Business Insurance for Web3 Companies: From "Skip" to "Must Have"
Web3 founders can now quickly and easily purchase insurance coverage that doesn’t exclude relevant Web3 risks.
For tradtech founders, business insurance is just another item on the startup checklist, like incorporating in Delaware or opening a bank account. Not something to skip.
But like everything in the world of Web3, things are different. In 2020 and 2021, the team at Vouch talked to dozens of Web3 founders, and we discovered that companies with tens of millions of dollars in funding were typically operating without coverage. Why?
- No viable options. Until recently, insurers either disqualified Web3 companies or offered policies with so many exclusions that they were effectively useless.
- Founders were hungry for risk. Entrepreneurs are generally risk takers, and Web3 founders are even more inclined to focus on upside and disregard risk management.
- Bull market. With seemingly infinite funding and rising asset prices, the relative cost of mistakes is lower. Why pay for insurance when resources are abundant?
Web3 founders made the rational decision to pay claims out of pocket rather than deal with the cost and complexity of insurance. As such, the industry norm became “skip insurance”, and it was rarely included in contract requirements.
Everything changed in the bear market of 2022
As Warren Buffett famously said: “Only when the tide goes out do you discover who's been swimming without a suit.”
As we settle into another crypto winter, the market is rapidly separating the speculative, hype-driven crypto schemes from the Web3 builders that are developing useful technologies that solve real problems.
While we anticipate industry contraction to continue through 2023, we remain bullish that committed innovators will find durable business models in the years ahead.
For instance, in the same week that Sam Bankman-Fried was arrested, Aztec Network announced $100 million in new funding to continue building their blockchain verification technology. And the world’s largest companies continue to adopt Web3 technologies to deliver new customer experiences, including Loreal and Nike, despite the scandalous collapse of crypto in mainstream consciousness.
High-integrity Web3 builders are rethinking their relationship with risk as market conditions change. And many are coming to the conclusion that it’s time to take business insurance seriously.
5 Reasons to Insure Your Web3 Company
1. Insurance is now available
With the introduction of Vouch’s Web3 Protection Policy, Web3 founders can now quickly and easily purchase insurance coverage that doesn’t exclude relevant Web3 risks, including smart contract vulnerabilities and theft of digital assets.
2. Insurance helps companies survive downturns
With policies now available that are designed to cover Web3 companies, insurance is a good business decision. You can mitigate the routine risks that are incidental to your vision, like getting hacked or sued by a dissatisfied customer, to ensure these types of mistakes or attacks won’t consume your valuable time and runway.
3. Insurance is a credibility signal
Business insurance is more than a promise to pay for covered losses. It’s a signal to your customers and investors that you take risk management seriously, because insurers like Vouch will not underwrite you without analyzing your risks and risk controls. In effect, your insurance policy is a vote of confidence in your ability to avoid claims, scandals and collapse, and can give you a serious advantage in a skeptical business and investment environment.
4. Insurance is increasingly a requirement, not a negotiation
Web3 builders, especially those working with traditional enterprises including Fortune 500 companies, are discovering they cannot close deals without insurance. These are requirements for every business, and Web3 no longer gets a pass.
Why do businesses care that their vendors have insurance? It’s simple: they need confidence that money will be available to remediate problems and disputes, whether your company is solvent or not, because insurance continues to pay out through bankruptcy. Your business partners will request coverage limits (the maximum that your insurance will pay) that align with their assessment of the risks associated with working with you.
5. You can protect yourself from personal bankruptcy
Some Web3 founders are learning the hard way that the “corporate veil” can be pierced, and that they can be held personally liable for decisions made on behalf of their company. The result can be personal bankruptcy. Directors & Officers coverage exists to protect you in this situation by paying for your defense and settlements. We’re proud to make this coverage available to Web3 companies, which dramatically reduces the personal risk of entrepreneurship.
The Vouch Web3 Protection Policy
Vouch’s Web3 Protection policy consists of four coverages, each designed to cover a different category of business risk. Most Web3 companies should buy all four, but they can also be purchased separately. The coverage limit, which is the maximum amount the policy will pay out in the event of claims, can be adjusted based on your risks, customer requirements and budget.
