Ask HN: Just got $200k from an angel, where do I stick it? Savings? CDs? | Hacker News Reader

Ask HN: Just got $200k from an angel, where do I stick it? Savings? CDs?

118 pointsmoneymoron80 comments

Hi, HN,

An angel investor just cut me a check for $200k (convertible note, solid terms). My questions is, what do I do with the money? I have a business banking account that has about $3k in it right now. Do I just deposit the 200k in the savings account there? Do I stick 150k of it in a savings account so it can generate some interest?

I realize this is a super elementary question, but I've never seen it addressed here or anywhere else. What does a startup do with its cash when it gets a bunch of it like this?

FWIW: Our burn rate is about $5k on 9k monthly in revenues at the moment.

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Don't put it in "investment vehicles" of any sort. Keep it all at the same bank that your angel knows about. He is not paying you to be a fancy treasury management guy. Risk aversion is the name of the game. You also should keep it at that bank to avoid the appearance of funny-biz.

DO put it in a MMA to get some yield, but understand that you'd be doing amazing to get 2% on it, and that should be lost in the noise if you're doing well in the real work.

You might also be able to extract some concessions from your banker for having more assets at the bank.

MMA's may not be fully insured.

Or not fully liquid. Look up The Reserve Fund for an example. People got nearly all their money back, but not for a while.

There are a few banks whose business is specifically startups; the two most well-known are Silicon Valley Bank ("SVB") and Square One. I'd start a relationship with them and deposit there if I were you. I've personally worked with Square One before and they're awesome. You should look into the Square Roots program there, since it's designed for exactly this scenario. They can give you more specific advice. But generally the rule is not to get creative.

Square One is definitely the better of the two, at least from everything I've seen. The other option would be a business banking account at a bank where you already have a relationship (from personal banking).

Thanks. I just want to make sure I'm being a good steward of the money that was given to us. We obviously don't want to do anything fancy with it since we need to spend it, but I want to do due diligence on what others are doing with their cash when they get it like this.

Another vote for Square One. They've been extremely helpful and offer great service. They'll be happy to put the money in CDs or in an interest-bearing savings account, and will also be able to advise you on what's common for startups at your stage.

https://www.square1financial.com/

I've heard nothing but bad things about SVB.

Using SVB for a second startup; in my experience, they've been fine and even helpful. Good customer service. No experience with Square One, so I can't compare the two.

The bankers themselves are wonderful, helpful people.

The online banking (which I want to use a lot) needs a lot of work.

1) Does not allow logins from linux desktops

2) Password entry uses a virtual keyboard where you manually click on-screen letters with a mouse; this discourages logging in and encourages worse passwords.

3) The actual online interface has significant work to do to catch up to that of larger commercial banks.

Agree with all of these points, except that I've never had to use a virtual keyboard; password entry does use sort of an odd widget, but I can type normally into the password field (typically Chrome/OSX).

Thanks especially for noting the linux problem; I'd forgotten about that.

Your main concern is the safety of your money. This savings isn't supposed to make money for you, that's what the business is for.

You can put it into a savings account or CDs at an FDIC/NCUA-insured bank or credit union, and that'd work just fine, but make sure that you stay UNDER the insurance limit (currently $250k), otherwise if the bank goes, so does the portion of the deposit beyond the limit.

If you're feeling curious about other options, a money market account[1] would work too, as would short-term treasuries via TreasuryDirect. But it's likely the case that neither of those will be better than a plain old bank account.

As an aside, there are some states which allow banks to buy private deposit insurance (eg ASI), but I don't trust that system; it's already failed many times in the past[2]. Basically, if they don't have a FDIC or NCUA logo at the bottom of their page, skip it. However, I've only seen one place that actually used that crap (SF Fire CU).

[1] I'm referring to actual money market mutual funds (which are NOT insured like a bank deposit, but are regardless considered 'safe money'). Some banks offer "money market" accounts, but they're identical to the normal insured savings accounts with a different label slapped on the front.

[2] https://www.clevelandfed.org/Research/commentary/1994/0501.p... "Lessons from the Collapse of Three State-Chartered Private Deposit Insurance Funds"

This is probably more info than you really need, so here's the tl;dr version: Yeah, a savings account is fine. Just keep the balance under $250k.

Oh, forgot to mention: Savings accounts have a 6 transaction per month maximum (as mandated by the Fed). If you exceed that, you'll be paying fees. So if you're going to be doing a lot of frequent deposits/withdrawals, you'd want to use a checking account.

Any investing decision should answer this question:

  When do I need the money back?

Since you'll want to access the money pretty soon, preservation of cash is the primary goal. So a savings account is the answer for you.

(Likewise, someone saving for a retirement in 30 years would do well with aggressive capital gains investing, but that's a whole different thread. Just stick to answering the above question for any financial question and you'll be ok.)

