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Start-ups – Don’t lose sight of your liabilities


Born out of risk-taking and fast-paced by nature, start-ups can lose sight of their liabilities. But what are the common pitfalls? Andrew Pring reports

“The intensity of the start-up process is a dangerous time for a budding Zuckerberg or Bezos, often blinding them to unglamorous but fundamental aspects of business”

Start-up entrepreneurs are inspired, often brilliant people. Fuelled by boundless optimism, they focus relentlessly on the big picture – the vision of success that makes the long hours and sacrifices all worthwhile. But as with any newly emerging life, there’s a vulnerability about entrepreneurs too.

The intensity of the start-up process is a dangerous time for a budding Zuckerberg or Bezos, often blinding them to unglamorous but fundamental aspects of business. In these early stages, the need to attract investors, assemble teams, find offices and win customers dominates thinking, and many basic business risks are just not factored in to the plan. Sadly, such oversight can rebound disastrously on the start-up, derailing its progress, perhaps terminally, before it has even properly begun.

Within the booming technology sector, these basic business risks are everywhere. Start-ups can see their products or services fail, leaving them contractually exposed to their customers. Major disruption can arise from something as basic as building contractors cutting through power cables. But most embarrassingly of all for an infotech company, it can find itself the victim of a cyberattack, which could cause havoc, both for the company itself and its customers. It may even unknowingly become implicated in tax evasion and money laundering by criminals or terrorists. The reputational damage for a company supposed to be expert in IT could be catastrophic.

Defusing these problems, and there are many others like them, is vital for the future of the technology sector in Europe. The sector is hot, and countries are competing hard to attract innovative start-ups, offering a range of services and tax breaks as inducements. But for the next Amazons and Apples to flourish, create jobs and inject entrepreneurial dynamism into their host economies, they need to overcome a sometimes, blinkered approach to business.

Marcellien Breedveld met many start-up entrepreneurs when she worked as Ideation Manager at UtrechtInc, a Dutch business incubator set up eight years ago by the Ministry of Economic Affairs to bring research knowledge to the market and make a social impact. It has supported 157 start-ups, with a 63% success rate, and Marcellien, who worked there until May, opened the eyes of many business-innocent entrepreneurs during that time.

“Entrepreneurs are very enthusiastic about their product. They’re generally young and tend to be very optimistic. But innovation takes a long time to get to market so it eats up an entrepreneur’s time, and there’s a lot of chaos and uncertainty in this period. Insurance and risks are not their highest priority. They’re more concerned with customer-facing issues than anything else, but then the money runs out!” UtrechtInc’s role is to make sure things do not get anywhere near that stage. “We make sure they are linked to financial experts who offer a full range of advisory services,” says Marcellien. “In our experience, failure is generally down to lack of customers and poor team performance more than internal, operational matters, such as lack of insurance. But we definitely want entrepreneurs to receive the best advice possible so they can make smart decisions on those operational risks.”

Charles Bethoux, Technology Underwriting Manager for Continental Europe at Chubb’s Paris office, concurs with Marcellien’s assessment of start-ups. “They are often very fast-moving and free-wheeling, with a lack of internal controls or procedures in the early stages. They also often have a high staff turnover and vetting is not always carried out properly. This makes them vulnerable to crime and fraud, and rogue employees and third parties can exploit this.”

Avoiding the traps

Financial loss risk comes in many forms, but one area that causes particular concern for tech start-ups is contractual liability, says Charles. “Clients want their business partners to take out financial loss insurance. It’s often written into the contract and the client – particularly if they’re a big company – will seek to impose as much liability onto their supplier as possible. These terms can be quite onerous, leaving the supplier responsible for making good any loss incurred by the company. And as a start-up, they’ll be in no position to resist and will have to accept the terms if they want the business. If you want your software distributed in the US, for example, or you want to be a supplier to Amazon, you’ll have to comply with their insurance requirements, which means a company can pass on a part of its own liabilities to the supplier.

“We encourage our clients to manage their exposure by pushing back and not accepting full liability, and the recommendations issued by our Chubb Engineering Services team or by their insurance broker can help them.”

Charles and his team still regularly see the insurance element missing from a start- up’s business plan. “They often think everything’s covered by a standard General Liability insurance policy, but that’s far from the case.” Only a Professional Indemnity policy (also called Technology E&O) could respond to most of the technology related financial injury claims. In addition to financial loss and contractual liability, the insurance coverage should address privacy, reputational injury and network security claims exposures.


Other regularly overlooked start-up risks involve intellectual property and international expansion.  “It’s very important for start-ups to protect themselves against intellectual property rights infringement claims. With new technologies, the same ideas can occur in other parts of the world so companies need to check this, which can be difficult and laborious, especially in the field of copyrights and computer codes,” says Charles.

“And there’s another problem too – rivals may seek to prevent a company entering its territory by claiming intellectual property infringement, and sometimes start-ups have to accept they must pay royalties to avoid a claim.” Professional indemnity policies can give start-ups peace of mind in this notoriously litigious minefield. International expansion can have other risk implications too. In Charles’s experience most, start-ups are unaware of the insurance requirements of the countries they wish to do business with. “There may be very different and very stringent requirements. The US, for example, is a highly regulated market and start-ups wishing to operate or sell there would need to seek US exports insurance extensions or US admitted insurance for their local staff and their business. Sorting this out can delay expansion plans.”

Even with the right insurance protection in place, success is clearly not guaranteed, so directors’ and officers’ (D&O) insurance is another vital protection. “Bankruptcy risks are very high in the first three years of any start-up, and particularly when the founders are focused on the technical side of the business and not so much the finances,” says Charles. “Founders often offer their homes as loan security, so they’re very exposed if the business fails. Many companies ask their suppliers to take out D&O cover.”

Christophe Gautié, a broker with the French firm Apollo, offers specialist advice to infotech start-ups and is often struck by the inadequacy of their cover. “Many have just gone to their domestic insurer and then when something goes wrong, they find themselves badly placed. It’s far better if they’re insured properly right from the start.”


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