A startup’s perspective on the B2B indemnity provision

As a startup founder, I feel screwed when it comes to B2B indemnity provisions. Someone should do something about it.

Each of our B2B deals has an indemnity provision which outlines a scenario that makes me cringe as a startup founder. In each agreement, the customer, usually a larger company, asks for the same indemnity that we ask of the customer. Seems fair right?

It’s not. When you’re a startup you only have a certain amount of cash which keeps the lights on. One indemnity can cause certain death and bankruptcy. Unfortunately, as a startup I also have very little alternative but to accept the risk so our company can get traction and get to the next stage.

This got me thinking about all B2B startups. For the startup, one product/functional slip-up with this kind of provision can mean death by the larger company filing a suit against the startup. Larger companies have the ability to mis-step and pay for remedies when they don’t uphold their reps, but startups can’t cover the same amount of damages that larger companies can.

I’m trying to think of some ways the entrepreneur can get around this:

1. try to increase the price. Hopefully your product is differentiated in the market enough that the customer is willing to pay for it.

2. make the customer realize that if you go under, your service will disappear. If your service has enough value, then they should want to protect you from this.

3. get insurance. This seems like a fallback plan. I would be paying for something that has a very very unlikely chance of happening and has plans priced for the risk averse. Basically $1M in capped liability costs $3k/mo per contract? Seems steep for a cash conservative startup.

Any others? Would love to hear other points of views from other founders.