I would not mess around with CDs or Money Market Accounts to chase yield, because the returns from doing so are very low and it can be a distraction from the real business. This is particularly true now because rates are so low. For example, the average CD Rate for a 6 month CD is 0.38% (http://www.cdrate.com/?term=13).

* A CD requires you to lock your money up in the CD for a certain amount of time, e.g. 6 months

* You can get the money out early only by paying a early withdrawal penalty, which is typically 30-90 days worth of interest for a CD with a term less than a year (http://banking.about.com/od/cds/a/cdpenalty.htm)

* This is not applicable to you, but FDIC insurance typically covers up to $250k per CD, so you may need multiple CDs (http://en.wikipedia.org/wiki/Certificate_of_deposit#Deposit_...)

Money Market Account rates can be as high as 1.10% (http://www.cdrate.com/money-market/). However, they are not like checking accounts and you'll have to plan out when you withdraw what amount.

* Because of "Regulation Q", MMAs allow only 6 withdrawals a month, which sometimes includes ATM transactions, and only 3 may withdrawals may be checks (http://en.wikipedia.org/wiki/Money_market_account)

* FDIC insurance is up to $100k per account

A $200k deposit in a CD earning 3.8% would make around $7.6k over a year. The same deposit in an MMA earning 1.1% would net around $2.2k over a full year.

My personal view is that a CD or MMA requires extra effort and management time and reduces flexibility, so I don't use CDs or MMAs for my businesses unless there are very large amounts involved and a lot of stability in the business. I also don't chase rates from different banks, because of the convenience of having a single bank provide all my accounts.

ingdirect.com has a checking account that gives 1.25% APY with a balance over 100k

http://home.ingdirect.com/products/products.asp?s=ElectricOr...

That's a personal banking product, not a business banking product. Here are the business banking products: http://business.ingdirect.com/

Best rate is 0.95% for a business savings acct. And note that it requires linkage to a "regular" bank account.

What's the difference? Besides the obvious name.

One is owned by the entity (associated with an EIN), while the personal account is owned by an individual (and associated with an SSN).

As a business entity, you won't be able to get a personal account

The FDIC insurance limit is actually $250k. It was raise some time ago.

It was raised during the recession, possibly to boost confidence (but honestly, to maintain coverage with inflation it was overdue). There were talks for it to be a temporary raise, but I don't see anything about lowering it now. I guess it's permanent.

It was actually because of lobbying from printing companies so they could profit by changing all FDIC insurance signs at banks. Just kidding, you are correct, inflation should have pushed this up to $250k quite some time ago.

(but honestly, to maintain coverage with inflation it was overdue) I have to disagree.

Prior to the increase there was $100,000 of coverage. In 1934 when the program was started there was $2,500 of coverage. After adjusting for inflation this $100,000 (2011) would be worth $6,055.12 (1934). [1]

[1] http://www.wolframalpha.com/input/?i=%24100%2C000+in+1934

The rate was raised to $100,000 in 1980. Adjusting for inflation from 1980 to current, the $100,000 would be worth $275,000 by today's standards. The move to $250,000 was overdue.

The prior rates are irrelevant to my point. See www.fdic.gov/bank/analytical/banking/2000dec/brv13n2_1.pdf for discussion of historical FDIC rates, and the reasoning behind them.

Put it in the business banking account in plain cash.

Your angel investor presumably has relevant experience - have you asked their advice?

I would recommend the Business banking for the full amount. Give that you can 'maximize' your interest/return in other forms of accounts BUT it is much more important to you as a start-up to be able to have cash at hand quickly if an opportunity presents itself AND if you are to negotiate larger deals you might have to prove that you have funds at hand.

In my opinion it's not worth the hassle and small extra income to complicate your capital structure.

This is more or less what I was hoping/expected to hear.

Well also depending on what your business is, there is also the risk that tying up funds might end REALLY badly. For example if you happen to be hosting your own servers or tangible assets and suffer a major breakdown just a few days of not being able to access enough funds could kill or at least very seriously hurt your company.

Minimizing risk should be supreme! It's not worth chasing a few tenths of a percent or spending too much time doing something fancy. Plus doing something fancy usually costs some admin fees. E.g. An extra .1 % on 100,000 is only $100 a year.

I'd toss nearly all of it into an FDIC insured savings account (ING Direct is 1.1%) with the rest in your corp checking account.

My question is why did you accept money that you have no use for at the moment?

We're going to hire a crapload of people to hack for us and sell for us.

Oh ok, gotcha. Growth capital. Sorry if it seemed like I was trolling - just genuinely curious.

