Startups that use Silicon Valley Bank are freaking out over payroll | Hacker News Reader

Startups that use Silicon Valley Bank are freaking out over payroll

businessinsider.com

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“He said that some had refused to report to work because they hadn't been paid.”

And rightfully so. I am wondering if they will need to pay delayed salaries with an interest.

this is probably predominately California, so no; employees owed back wages are top-line creditors but not contractually owed interest. Not sure about other jurisdictions, and they could always pursue legal action.

in CA, unpaid wages pierce the corporate veil and damages are owed. so there will definitely be lawsuits, including class action.

The company I work for only said our next payroll is safe. The rest of the statement was wordy without saying much which is a pretty big red flag to me. Here's hoping we didn't lose the entire extension round we just raised.

Does anyone know if there's an estimate of what % of Y-combinator companies used SVB?

>=30%, which is the proportion of Y-combinator companies who cannot make payroll thanks to SVB's failure.

Source: https://twitter.com/garrytan/status/1634286688922132481

You are mis-quoting the tweet. It’s not >=30% of YC companies. That 30% is the percentage of YC companies _that have exposure to SVB_. So that could be 30% of 5% of YC companies or 30% of 80% of YC companies.

No, 30% is the percent of yc companies who reported having money trapped in SVB that can’t make payroll.

The question you’re responding to is asking what percent used svb. That is unknown.

That's what I said. Did you even read my comment?

Used SVB and cant make payroll does not equal used SVB and can make payroll (because e.g. they have cash stored in more than one bank).

You're familiar with what >= means, right?

The OP was saying it was at least 30%

Why are you all so mean to each other?

I can see where the confusion comes from. 2% of YC companies could use SVB and 30% of that 2% can't make payroll. Or 90% of YC companies could use SVB and 30% of those can't make payroll. That's a big difference.

> Why are you all so mean to each other?

The "No, " at the beginning of my response probably triggered them. I was simply trying to make it clear to others that their information was misleading.

I would characterize my response as flippant, not mean :)

I have a very strict policy. No pay, no work. Only once in the past was it nearly invoked. We'll see if this is the time.

I made the mistake of doing this once and never again. I ended up deferring almost $20k into stock that never became worth anything. The company went under and I was so low on the list of people getting paid that I got literally $0.

That's a good policy.

Additionally, salaries are usually paid in arrears, which means you already did the work when payday comes so if it does not and you keep on working you're actually going deeper into the red.

I think it's reasonable when the employer is having trouble, but in this case it's the employer's bank, or the employer's payment processor's bank.

I would think it worth working at least Monday, then deciding how to proceed after the banks have opened.

I'm generous, so I might give them a week, and certainly Monday, but even if it's not their fault, if they can't get payroll running in a week, it is their problem. What else isn't going to get paid, etc.

Lots of stories about people working without pay start with explainable reasons and end with a huge missing amount.

Not sure about the particulars in the post above about "getting burned with deferred stock" but wages are very high in the priority of creditors. Unless your company essentially goes to zero, or the payroll is so big that insured savings wouldn't cover a pay cycle you should be pretty confident that you (and the government) will get paid. Also news flash: you get paid at the end of the cycle, so you're already working on credit.

Ultimately I think what matters is whether you think it's only a short delay because of a technical reason. If that's the case, sure keep on as usual but do remind your boss that you were understanding when the time comes.

I support this, but a policy that was never invoked cannot be strict - you will find out when it actually gets tested.

I also have a policy that i will never pay ransom, but 8f it happens, will I?

Have you had to use that policy in a situation where you were a direct employee?

I certainly feel the same way but never put it to the test.

The story of the one time it was almost used. I saw that the direct deposit was an incorrect amount. I communicated the issue and did not go in to work as usual. Turns out it was a payroll error that affected literally everyone. It was swiftly corrected, and I went in late. It did just end up being a one time mistake at that employer.

It was many years ago, but I vaguely remember I was hoping they really messed up so I could go to the beach or something.

> SVB is the bank of choice for nearly half of all US venture-backed startups

Why? What did SVB provide that Citibank, JP Morgan, Wells Fargo, Bank of America, etc. not provide?

Bank accounts and service. Seriously.

When you are a startup, a typical model is you deposit $2mm or $4mm or whatever of VC money and spend it down. You are a brand new company with no income and a bunch of money. You trip all their fraud flags, and all their models for credit are based on income, age of account, etc.

Payments to vendors would constantly get frozen, incoming wire transfers get flagged. Getting a cash-backed company credit card wasn't possible. It has improved slightly recently, but still very tough.

