Privacy and Cybersecurity Considerations for Startups

Startups often operate with tight budgets and lean teams, but implementing foundational cybersecurity and privacy practices is essential from day one. As startups collect customer and employee data and build digital infrastructure, they become increasingly attractive targets for threat actors. A single breach can erode customer trust and jeopardize future investment.

In this Legal Update, we outline key cybersecurity and privacy considerations for emerging businesses, drawing on recent incidents and legal risks to offer practical steps startups can take to protect their reputation, foster user loyalty, and lay the groundwork for sustainable growth.

Recent Data Breaches Highlight the Importance of Baseline Privacy and Cyber Practices

Threat actors continue to successfully target emerging companies. For example, earlier this year, a healthcare management SaaS company, suffered a breach that allegedly compromised sensitive patient data, including Social Security numbers, birth dates, and medical records. The incident spawned several class actions, in which plaintiffs allege that the company’s conduct compromised the personal information of over 118,000 people. Even more recently, a popular dating app developer announced a breach of one of its data storage systems. The compromised dataset allegedly included 72,000 user images and direct messages. The incident garnered nationwide attention and triggered a wave of class action lawsuits.

These incidents reinforce that the legal, operational, and reputational risks associated with privacy and cybersecurity are real and significant. Failure to implement baseline security and privacy practices can expose emerging companies to substantial fines, lawsuits, regulatory investigations, and enforcement actions. Operationally, poor cyber and privacy hygiene can stall growth and lead to costly remediation efforts that can disrupt product launches. Moreover, the potential reputational damage from the media attention to cyber incidents is immediate and lasting. Publicized privacy failures or inadequate incident responses can quickly erode customer trust and damage key business relationships.

Likewise, privacy and cybersecurity are key areas of focus for investors and buyers, who routinely scrutinize a startup’s security posture as part of their due diligence. Investors increasingly expect to see formal cybersecurity policies, data protection measures, and clear evidence of regulatory compliance from the start. Thus, poor cybersecurity and data privacy hygiene can significantly lower company valuations, delay funding rounds, and even derail acquisition talks.

Startups that implement strong privacy and cybersecurity programs from the outset may be able to avoid costly, last-minute changes. Retroactively fixing overlooked security gaps or reengineering a product to comply with data protection laws, particularly before launch or a round of funding, may result in expensive delays and a loss of market momentum. Early investment in sound practices helps reduce these risks.

Cybersecurity Considerations for Emerging Companies

Startups do not need enterprise-level budgets to build strong cybersecurity foundations. Six practical steps can help significantly reduce risk:

1. Educate staff on cybersecurity best practices

Human error remains the leading cause of security breaches. Startups are frequent targets for phishing and social engineering attacks, making employee training one of the most effective and affordable defenses. Regular training helps staff spot suspicious activity and respond effectively, significantly lowering the chances of a successful attack.

2. Enforce strong authentication policies, including multi-factor authentication

Multi-factor authentication is a powerful, cost-effective way to protect both company and customer data and significantly reduce the risk of cyber incidents. This added layer of protection is crucial because passwords alone are frequently compromised through phishing, social engineering, or hacking attempts. With multi-factor authentication, an attacker needs at least two authentication factors, making unauthorized access significantly more difficult.

3. Encrypt sensitive data

Data encryption converts sensitive information into unreadable code, protecting it even if a company’s systems are breached. This safeguard is vital for securing customer and employee data, intellectual property, and financial records. Encryption also helps ensure data integrity and regulatory compliance under such data protection laws and regulations like the European Union’s General Data Protection Regulation (GDPR) and the Health Insurance Portability and Accountability Act (HIPAA). In many jurisdictions, data breach notification laws often exclude encrypted data from notification requirements, reducing legal exposure in the event of an incident.

4. Conduct regular cybersecurity audits

A cybersecurity audit is a comprehensive, technical evaluation of an organization’s information security systems, policies, and practices that identifies potential vulnerabilities and compliance gaps. For startups, cybersecurity audits are valuable tools that can uncover vulnerabilities and weaknesses before they’re exploited, provide actionable recommendations to strengthen the company’s cybersecurity posture, and help meet evolving regulatory and industry standards.

5. Ensure secure cloud practices

For companies that store data on the cloud, secure cloud practices are mission critical. Such practices include selecting a reputable could storage provider with strong security certifications and implementing strict access controls. Startups using cloud storage should also consider adopting a “zero-trust” approach, which assumes no user, device, or application is trusted by default. This approach helps limit exposure, allows for granular access controls, and provide real-time enforcement of access policies.

6. Prepare an incident response plan

Incident response plans (IRPs) outline how organizations detect and respond to cybersecurity incidents, enabling startups to rapidly contain threats, minimize damage, and restore normal operations while ensuring clear communication and coordinated efforts among key personnel. Companies should pressure-test their IRPs through regular tabletop exercises, which are discussion-based simulations where key team members walk through a hypothetical cyber incident. Documenting lessons learned from these exercises and actual cybersecurity incidents strengthens future defenses, and demonstrates compliance and accountability to key stakeholders.

Privacy Considerations for Emerging Companies

While cybersecurity safeguards the environment where the data resides, data privacy governs how data is collected, used, and shared. Enacting robust privacy practices from the outset is just as critical to supporting a startup’s reputation, legal compliance, and competitive advantage. Key privacy considerations include:

1. Determine which privacy laws apply

The first step to ensure data privacy compliance is to identify applicable privacy laws, which may apply depending on, among other factors:

• The sector in which the startup operates (e.g., HIPAA for protected health information, and the Family Educational Rights and Privacy Act for student educational records);
• The data the startup collects (e.g., the Children's Online Privacy Protection Act, which regulates the collection of information from children under 13);
• The activities used to collect data (e.g., the Telephone Consumer Protection Act for telemarketing, text messages, and automated dialing systems, and the CAN-SPAM Act for commercial email); and
• The jurisdiction in which the startup operates (e.g., the GDPR in the European Union, or any comprehensive US state privacy laws).

2. Implement and regularly update the company’s privacy policies and notices

After identifying applicable laws, companies should map their data and create internal privacy policies and procedures that govern how the company will process personal information, in addition to an external privacy notice that clearly identifies the types of personal information the company collects, why the business collects such information, and how such information is used. As the business grows and as the laws applicable to the business change, companies should regularly revisit and update their privacy policies and notices to reflect those changes and remain compliant.

3. Minimize data collection and obtain clear consent

Startups should only collect the minimum data necessary to deliver the company’s services and products, regularly reviewing and deleting unnecessary or outdated information. Minimizing collection also reduces a company’s risk and compliance burdens. Privacy notices should clearly explain the company’s data practices. In addition, companies should obtain explicit consent when required and give users easy ways to exercise their privacy rights under applicable laws (such as the ability to correct or delete their data).

Key Takeaways

For startups, adopting strong cybersecurity and privacy practices is essential to protecting business confidential data and individuals’ personal information, avoiding costly breaches and regulatory penalties, and building trust with customers and investors. Prioritizing these practices from the outset signals credibility to investors, and gives emerging companies a competitive edge as they grow.

To request our Cybersecurity & Privacy Checklist for Founders, please see our Cyber and Privacy Resource Center.