All companies face risks. Startups are no exception. As the entrepreneur considers seeking financing from third parties, it is important that they recognize that once financing is obtained, the business no longer exposes only the personal resources at risk, but also that of their outside investors.
One way for the entrepreneur to mitigate startup risks is through insurance. Listed below are eight types of insurance that entrepreneurs should consider as they develop and grow their startup.
- Personal Property Insurance provides the holder of the policy protection against the financial risk of damage or loss of personal property due to fire, theft and certain weather perils.
- Real Estate Title Insurance provides the holder of the policy protection against financial loss due to defects in a title to real property and from the unenforceability or invalidity of mortgage loans. Its purpose is to protect the property owner or lender from losses due to title defects, liens or other similar issues.
- General Liability Insurance provides the holder of the policy protection from liabilities which may occur from the imposition of lawsuits or other similar claims. In general, it provides protection against third party claims, excluding damages caused intentionally or liabilities which are contractual in nature.
- Product Liability Insurance provides the holder of the policy protection against financial loss of property due to issues arising from or related to the property, in a manner similar to General Liability Insurance.
- Directors and Officers Insurance (D&O) is a liability insurance which provides financial protection, (indemnifies) the insured director or officer of a company, or the company itself for losses or costs of legal defense suffered as a result of legal action brought against the parties for alleged wrongful acts.
- Errors and Omissions Insurance (E&O) is a form of liability insurance which protects professionals, consultants and companies engaged in providing professional advice as a service against the financial losses which may occur due to the need to defend against negligence claims made by clients and resulting damages which may be awarded as a result of civil lawsuits. Specifically, the coverage is directed to provide protection against financial loss caused by errors or omissions in the service provided.
- Workers Compensation Insurance protects employees by providing wage replacement and medical benefits to employees injured in the course of employment.
- Key Man Insurance is a form of business insurance. It is an insurance policy executed by the business to provide financial compensation to the business as protection against financial losses that may arise in the event of the death or extended incapacity of a critical member of the business.
Based on the stage of the startup, some coverages may not be applicable or appropriate. Indeed some may be considered quite expensive and the entrepreneur may choose other alternatives to address the risk involved, or not to address it at all. Ultimately, the investor will, as they ponder a potential investment, consider the entrepreneurs approach and make judgments as to if they have and are acting in a prudent manner related to mitigate startup risks. Such assessment will impact their view of the entrepreneur’s approach to issues and their judgement. These conclusions will likely impact the investors’ ultimate investment decision.
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NOTE: This article may discuss issues for which legal advice should be considered prior to a decision or agreement with a third party. It should be noted that the author is not an attorney, and FundingSage is not a law firm. FundingSage’s employees and affiliates do not provide legal advice. We recommend you seek the services of an attorney if legal advice is required.