We all have that dream within us to start our own company and work for ourselves. Daily, people are creating new companies in the hope of success. These companies aim to change the world with innovative ideas and unique working styles. These companies are well known as startups. A startup is a new company that has developed a unique business idea, aims to impact immediately, and takes over the market. In a city like Hong Kong, new startups have increased by 68% since 2017.
Asia is one of the most common places where founders develop their startups due to the diverse target market and economic success. Statistics show China and India hold second and third place in the highest number of unicorn companies, with 25% and 5% respectively (the US at first with 50%). A Unicorn company is a startup valued at USD 1 billion or more. A startup that turns into a unicorn company is rare as there are only 600 unicorns companies worldwide. However, it is the golden dream for any startup owner.
Being a founder of a startup comes with great perks but also fatal risks. Threats can be internal and external, such as cyber risks, lawsuits, employee injuries and more. As a result, there is a rise in startups opting for startup insurance as soon as they begin their business adventure. Startup insurance is essential to new companies to protect the business, employees and data from a range of risks.
What are Startup Insurances?
Startup insurance solution consists of a range of insurances that will protect the company from risks that could damage the company and their brand. It is an insurance solution that allows startup companies to focus on impacting the market rather than worrying about the risks out of their control.
The main insurances include cyber, employee compensation, director & officer liability and professional indemnity. Although insurers may also customise solutions to add more insurances, that would be the perfect fit for the startup’s type of business.
What Is Covered In a Startup Insurance Solution?
In the 21st century, all startups begin on a computer. Even the addicting social media platform, Facebook, started with the founders coding on a single computer. Technology has made it easier to research and create new companies. However, the internet has dangerous risks that can destroy a company at any time. The internet is full of cyber risks such as hackers, phishing, malware and various viruses. Even one of these cyber risks can destroy a company’s data, brand reputation and customer relationship. Especially as most startups recently are technology startups that deal with sensitive client data. In fact, 7.1% of global startups are fintech that deals with clients card details, investment secrets and more.
For example, in 2019, a well-known company- Alibaba- was hacked. The hackers stole customer data, including usernames and mobile numbers, from the Alibaba Chinese shopping website, Taobao, using crawler software they created. The cyber-crime had an enormous impact on the successful company and lost millions of customers and a significant financial loss due to the damaged brand image. Thus, even a big company like Alibaba can be a victim of cyber-crime and suffer devastating outcomes.
The increase in cyber-crimes is why cyber insurance is a vital part of startup insurance. Cyber insurance can limit cyber threats and provide valuable advice when a company is affected by cyber-crime. This main factor of startup insurance will help the company cover legal fees, notify customers about a data breach, and assist in recovering compromised data. In addition, startup insurance can help a company recover from financial loss and reputation damage. Therefore, insurance will protect startups from cyber-crimes, which could happen anytime.
Director and Officer (D&O) Insurance
As a startup grows, there will be directors and managers involved in decision making and running the business. They are imperative to the success of the startup and the development of the brand. As the company grows and there are more powerful roles that are liable for employees and stakeholders experience. Directors and officers have specific duties they must perform and regulations they have to follow. Unfortunately, this means there are also more chances of risks and mistakes that could result in lawsuits.
For example, the ‘Theranos Scandal‘, where the founder had claimed her startup company Theranos had created a compact blood kit that would allow customers to test blood at home and without syringes. She had pitched the idea to many successful people, who decided to become the directors and invest more into the startup. After a year, medical experts revealed that the technology was a scam and inaccurate, resulting in lawsuits against the company. The claims affected the founder who was at fault and the board of directors who were not. The directors and officers had lost a large fund and had to pay more to defend themselves.
Claims like these are why director and officer (D&O) insurance is crucial for startup insurance. It can help the director or officer by providing legal costs to defend themself. The cover will pay for defence proceedings and compensations related to the claim. In addition, startup insurance with the help of D&O will cover an extensive range of personal liability for any director and officer at duty.
Professional Indemnity (PI) Insurance
More than 14% of startups globally provide advice and services to their clients, with 7.1 % startups in fintech and 6.8 % in healthcare and lifestyle science. These startup companies consist of professionals who provide a range of services and are responsible for their client’s outcome post their company service. When a startup company includes professionals giving advice, there are bound to be errors and omissions that can negatively impact the client. When clients feel like they have had a negative impact due to professional negligence, misrepresentation or inaccurate advice, they have the right to sue the company. These lawsuits can cost a company millions, and for a small startup, it could even financially ruin them.
For example, in August 2019, Apple sued another company called Corellium for creating a “virtual” iOS-operated software that’s main function was to run unauthorised copies of the IOS system on non-Apple devices. Such cases are considered copyright infringement claims and can be very costly to defend against, as the founder will have to pay for lawyer fees and any compensations costs. However, the 2017 startup eventually won the case with the help of their lawyer in December 2020.
Professional Indemnity (PI) is a perfect fit in startup insurance for companies with professionals involved in these situations. Professional indemnity insurance will provide the company with the cover of the cost of the claim and settlements. The involvement of PI insurance in the startup insurance solution will protect the business and avoid damaging financial loss and allow them to have a future in the market. In addition, startup insurance understands mistakes do happen and help professionals when they need it the most.
Employee Compensation Insurance
Employees are a crucial part of developing a startup and converting it into a successful business. Unfortunately, the more employees a startup has, the higher the chance of a work injury. According to the law, the employer is liable for any injuries and costs related to the injury at work. A work accident can range from physical injuries or occupational illness. The cost of supporting an injured employee can be expensive, as they will have to pay the employees medical bills, 80% salary while they are on recovery leave and compensation costs.
For example, an injury may occur when an employee has slipped in the office, resulting in a broken arm and leg. The manager will have to rush the employee to the hospital, get him treated. The doctor will advise around two months of recovery, and the employer will have to pay him during his break till he returns. At the same time hire a new temporary employee to cover the work of the injured employee.
In many cities like Hong Kong, it is part of the law to have employee compensation insurance to hire an employee, and the government fines any company that doesn’t follow. Therefore employee compensation insurance is a mandatory factor of startup insurance. Additionally, employee compensation insurance reduces a large sum of financial loss for the startup and provides support to their employee as much as possible.
Why Do Startups Need Insurance?
As you can tell, the startup insurance solution has a range of insurance that will cover almost all risks that may affect a business. Therefore, a new company needs to meet with insurers to discuss the best startup insurance that fits the business model. When insurance protects a startup from most risks, it benefits them in many ways. One of the best benefits is that insurance helps cover any financial loss due to any risks mentioned above. Especially for new company money is always tight, and as a startup, a founder would instead invest funds into the business rather than claims.
Another reason to have startup insurance is to gain clients trust. Clients must know that their data is safe from cyber risks, and insurance will help them recover if anything goes wrong. As a result, a client is more likely to take advice or buy products from a secure and protected startup.
Lastly, startup insurance gives the company more confidence to grow. As the founders and employees do not need to worry about things that may not be in their control and focus on developing the future of the business. It motivates employees to know if they happen to make an error or even get injured at work. The company founder(s) have insurance to cover them.
It is not easy starting a new business and joining this competitive market. However, startup insurance protects the company to succeed and turn founder(s) dream into reality.