Cash Management at Startups
Easy-to-implement tips and tricks to keep your money safe
Embedded content: https://twitter.com/chrija/status/1635335055307575297?s=20
As I said on Twitter yesterday, most (if not almost all) VCs — ourselves included — have failed to talk to founders about where they store their cash. We spend enormous amounts of time discussing runway, burn, and financing with founders. But if a startup has stored its cash safely is, unfortunately, not a question that I’ve ever asked. And although I’ve been in hundreds of board meetings with dozens of companies, I don’t remember hearing that question from any other VC either.
Here is the simple guide that could have saved founders a huge amount of stress over the last few days and that I wish we had published years ago. We’ve put this together very quickly over the last few days, so consider it a v0.9 that we might update in the coming days and weeks. If you have any feedback, let us know!
Guiding principles
1) Balance safety with simplicity
You want your money to be as safe as possible, but the setup needs to be manageable. Managing 40 bank accounts (because you have $10M and the FDIC limit is $250k) is, obviously, not a practical solution. On the other end of the spectrum, having everything in one account is not a good idea either (more on that below).
The need for simplicity is especially true for early-stage companies that don’t have a CFO or VP of Finance and where the founders are still running finance. As a founder, you don’t want to spend several hours per week dealing with banks, moving money from one account to another, etc. If you have an experienced finance person taking care of finance full-time, you can afford to have more complexity.
2) Don’t speculate
If you can earn a little bit of interest on your company cash, that’s great. However, it’s not worth taking any additional risk in order to earn more interest.
If you are being offered an interest rate that is higher than the risk-free⁽¹⁾ interest rate, that’s a red flag. This is one of those areas where there really is no free lunch.
As a reminder, this post is not general investment advice. If you’re saving money for your retirement, it can make a lot of sense to invest in higher-risk asset classes to get a higher yield. Not if you’re a tech startup. Your job is to invest the capital that you’ve raised into your business, and you have to ensure that the money is there when you need it.
Similarly, don’t engage in currency speculation. If you have a view on how interest rates are going to develop or whether the US$ is going to gain relative to the Euro, I think it’s best to leave that view at home when you go to the office (unless your office is in Wall Street — again, this is advice for startup CEOs).
Where to put your cash
The core issue is that in the US, the Federal Deposit Insurance Corporation (FDIC) guarantees only $250,000 per account, which is utterly inadequate for most tech businesses. In the UK, the amount guaranteed by the Financial Services Compensation Scheme (FSCS) is even lower: £85,000 per account.
Thankfully, this time the authorities in the US and the UK stood up to make sure that SVB customers get all of their money… but they didn’t have to and might not next time! I believe better regulation and/or a greatly increased insurance amount is needed to ensure that bank customers can rely on their bank deposits to be safe. Until then, here are a few measures you can take to minimize your risk:
1) Don’t put all your eggs in one basket
If you can implement only one thing from this list, it should be this: don’t put all your money into one bank account (or bank accounts of affiliated banks). By spreading your cash across two or three accounts, you’re significantly reducing your risk.
Having at least two bank accounts also makes sense because of other issues that can hurt your ability to make payroll. Cyber attacks, website outages, losing your card reader, or getting blocked from making transactions because of routine fraud checks can all take down your short-term access to a given provider. Having a backup bank helps mitigate a lot of short-term access issues.
However, keep in mind that because of the interconnectedness of players in the financial system and the psychology of bank runs, there is a risk that one bank run provokes another. Also, while losing a third or half of your money isn’t as life-threatening as losing almost all of it, it would still be awful. Therefore, having two or more bank accounts is a great first step, but it’s only part of the solution.
2) Keep the majority of your cash at a “Global Systemically Important Bank” (G-SIB)
The largest banks on the planet are considered “too big to fail”. Because of that, they are required to maintain higher levels of capital and liquidity and undergo regular stress testing. Should one of these banks ever struggle, governments will likely do whatever it takes to save them.
The list of G-SIBs currently includes:
North America:
Bank of America
Bank of New York Mellon
Citigroup
Goldman Sachs
JP Morgan
Morgan Stanley
Royal Bank of Canada
State Street
Toronto-Dominion Bank
Wells Fargo
Europe:
Banco Santander
Barclays
BNP Paribas
Crédit Agricole
Credit Suisse
Deutsche Bank
Groupe BPCE
HSBC
ING
Société Générale
Standard Chartered
UBS
UniCredit
A counter-argument might be that if one of these giant banks did get into trouble, it would be too expensive for governments to save them, whereas saving a smaller bank is comparably easy. I don’t know if that’s a valid concern, but if I had to keep all my cash in a bank deposit, I’d go for one of these large banks.
Unfortunately, these banks frequently don’t offer the most seamless operational experience, and you may prefer a regional bank or a neo bank for payroll, checks, wire transfers, credit cards, etc. to make day-to-day operations more manageable. In this case, you will:
Have a checking account at the smaller bank and use that for all your day-to-day banking activities.
Keep most of your cash at the large bank (and use that account to receive payments from customers)
Wire money to your checking account once or twice a month.
One thing to keep in mind is that having multiple banking relationships may increase the risk of you or your customers falling for phishing attacks. A simple best practice, besides basic cybersecurity protection and training, is to have a process that requires payments above a certain threshold to be confirmed on the phone by a trusted person. Never rely on email as your only channel of verification.
Spreading your cash across accounts at two or three G-SIBs gives you a lot of safety and arguably is enough for most earlier-stage startups. However, there are even safer solutions, so if you’re a Series B or later company with tens of millions in cash, read on.
