Five Things Tech Startups Need to Know After They've Landed Their First Round of Funding
Content from Built In Chicago by Sam Dewey
Congratulations! Things are looking up for you and your young technology business. You've finally closed your seed round, and you're prepped and primed to start streamlining your product or scaling your business.
But before you distract yourself with well-deserved celebrations, there are some safeguards you need to establish in order to ensure your business is financially protected. It might not be the sexiest thing on your to-do list, but buying commercial insurance might just be the most critical step you can take on your journey to success.
"When tech companies start out, it's typically one person with an idea," said Kirsten Charlton, AVP of CNA Insurance's technology division. "They run very lean companies. They don't need a lot of infrastructure or resources, and insurance is often the last thing on their mind. But in reality, it's the first thing they need."
Workers Comp Insurance
For many startups, securing that first round of funding means they can finally afford to bring on employees to help their company grow. As you start scheduling interviews for workers number one and two, remember they will cost you more than just payroll expenses.
"Once you have an employee, you have certain obligations," Charlton said. "You have to be compliant with the law and make sure that — even if you only have one employee — you're covered. If your employees are injured on the job, you'll need to ensure that they are taken care of so they can get healthy quickly and return to helping you build the company."
Even some of the most successful tech companies planted their roots in the humblest of origins. If your first round of funding means graduating out of your basement and into a cool new office space, you're going to need property insurance.
Many people think of property insurance as protection from disasters like fires or floods. While it's important for startups to have their leased or owned office space covered, the importance of property insurance extends past the reimbursement of damaged buildings.
"Property insurance doesn't just cover buildings," said Charlton. "It covers equipment as well. As a tech startup, they're probably going to have a lot of electronic data processing equipment. That's probably their biggest asset, because it likely runs their business. Property insurance covers not only their business property, but it also includes any business interruption."
For tech companies, business interruption is one of the most valuable components of property insurance. If a disaster impedes your ability to access or use the technology you need to run your business, you could lose a lot more than time and money. This coverage also includes what is called "extra expenses" — money that can be used to replace laptops, or get new space in the event of a loss so you can get back up and running quickly. Business interruption helps cover the cost it takes to bring your business back up to speed.
"It's very critical coverage, especially for small tech companies," Charlton said. "They might not have much property, but the property they do have is essential to running their business."
As you're working with one of your first contracts, you might be surprised to see that general liability insurance is often a required condition of the relationship. But it's a fairly standard mandate, and Charlton said it's important to make sure you're complying.
"General liability insurance covers property damage or bodily injury to someone else. In other words, damage caused by you to someone else or to someone else's property" Charlton explained. "Let's say that you're an IT consultant and you're working offsite at a client's office. Maybe installing something and you don't have all of your equipment secured, and it falls and you break somebody's leg. This insurance covers that tech company's liability to the injured person."
Technology Errors and Omissions Insurance
Charlton said one of the most important types of coverage for tech startups is technology errors and omissions insurance, or Tech E&O. For young companies still coming into their own — whose products may still have a bug or two — Tech E&O is the best defense against potential lawsuits and helps support a strong business contract.
"Tech E&O covers financial loss to your customers," she said. "A good analogy is if you're a doctor, you need medical malpractice insurance or medical liability insurance that covers your actions in the course of delivering professional medical care. Tech E&O insurance is the equivalent for a tech company.
"If in the delivery of your product or services you cause financial loss to your clients, Tech E&O covers that financial risk if your clients come back to you for damages," she added.
According to Charlton, young companies should be careful to avoid acquiescing to every contract demand by their often much larger business partners, or being overly optimistic about what to promise in the contract. Even though landing your first major client is exciting, contractually over-promising services or results you aren't capable of delivering could end up costing your company big.
"When you get to the point where you do have your first big contract, you really should engage a commercial insurance agent who knows the technology industry. One contract gone wrong can financially decimate a young tech company," she said.
Cyber insurance — which is also sometimes called information risk or network security and privacy insurance — is the final insurance coverage young startups need to secure, especially if they deliver digital solutions to their clients. Cyber insurances helps cover companies from damages caused by hacks, breaches, denial of service attacks, Trojan horses, and other viruses and digital attacks.
"We feel that tech companies have a special risk to these types of exposures, and they're held to a different standard than regular companies in securing their networks," Charlton explained.
While CNA offers cyber insurance bundled together with their Tech E&O coverage, not all insurance providers offer them as a package deal.
"The real challenge with Tech E&O and cyber insurance policies is that they can be rather different from carrier to carrier, so you need to make sure you don't have big gaping holes in the coverage," she said.