The coverage descriptions below are general and not comprehensive. In the event of a claim, only the individual policy issued to you will be used to determine if coverage applies.
Directors & Officers
Helps protect your company and the personal assets of founders, officers and board members.
- Damages and Defense Costs from claims of wrongful acts, such as misrepresentation or breach of fiduciary duty, made against Insured Persons or the Company.
- Digital Asset Regulatory Defense Coverage (optional)
- DAO Structure Protection for major token holders (optional)
- Intellectual Property Defense Coverage (optional)
- Cap Table Disputes
- Damage to your business property
- Claims from your professional service(s)
- Bodily injuries.
- Employment related claims
- Data breaches.
- Breach of contract by the Company
Learn about the basics of Directors & Officers insurance.
Errors & Omissions
Helps protect your company in situations where your services cause a financial loss to a customer.
- Damages and Defense Costs from claims alleging wrongful acts, such as mistakes or negligence, in your performance of professional or technology services
- Liability for Loss of a Client's Digital Assets (optional)
- Investment Advice and Activities Errors & Omissions(optional)
- Lending Activities and Lenders Liability Errors & Omissions (optional)
- Insurance Services and Agents Errors & Omissions (optional)
- Real Estate Activities and Agents Errors & Omissions (optional)
- Data breach claims
- Employment related claims
- Bodily injury or Property damage
- Promises or guarantees of profits or cost savings
- Regulatory investigations or proceedings
- Intellectual property claims
Learn about the basics of Errors & Omissions insurance.
Helps cover the cost of data breaches caused by mistakes, hacking and social engineering.
- Loss of digital assets stolen by cybercrime (optional)
- Public Relations Costs (in response to Reputational Harm)
- Breach Response Costs
- Restoration Costs
- Forensic Accounting Costs
- Business Income Loss
- Damages and Defense Costs from third party liability claims of privacy or security wrongful acts
- Errors & Omissions resulting from your Technology Product or Service.
- Harassment or discrimination any person
Learn about the basics of Cyber insurance.
Helps protect your company against employee theft, forgery and fraud.
- Employee Theft
- Forgery or Alteration
- Loss or damage to a Client’s Digital Assets from theft, including forgery, committed by an employee (optional)
- Loss or damage of your Digital Assets from theft, including forgery, committed by an employee (optional)
- Costs resulting from a data breach.
- Loss resulting from seizure or destruction of property by order of governmental authority.
- Loss resulting from trading.
Learn about the basics of Crime insurance.
The elephant in the room: fraud & negligence
During his testimony to Congress, John Ray, the new CEO of FTX, was asked if there were any indications that the company had been negligently run. He identified three red flags: mismanagement of bank accounts, mismanagement of employees, and insufficient or non-existent insurance coverage.
As of December 2022, there are already 9 lawsuits against FTX and/or SBF, including allegations of fraud, unjust enrichment, breach of fiduciary duty, false advertising, violations of security law, wire fraud, and more.
While Ray’s comment points to the importance of insurance, even if FTX had been insured, it would not have provided much protection. The insurance company may cover legal fees for defense against criminal allegations, but would not pay for any damages if the allegations are proven true.
Vouch conducts extensive diligence to ensure that we are working with trustworthy founders who are not at risk of breaking the law. These kinds of bad actors, whether engaging in criminal behavior or gross negligence, increase the cost of insurance for everyone and reflect poorly on the Web3 industry at large.
Vouch is committed to insuring high-integrity Web3 startups for the risks associated with building a durable business.
Vouch understands the unique risks that Web3 companies face and is dedicated to providing the coverage they need to thrive. Our underwriting process is designed to identify and partner with companies that have strong business models, experienced leadership, and a commitment to integrity. By carefully evaluating applicants in a range of categories, we're able to spread risk across our portfolio and offer affordable premiums for our clients.
Now is the time to get insurance
As the macro-environment continues to deteriorate and new shocks to the ecosystem arrive month-by-month, now is the time to prepare with business insurance. After all, you can’t put on a seatbelt after a car accident.
Your next step is to request an invitation and talk to our Web3 team about your risks and insurance needs.