3) Buy Treasury Bills (AKA T-Bills)
The big advantage of buying T-Bills (or similar government-issued short-term securities from countries with an AAA credit rating), is that they are held in your investment account, just like stocks. Even if the bank where you have your investment account goes bust, your T-Bills won’t be affected. This makes them significantly safer than deposit accounts.
For T-Bills, the shortest maturity is four weeks⁽²⁾, so unlike an instant savings or checking account, you can’t access your cash daily. If you only put money into T-Bills that you need in 3–18 months and keep enough cash for the next three months, that shouldn’t be a problem, though. If you do need much more cash much sooner than expected, you can always sell T-Bills at any time. If interest rates went up after you bought them, you’d incur a loss, but because of the short time to maturity, it won’t be a big loss.
T-Bills are noted in US dollars. For cash that you want to keep in euros or pound sterling, you can use similar government-issued short-term securities. Keep in mind that different countries have different ratings. You can argue that every country from the Euro zone is “too big to fail” but I’d always go for the highest-rated issuers just because it’s not worth it to even take the slightest risk here.
The disadvantage of buying T-Bills is that you’ll have to buy new T-Bills every month, so there’s a little bit of overhead. Another disadvantage is that depending on the location of the startup, its shareholders, and the bank, opening an investment account may take a bit more time because of anti-money laundering and other regulatory requirements.
4) Other options
A few other potential options are worth mentioning:
Money market accounts (MMAs): Money market accounts act like a checking-savings account hybrid, combining the flexibility of a checking account with the interest you get on a savings account. However, unlike money market funds, money held in MMAs is at risk if a bank fails, so MMAs don’t solve the problem.
Money market funds or ETFs that invest in AAA government securities with maturities of less than three months. This is similar to the T-Bills strategy mentioned above but requires less effort because the fund takes care of continuously recycling money into new securities. If you go with this option, make sure to choose a fund or ETF that holds the physical assets. Some funds and ETFs use derivatives or other securities issued by financial institutions which introduce counterparty risk with regard to the issuer.
For later-stage companies with $20M+ (?) cash on hand, it might make sense to have a managed investment account where the bank (typically an investment bank) has the mandate to invest your cash into AAA short-term securities. As far as I know, banks charge something in the order of 0.20–0.30% per year for this service. I don’t know yet what the minimum amount is to get this type of service — I’ll update the post when I know more.
Some practical tips & tricks
Opening a bank account can take time, and unfortunately, there is a strong correlation between the time it takes and the size of the bank. Here is a list (which we haven’t verified) with information on how long it takes to open an account with various banks. To get your account up and running as fast as possible:
Do it in person if you can (this always goes faster)
Have your documents prepared in advance (many banks have their applications online — it is easy to see what is needed)
Get a warm intro to the bank if you can, e.g. from one of your investors.
If you change your bank account, don’t forget to inform all customers multiple times and implement a great transition process to reduce the risk of payments bouncing. Assume your customers implement the same safety and security checks you do — so be ready to jump on the phone or a video call to verify changes, and make sure they can get hold of you!
Summary
In case you feel overwhelmed by all this information, here’s a summary in the form of a simple checklist.
1) Check the insurance coverage applicable to your bank accounts
In the US, the FDIC insures deposits up to $250,000 per depositor, per insured bank. Deposits in the UK are protected up to £85,000 per account. For most tech startups, this is way too low.
In Germany, the mandatory deposit insurance insures €100,000 per account, but most private banks are part of an additional, voluntary deposit protection scheme of the Association of German Banks, which offers much higher protection (in the order of €10–50 million — you can look up the precise amount for each participation bank here).⁽³⁾
2) Have more than one banking relationship
Don’t put all your eggs in one basket. Diversification is the first step towards keeping your cash safe and accessible at all times. Try to have two or more accounts with a couple of months’ cash burn in each of them.
3) Hold 80% of your cash at one or more large banks
Open an account at one of the large, the so-called “Global Systemically Important Banks”, and keep 80% of your cash there. There’s no guarantee they won’t fail, but I’d argue they’re safer than smaller banks.
4) Implement cyber security protection and training
Phishing attacks are a real risk, and with multiple bank accounts, your risk may increase. Make sure to have some essential cyber security protection and training in place.
5) Have a clear process for larger payments (incl. four-eye principle)
Define a process for clearing larger payments: what constitutes a larger payment, who are the required signatories, etc. Make sure this process is shared with and adhered to by the relevant team members.
6) If you have expenses in different currencies, hold cash in these currencies
If you have expenses in multiple currencies, make sure you can meet your expected commitments by holding cash in these currencies. You don’t need a complicated hedging strategy. Just aim to keep different currencies based on your expected net cash outflows to avoid that FX swings can shorten your runway.
7) Put money that you don’t need in the short term into T-Bills or similar, government-issued ultra-short-term securities
T-Bills and similar ultra-short-term government securities offer a safe, bank-independent method of storing your cash. If you have a few million or even tens of millions of dollars or euros that you don’t need within the next few months, consider this option.
Many thanks to Sabrina Castiglione and my P9 teammates for their help with this post!
⁽¹⁾ In reality, risk-free doesn’t exist. I’m using the term to refer to the lowest-risk asset, which is usually government bonds.
⁽²⁾ You can buy T-Bills with even shorter durations on the market, but I think doing so wouldn’t be practical.
⁽³⁾ State banks and regional public banks (Kreissparkassen and Landesbanken) have their own deposit scheme where all of them are liable in case one of them fails. Germany isn’t known for being a particularly startup-friendly country, but when it comes to deposit insurance, it looks like German startups won the jackpot. :-)