Starting on the right foot – insuring your tech startup
March 6th, 2020
As the bright young minds of today jockey to create the next Amazon or Google, there are some fundamental things they should know about insurance.
More than five tech startups launched every hour in 2019, according to the UK-based Centre for Entrepreneurs. We all know the stories – working day and night to carve out a niche, growing rapidly to see off competition, all in the hope that their brilliant idea will be the next big thing.
But in the whirlwind of meetings to develop products, win contracts and build new revenue streams, entrepreneurs can give too little time to one business basic – insurance. “The biggest risk for a tech startup is that insurance is going to be the least interesting thing on their agenda,” says Tom Dixon, Head of Technology at Hiscox.
Investing time in setting up the right insurance policy is therefore vital. “We see a lot of clients who come to us with a policy they purchased from another insurer and there’s a big exclusion in the wording that effectively gives them no cover,” says Tom.
The mindset that startups have towards insurance makes all the difference. “If you’re only looking at the price of the insurance, you might be missing some key cover,” says Tom. “One of the reasons you would want to go to a specialist technology insurer is that they fully understand what they’re covering.”
Playing dirty – protect your business
Specialist knowledge is not the only reason entrepreneurs might want to look higher up the insurance value chain. “When startups are successful and begin to turn the heads of their competitors or go into new markets, the established players sometimes try to slow them down by wrapping them up in tactical litigation – over intellectual property, for instance. That’s something we’ve seen before,” reveals Tom. “The beauty of having a specialist tech insurance market with good professional indemnity policies is that it takes the pressure off if someone does put litigation your way.”
One question Tom frequently gets asked is how much cover clients should buy. “We’re a non-advice entity, but I suggest that you think about the size of your largest contract. If you’re contracting really well, and limiting your liability to the value of that contract, then you know what your worst-case scenario is in terms of the potential liability. From there you can take a view on whether to add costs on top, which should be the basis of calculating what limit you buy.”
For startups in the early growth phase, Tom explains that it’s important to think about how much you’re giving away under contract. “Your mindset is that you need to grow and win contracts, and the way to do that is to be more accepting of what the client is demanding. The client could take advantage of that fact – they might want your services but they know you’re more likely to accept a worse contractual or legal liability position.”
Setting a good liability cap and having a clear understanding of who is responsible for what if things go wrong is therefore another important process for startups wanting to avoid unpleasant claims scenarios. “The last thing you want as a growing company is to get involved in messy litigation with one of your clients because the reputational damage can be pretty big and it’s a massive distraction,” says Tom.
Translating a foreign language – insurance in your words
Of course, all of the above can be a foreign language to busy tech entrepreneurs who want to focus on creating the next Google. “Hiscox offers client contract reviews, which point out all of the stuff that you wouldn’t pick up on unless you’re legally qualified and have experience running through multiple contracts,” says Tom. This is particularly helpful for startups, but big companies with in-house legal teams also use the service for a second opinion.
Of course, insurance may not be the most glamorous side of starting a business. However, by investing time in buying the right policies early on, startups can make sure it doesn’t suddenly leap to the top of their agendas…for all the wrong reasons.