Planning on taking more? $200k seems a bit low for a crapload :)

3 FTEs and a contractor feels like a crapton to this longtime bootstrapper!

3 FTE's and a contractor seem 4-500,000 to me who knows nothning and would want to run a year before going broke.

curious what others think is 150k/yr per fte (sallry, taxes, benifits, equipment, office) high or low

I think that's a bit high - possibly a lot high. You can likely find quite good qualified people at $70-$80k - base of $50k plus benefits and overhead. Be prepared to offer some equity stake in the operation in exchange for that somewhat lower base salary.

> I think that's a bit high - possibly a lot high

This seems very low to me.

Let's assume 3 employees at your rather low rate. That's: 3 x $70k = $210k.

So all you money is now gone.

With no money left how are you going to pay the rent, pay for equiment, pay for any other day to day business expenses (i.e. phone, electricity, insurance, taxes etc).

I'd say $200k is even too low for 2 employees (in any western country).

That's assuming he's taking money for a full year…

In reality, he's not paying the employees a year's salary upfront, so at this point all he really needs to have in cash is the first couple months' salary.

Imagine that he's going off 6 months, at which point he would reassess the financial situation (whether he needs to raise more money, lay off, or is now making enough profits to pay for the team.)

Just a thought…

depends on location.

You are assuming that the company has 0 revenue/profit.

When I was still in market research, we used a rate of 150000€ per FTE as as heuristic to convert between number of empolyees and gross revenue whenever one of the numbers was missing. But this number is mostly for businesses that move inventory. Since software startups usually do not have to stockpile luxury cars in the showroom, the number might be too high in this field.

Just one quick comment: a lot of people here seem to be concerned about putting the money in an FDIC-insured account.

I'd say that this isn't a huge concern, as long as you don't put it anywhere particularly stupid. You're running a startup. The chances that your startup will go broke are 80%. The chances that your startup will go broke due to the bank vanishing are 0.0001%. You're more likely to go broke due to your servers being eaten by giant ants.

Clearly you have been living in a cave for the past two years; we are currently in one of the largest bank crises in history, and it's not over yet.

The definition of "anywhere particularly stupid" changed radically in the past few years. There were 157 bank failures in the U.S. in 2010, and another 140 in 2009.

Those depositors with FDIC-insured accounts did not lose a dime in these bank failures. Those who rolled the dice and exceeded the $250K limit, well, who knows what happened to their money.

Actually as far as I know nobody has lost any money out of their bank accounts. I'm under the impression (someone can correct me if I'm wrong) that banks which have failed have had all their assets and liabilities transferred to another bank -- the FDIC limit hasn't come into play because the FDIC hasn't actually paid out any money.

I agree with other commenters. The investor didn't give you the money to invest in, they gave it to you to invest in your business.

In Australia we have easy access to high interest savings accounts that can be attached to a regular savings account. So money you put in this account can't be accessed by an atm or used for daily transactions but you can put it into your main savings account instantly when ever you want. But for every day it is in this high savings account you will earn 5% interest.

Ask the angel investor they would also probably have some great ideas.

But focus on investing that money in your business. You have a burn rate of about $5k-$9k would increasing that burn rate by investing more into your business (people, sales, marketing, etc) help you reduce that burn rate quicker?

Anyway I have no idea what business you are in, but use it to invest in your business, that is what is was given to you for.

As someone currently maintaining bank accounts on both sides of the Pacific, interest is way higher in Australia than in the US right now. You can easily get 6% or even more in Australia with money at call, whereas circa 1% seems to be the norm in the US.

For me this means a change of strategy: I'd bother with the additional bank account to get six percent, but not to get one percent.

Exposing yourself to exchange rate risk isn't worth it in this case

Well the central question is why did you raise the money? Your case seems to be atypical, but I think the best thing to do right now is to grow your business.

Instead of letting everything stay on a static basis of consistent 5k burn rate on a 9k monthly revenue, why not think of strategies to increase burn rate and increase revenue? If you took investor's money, I believe the key thing to do right now is to think how to increase your investor's stock value, which will also benefit you.

Don't even consider putting in a CD and Savings. If you do, it would be considered unethical if you're going to earn your investor the pathetic 3-4% in risk free asset, he's better off investing it from a mutual fund.

Hire. Spend. Grow. Never let cash sit idle, be a magician and transform money into more money.

Over-spending has been the doom of too many startups. Don't just grow for the sake of growing. Plan strategically and try to get your business profitable at least on an operating basis. More revenues does not mean more profits. Some things take money but there are other things that just require time. Sometimes, you just need to be around for so long for some things.

Keep the money in an FDIC-insured account, and don't worry about the interest. You need to focus on your business.

This is terrible advice.

Thanks for asking this. I am in a similar situation.

I already have a strong relationship with a local bank that I use for my personal accounts and my other business. After reading the comments here, I guess I will stick with that plan.

100% this. The little interest/dividend you might be able to squeeze out of $200k is by no means worth any of the hassle when you should be focusing 24/7 on your business.

