Startup Insurance: What You Need (and Why)

You're building something from scratch—late nights, tight budgets, and a thousand decisions competing for your attention. Insurance probably isn't the first thing on your mind. But here's the reality: one unexpected lawsuit, one stolen laptop with customer data, or one contractor injury can undo months of progress. The question isn't whether bad things happen to startups. They do. The question is whether you're protected when they do.

Startup insurance isn't about checking a box for investors or landlords (though it helps with both). It's about making sure a single incident doesn't become an existential threat to your company. The good news? You don't need every policy on day one. What you need depends on your stage, your team, and your customers—and it's more affordable than most founders expect.

This guide breaks down what insurance you actually need for a startup, when you need it, and what you can skip. No jargon. No scare tactics. Just practical advice from people who work with startups every day.

Do Startups Really Need Insurance?

The short answer: yes, but not always for the reasons you'd think. Some insurance is legally required—if you have employees in most states, you need workers' compensation coverage. If you're driving for business purposes, you need commercial auto. These aren't optional.

But the bigger reason startups need insurance isn't legal compliance. It's leverage. Try signing an enterprise contract without general liability coverage. Try closing a lease without proof of insurance. Try raising a Series A without D&O coverage for your board members. Insurance unlocks opportunities that would otherwise be off the table.

Then there's the obvious reason: protection. A product liability claim, a data breach, a slip-and-fall at your office—these aren't hypotheticals. They happen to startups at every stage. The median cost of a cyber incident for small businesses is over $25,000. A single employment practices claim averages $75,000 to defend. Without coverage, that comes directly out of your runway.

So do startups have to pay for insurance? In some cases, literally yes—it's the law. In most cases, practically yes—it's what allows you to operate, grow, and survive the unexpected.

What Insurance a Startup Needs (By Stage)

Your insurance needs evolve as your startup grows. Here's what to prioritize at each stage:

Pre-Revenue (Building the Product)

At this stage, you're lean. Maybe it's just you and a co-founder working from home or a coffee shop. Your exposure is limited, but it's not zero.

• General Liability: If you meet with anyone in person—investors, potential customers, co-working space members—you have exposure. This covers third-party injuries and property damage. Many co-working spaces require it.
• Cyber Liability: If you're collecting any user data, even for a beta, you need this. A breach at the early stage can kill a company before it launches.
• Consider: Errors & Omissions (E&O) if you're providing any professional services or advice, even informally.

First Customers (Generating Revenue)

You've got paying customers. Congratulations—you also have real liability. This is when insurance shifts from 'nice to have' to 'need to have.'

• General Liability: Non-negotiable. Customer contracts will require it.
• Professional Liability (E&O): Essential if you're providing services, software, or advice. This covers claims that your work caused financial harm to a client.
• Cyber Liability: Increase your limits. You're holding more customer data now.
• Product Liability: If you're selling a physical product, you need this from day one of shipping.

Hiring Your First Employees

The moment you have W-2 employees, your insurance requirements expand significantly.

• Workers' Compensation: Required in almost every state. Covers medical costs and lost wages if an employee is injured on the job.
• Employment Practices Liability (EPLI): Covers claims of discrimination, harassment, wrongful termination. Even frivolous claims cost money to defend.
• Consider: Group health insurance—not required for small teams, but increasingly expected by candidates.

Enterprise Customers and Investors

Closing enterprise deals and raising institutional money brings new requirements and higher stakes.

• Directors & Officers (D&O) Insurance: Investors will require this. It protects your board members and executives from personal liability for company decisions.
• Higher Limits Across the Board: Enterprise contracts often specify minimum coverage amounts—$1M or $2M in general liability is common.
• Umbrella/Excess Liability: Provides additional coverage above your primary policies when enterprise contracts demand higher limits.

How Startup Insurance Works

Understanding how insurance works for startups helps you buy smarter and avoid surprises when you need to use it.

