currently own a tech startup or are considering finally taking your big idea to the world, there are insurance policies you should consider. We’ve put together a “tech insurance” homework assignment for you. Pay attention to your assignment details and due dates so you don’t find yourself in the news for anything other than business success.

Types of Tech Startup Insurance

Business Owners Policy (BOP)

Assignment: Secure a Business Owners Policy

Prerequisites: None; if you’re ready to start your startup, you’re ready for a Business Owners Policy

Due Date: Before you start building, selling, or growing your business

Notes: This is the bare bones version of insurance for businesses. It offers coverage for damage to property, some degree of general commercial liability coverage, and coverage for other things like signage, business income insurance, and some coverage for business property – including some inventory.

The specific types of coverage and coverage amount will vary from one company and one policy to the next. Make sure you understand what is included in the standard business owner’s policy so that you can make up for what is missing elsewhere in your coverage.

Data Breach Insurance   

Assignment: Secure Data Breach Insurance

Prerequisites: Storage of customer, client, employee, or product data

Due Date: Insurance should be in place before you store any data that could bring harm to you, your business, or customers

Notes: Data breaches can bring big problems to businesses of all sizes. Depending on the specifics of the breach, it can reveal private identification or financial information about your business, customers, and employees. This not only places you at risk of lawsuits and monetary damages, it also places the reputation of your startup at risk.

Data breach coverage can be a literal lifesaver for tech startups at times like these by providing funds for:

  • Data forensics (to determine the extent of the breach)
  • Data recovery (in the event that the purpose of the hack was to deny access to or erase business data)
  • Legal fees
  • Judgement awards
  • Reputation Management/Public Relations (some policies)
  • Notification costs

There’s a lot more than the simple recovery of information at stake in the event of a breach. It can present your startup with substantial liabilities. That’s why it’s important to make sure that you have data breach liability coverage and that you have an adequate amount of coverage for your industry. Working with an independent insurance agent will help insure adequate coverage.

Errors and Omissions Insurance

Assignment: Secure Errors and Omissions Insurance

Prerequisites: A platform to offer advice or services to clients

Due Date: Sooner than later; Errors and Omissions covers incidents based on when the claim was made, not when the event happened

Notes: If you offer services or advice of any type to clients as part of your business, then you need the protection Errors and Omissions, or Professional Liability, insurance provides. This insurance protects you from a wide range of liabilities related to your professional advice or services.

Workers’ Compensation Insurance

Assignment: Secure Workers’ Compensation Insurance

Prerequisites: Employees

Due Date: Before employees start to work; this type of insurance can take several weeks to secure so think ahead of time

Notes: If you have employees in your startup then you need workers’ compensation coverage for them. Even if your business isn’t large enough that it’s required by law…yet, you need the protection for your business this type of coverage offers. Not only does it provide for employees who are injured while performing their job, but it also helps to protect your business from lawsuits resulting from these injuries.

Umbrella Insurance

Assignment: Secure Umbrella Insurance

Prerequisites: Other insurance policies

Due date: As soon as possible

Notes: Despite your best efforts, sometimes bad things happen, and your startup finds itself in the middle of a lawsuit that goes beyond what your general liability insurance covers. An umbrella policy kicks in once those funds are exhausted to help your business pay for settlements, judgments, and or legal costs related to covered liability issues that have been exhausted.

Commercial Flood Insurance

Assignment: Secure Commercial Flood Insurance

Prerequisites: Office, warehouse, or building covered under a Commercial Property policy

Due date: Same date as you sign a lease or take on ownership of the structure

Notes: Many small businesses and startups learn too late that floods are not protected as part of the standard BOP. In fact, floods are specifically excluded. You will need to purchase flood insurance through the National Flood Insurance Program (NFIP). For startups, flood insurance will provide for repairs to the building, replacement of equipment, and inventory up to a specific dollar amount. Anything above and beyond the program limits will need to be purchased as a supplemental policy.

There are other types of insurance your technology startup may need in addition to these vital types of coverage. With so many types of insurance directly affecting tech startups, it’s a wise decision to work with an independent insurance agent you can trust to help you get the right types and amounts of coverage to protect your startup best.

Insuring your technology startup is no easy task as each tech startup has different insurance coverage needs. As such, some insurance companies do not have standard insurance packages that meet the needs startups face. This makes it more important for startup owners, like you, to take the time to understand your insurance needs and to make sure that the coverage you purchase meets them.

In most cases, your technology startup will require a completely customized plan for insurance coverage.

Just remember that technology is evolving at a rapid pace and you owe it to the future success of your business, your clients, and your employees to make sure you revisit your tech startup insurance coverage often to make sure it’s adequate for the latest threats your startup faces.