Entrepreneurs: Make Sure Insurance/HR Fit Your Needs
We work with some really cool companies.
Andy and Laurie again had the opportunity to talk insurance, HR and investing through a LifeX Labs webinar with several entrepreneurs involved in startup companies that are doing some fascinating work in the life sciences field.
While these entrepreneurs are focused on developing products that could someday change the world, one of the last things they tend to think about are insurance and employee benefits. Yet these aspects are exactly what they need to consider as their companies grow. After all, as Laurie puts it, “Insurance is when you buy something to transfer the risk from you and put that risk on an insurer. It is something that is necessary to help you sleep at night.”
Andy and Laurie know a thing or two about startups. They have been angel investors for over 20 years and have both been entrepreneurs themselves: Laurie owned a gourmet candy company, and Andy a watch company. And they essentially operate Kuzneski Insurance Group – a senior citizen of businesses at 55 years old – as a startup.
“We’re constantly looking at our weaknesses and looking at what we need to do to get to the next level, so we know where you’re coming from,” Laurie said.
How do you get insurance?
While you can go online to get insurance, it’s not always the best option because you need insurance that fits your business.
“When you’re doing something specialized, sometimes getting insurance through a portal is not the best way to go because they might not understand what it is you do,” Laurie said. “It is important to work with a broker who can take it to the correct insurance carrier and explain to the underwriters what it is you do, what the risk is,” especially for life sciences companies that deal with specialized products.
Andy put it this way: While some types of insurance, such as auto and homeowners, are essentially commodities that don’t vary much in price, it becomes important to “shop around when you get into more complicated situations, especially when you’re doing something that’s never been done before. It’s really important that the insurance company understand what stage you’re in, whether it’s R&D, hiring people, launching a product or opening your doors. If what you’re doing is cutting edge, it doesn’t lend itself to an online application. You really do want that expertise to help you.”
Why do you need it?
In many cases, business insurance is required by someone you work with – a university, a landlord, the state, vendors, investors or a bank.
“Even if someone is not requiring you to have insurance, there are basics that you probably should have in place just to be safe,” Laurie said. This could include general liability, product liability, a business owner’s policy (BOP), cyber security insurance and auto insurance, if you’re using a car for business purposes.
At later stages in a company’s life cycle, you need to consider directors and officers (D&O) insurance. If someone sues the organization, this would cover the legal fees. You may also want key person life insurance, a policy that provides death benefits to a business if something happens to the company’s “mad scientist,” Laurie says. Tail coverage on a D&O policy protects you legally after leaving the company, or if the company folds or is bought out.
When opening a physical location, you’ll need general liability insurance, which covers someone else if they get injured on your premises. You may also want errors and omissions insurance and product liability insurance, depending on your circumstances.
There is also employment practices liability insurance (EPLI), which pays for an attorney in the event that a company is sued over issues related to hiring and firing, sexual harassment, or discrimination. That being said, putting good HR procedures and solid contracts into place can avoid these situations in the first place.
“Insurance should be a final safety net,” Andy said. “You don’t want to have to use it.”
What’s it cost?
That depends on several factors, including the type, policy limits and how risky the product is. A business developing a software app would not be insured at the same level as one that is developing software for autonomous vehicles, Andy says. “That has a serious exposure if that doesn’t work.”
“If it doesn’t seem like it costs enough, you might need to ask, what does it exclude? We want to make sure the price fits the risk,” Laurie cautioned. “Don’t be penny wise and pound foolish.”
What about HR and benefits?
To attract top talent, especially in a competitive labor market, Andy said, you have to think about the needs and desires of potential employees.
“Right now, it’s extremely competitive to get people, no matter what industry you’re in,” Laurie said. “So, what do you need to do get those people to come work for you? What are those employees going to expect? They’re going to want health insurance, dental and vision insurance, life and disability, even pet insurance. You can pretty much buy employee benefits to cover just about anything.”
Different benefits are going to be important to different employees, so it can be helpful during the hiring process to ask what they are looking for.
Health insurance is by far the most expensive benefit you can offer, but most employers require employees to pay 10% to 30% of the premium. (The Affordable Care Act does require larger employers to pay at least 50%.) Andy suggests that employees “have some skin in the game so it’s not seen as a freebie” and is used wisely. And while employers have to offer health insurance to dependents (spouse and children), they don’t have to pay for them. In the same way, a 401(k) program without a match can be affordable, Andy said, and you can offer optional benefits that are 100% employee-paid.
It’s a myth, Andy says, that bigger companies always get better rates on health insurance. Policies for those with 100 or more employees take into consideration prior medical claims, while policies for smaller companies are based strictly on age and demographics. So, a startup with a younger workforce will probably have a lower premium.
Then there are policies that you have to have as an employer, such as worker’s compensation, which is required even for independent contractors that don’t already have worker’s comp.
“These are things to think about as you’re building your workforce out,” Laurie says.
Things to consider
It should go without saying that paying your bills on time is non-negotiable. But Andy said they have found that, during the COVID-19 pandemic, some people were not diligent about opening their mail, bills piled up, and insurance policies got canceled. When that happens, it can be difficult to get the policy restored. (Andy’s pro tip: Use auto pay to “set it and forget it.”) It’s also a good idea to evaluate insurance policies when a company hits certain milestones like adding or eliminating employees, launching new products, buying equipment and opening a facility.
While this all may seem overwhelming for a newly minted entrepreneur, Andy advised adding policies as events or new life stages make them necessary: “We’re not suggesting you need these things on day one, but it becomes important when you start to grow.”