Insurance policies have three key components: coverage (what's protected), limits (the maximum the insurer will pay), and deductibles (what you pay before coverage kicks in). For startups, getting the right coverage matters more than getting the cheapest policy.

Most startup policies are 'claims-made,' meaning they cover claims filed during the policy period, regardless of when the incident occurred (within reason). This is different from 'occurrence' policies that cover incidents during the policy period regardless of when the claim is filed. The distinction matters—if you switch insurers or let coverage lapse, you could have gaps.

Premiums—what you pay for coverage—are based on your risk profile. Insurers look at your industry, revenue, employee count, claims history, and specific operations. A SaaS startup pays different rates than a hardware company or a food delivery service.

The good news for startups: you're often in a favorable position. Low revenue, small teams, and limited history mean lower premiums. The best time to lock in coverage is early, before you have claims on your record or complex operations that increase your risk.

Common Coverage Mistakes

We see the same mistakes repeatedly. Here's what to avoid:

• Buying the cheapest policy without reading exclusions: A $300/year policy that excludes your core business activity is worthless. Always check what's not covered.
• Waiting until you need a certificate of insurance: Scrambling to get coverage the day before a contract deadline means you'll overpay and may not get the right policy. Plan ahead.
• Underestimating cyber risk: 'We're too small to be a target' is a myth. Attackers specifically target startups because security is often weak. A breach can cost more than your entire runway.
• Forgetting about contractors: If you use contractors regularly, make sure your policies cover their work—or require them to carry their own coverage.
• Not updating coverage as you grow: The policy you bought as a two-person team doesn't fit a twenty-person company with enterprise customers. Review annually.
• Skipping D&O before fundraising: Sophisticated investors won't join a board without D&O coverage. Don't let insurance be the reason a deal falls through.
• Assuming personal policies cover business activities: Your homeowner's or renter's insurance doesn't cover business equipment or liability. Your personal auto policy doesn't cover business driving.

What to Prepare Before Getting Quotes

Getting accurate quotes requires accurate information. Prepare these details before you reach out:

You'll need basic company information: legal entity name, address, founding date, state of incorporation, and EIN. Insurers also ask about your ownership structure and whether you've had any prior claims or lawsuits.

Be ready to describe your operations clearly. What does your company actually do? What industry are you in? Do you have physical products, provide services, or license software? Do you have a physical location where you meet customers or just remote operations?

Financial information matters for pricing. You'll need your current revenue (or projected revenue if pre-revenue), your funding stage, and your annual payroll if you have employees. Don't inflate numbers thinking it'll get you more coverage—it'll just increase your premium unnecessarily.

Finally, know your contract requirements. If you're pursuing enterprise customers, check what their vendor requirements specify. If you're signing a lease, ask what the landlord requires. If you're raising money, ask your potential investors about D&O requirements. Getting this right upfront saves time and money.

Startup Insurance Checklist

Use this checklist before you start getting quotes:

1. 1.
   Determine your current stage: pre-revenue, first customers, hiring, or enterprise-ready
2. 2.
   Identify legally required coverage (workers' comp, commercial auto if applicable)
3. 3.
   Review existing contracts for insurance requirements you must meet
4. 4.
   List all business activities that create liability exposure
5. 5.
   Inventory assets that need protection (equipment, data, intellectual property)
6. 6.
   Gather company information: entity type, EIN, founding date, state of incorporation
7. 7.
   Prepare financial details: current/projected revenue, payroll, funding stage
8. 8.
   Check contract requirements from landlords, customers, and investors
9. 9.
   Review any previous claims or lawsuits involving the company or founders
10. 10.
    Set a reminder to review coverage annually as your company grows

Get the Right Coverage for Your Startup

Getting the right startup insurance doesn't have to be complicated. At Anchor Insurance, we work with founders every day to build coverage that fits their stage, their budget, and their actual risks—not a one-size-fits-all package designed for established businesses. Ready to see what coverage costs for your startup? Get a quote in minutes, and we'll walk you through exactly what you need and what you can skip. No pressure, no jargon—just straightforward answers from people who understand startups.