More time than I can count at my last startup, our personal relationship with an actual live human at the bank saved our bacon when stupid bank bullshit strikes (i.e. big check from client comes but the bank automatically freezes the money for some interminable time period, etc.) I highly recommend business banking with people who know you. You can do specialty stuff with specialty bank later, when it's warranted. Right now you just need a business checking account. (And it sounds like you could use payroll, too.)

Just wanted to thank you for asking. This is a fantastic question that has not really been thoroughly addressed.

Put it in the savings account. No big deal.

We setup two separate business accounts with the same bank. Put 90% of the money in one, and 10% in the other.

Monthly float is transfered from the main account to the second account, and checks/wires/etc come out of that, and incoming checks are deposited into it.

If someone manages to forge a check against your account or recall a check you deposited then you don't get cleaned out.

We were in advertising with lots of incoming and outgoing payments, so the additional work was worth it. Check fraud against businesses is still a big problem, and the law states the party that put in the least amount of effort to prevent the fraud is ultimately liable for the loss (which is you if you are using any type of off the shelf inkjet business checks).

I haven't seen it mentioned yet: Make sure whatever you deposit it into doesn't have a lockup provision. The last thing you would want is to need the cash only to have the bank tell you that you will pay a penalty for accessing it early.

Most commercial bank accounts offer a "nightly sweep" that moves your funds overnight into an interest-bearing account, and then back into your operational bank account. You will find that this is only offered for Treasury Managed services or something similar. This will incur higher monthly fees as well as per-transaction charges, so any benefits you'd get from the nightly sweep would be outweighed by the costs in this economic environment.

Stick with a regular business banking account, preferably one that charges few, if any, fees. Fees will eat up any interest you'd get anyways.

$200K isn't enough for you to bother doing all the research to maximize your yield. Just keep making money and improving your business. Then when you hit a scale where you have a CFO/VP Finance, let them worry about how to make a couple extra percentage points on all the billions of spare capital you have floating around. For the time being you have way more important things to do like doubling your revenues and maintaining the same margin. Good luck!

You need to figure out your future expenses. You should definitely put the money into higher yielding (but SAFE) investment vehicles and such but which ones depend entirely on the timing of your cash requirements. You probably want 25% in cash, 50% in longer term vehicles and remaining in medium term vehicle. Key objective is to minimize penalties of withdrawal should you explore and require cash immediately. Terms vary so read the fine print.

Avoid CDs for now. The interest rates they pay don't justify the commitment. You can easily compare the interest rates of savings/checking/CDs here:

https://www.google.com/comparisonads/ussavings?s=1&kw=sa...

Right now it looks like AmEx's "High-Yield Savings" is leading the pack w/ 1.30% APY.

Great question and I can admit that I have inquired on the same logic. However, I am wondering why you accepted $200K if you didn't need it? $9K monthly on $5k expenses demonstrates that you could have taken less and made other changes to better utilize current resources.

Put it into a sweep account, look for government subsidies and subsidized loans. I know here in Canada there are quite a few you can take (with requirements) that literally pay off 60% of the loan up to $150k.

Have you thought about investing into advertising (not sure of your product, so you would have to gauge where the best place to put your money).

Definitely talk to a banker. They will give you advice on how to stagger the CDs, put some in savings, and keep enough cash on hand.

Ask your investor.

Depends on the investor. If he's big-time and busy then maybe it's best not to bother him with every piddling little detail. And this, I think, is a piddling little detail -- he doesn't care whether or not you're earning a few percent interest on his money, he cares about how fast you're turning it into fifty times his money.

what does convertible note/solid terms mean?

stock symbol QLD

Put it in a checking account and use it to run your business. The bar down the street probably has more money in its bank account.

If you plan to need it shortly, then you already have your answer. If not then I'm really curious why you took it

You should put your money into gold bullion as a hedge against inflation.

Corvettes seem to be a popular investment vehicle for some startups

Invest 93% in another small startup.

In my opinion that crosses the boundary of simply unwise to outright unethical. The angel investor decided to invest in company A, not company B, and it doesn't seem right for company A to turn around and re-invest the angel's money in company B. That would ignore the angel's interests entirely.

What about buying stocks that pays dividends with it? Microsoft pays quarterly dividends of $0.16/share. The Rate of Return is 2.23%. Intel's dividend of $0.16/share, has a ROR of 3.01%. AT&T's dividend of $0.42/share, has a ROR of 5.93%. Verizon's dividend of $0.49/share, has a ROR of 5.70%.

These are all companies that are going to be around for a while. And even if the stock goes down, you still get paid a dividend for it.

I consider this to be a horrendous idea when it comes to funds with a 'burn rate'. Not to mention that I would personally be completely outraged as a VC/Angel if I invested in a start-up and they turned around and speculated on the stock market with the funds they received.

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