Overall, I'd say very few startups use the big banks today. If they're not with SVB, they're with other mid-size regional banks.

venture debt with generous terms as well

This Vox article < https://www.vox.com/technology/23634433/silicon-valley-bank-...> talks about that a bit.

> More importantly, SVB was particularly flexible about lending tech startups money even though they didn’t have free cash flow (because tech startups usually lose money at the beginning of their lives) or much in the way of assets (because startups often don’t have much more than the brains of their founders and early employees when they launch). “If you are a startup company, you don’t look like a normal business,” says Sean Byrnes, a startup founder and investor who says he has used SVB for years. “Most banks, if you go to them and ask for a loan, they’ll laugh at you.” SVB was also often willing to work with founders who weren’t US citizens, which would be an obstacle for more traditional banks.

… none of which is to say that this made SVB particularly irresponsible or deserving of what happened this week. It really does look like a confluence of bad timing w/r/t increasing interest rates and some unfortunately timed bond buys. IANAB, but it seems like all the money is there, just tied up in bonds that won’t mature for ten years, leaving them illiquid.

If I understand this correctly, SVB will be bought by a larger fish, and we’re back to business as usual, albeit more consolidated (enormously bad, imo, but a different bad).

Per Matt Levine, their fatal and unforgivable mistake was putting their assets in fixed, low-interest, HTM investments whose value was directly correlated to the financial health of SVB’s depositors, so the bank had to write down assets when depositors needed their money.

In hindsight, it would have been better to keep cash. Or even better to find an asset inversely correlated with interest rates, even if it would have earned less money when rates were low.

It was a lack of beta that killed them, and while there doesn’t seem to have been wrongdoing, it sure looks like a classic “failed to understand their own business” mistake.

They were also a victim of massive success: their deposits skyrocketed and they did not have anywhere to put the money. This is not unlike the same problem wealthy individuals had for the past 10 years if they felt like the stock market was over-valued; nothing else was paying any return. Now imagine your depositors start increasing their withdrawl rate and you're locked in 10 year bonds at < 2%. Uh oh...

It was the greed of seeking high returns even though their value would drop for the same conditions that would cause depositors to need their money.

The bank would still exist, and just have been less profitable in previous years, if they had hedged against interest rate increases.

Thanks, that's the explanation I was looking for.

> inversely correlated with interest rates, even if it would have earned less money when rates were low.

I'm not too savvy but isn't that what I-series bonds are for?

those have very low limits - 10k per tax identifier

> because tech startups usually lose money at the beginning of their lives

Oh what a 2010 thing to say!

2023 startups lose money for all their lives. SVB was running a bad business banking almost exclusively to startups that have never had positive cash flow.

Right, and this is why they fundamentally failed. If their main depositors were traditional businesses and individual accounts they wouldn’t be an issue today. They invested their money as if they had low-risk depositors but a start-up is a high risk depositor——they don’t have a proven business model so it is hard to forecast their behavior.

To me this is classic SV echo chamber thinking. There’s a reason traditional banks are more wary of lending to start-ups and it isn’t because they hate money.

I see. So useful for companies who are considered too high risk for "regular big banks" --- but they're all clumping together so it should be your second choice, only if you couldn't get a loan from a regular big bank.

No. SVB was not a bank for high risk people. They were the 16th largest bank in the United States. They were a regular commercial bank. First Republic, Northern Trust, etc are all very large banks that cater to specific clientele.

It’s not that they catered to high risk clients it’s that they understood that the definition of risk was not universal. What may look risky to Bank of America isn’t actually more risky if you know the nuances of startups.

Or put another way, the odds that a new commercial Bank of America company goes on to become a 10 billion dollar company is probably 1 in a billion. The odds that an SVB customer would go on to become one is probably 1 in a thousand.

But the important thing is that SVB didn’t fail because of bad credit or bad loans - something you’d expect from riskier clients. SVB’s problem was that they had more deposits and cash than they could handle, they literally had too much money and the fed has raised interest rates too fast for them to absorb.

> more deposits and cash than they could handle

Do you know why couldn't they handle it? Banks usually have to manage their Credit, Interest Rate, Liquidity, Price, Foreign Exchange, Transaction, Compliance, Strategic and Reputation risk. And then from an investment POV, all investors have to handle portfolio risk. So I wonder whether SVB just wasn't sophisticated enough to handle these risks.

If they're the 16th largest bank in the US, it seems to me that they should have had the chops to "handle" large amounts of cash...

Three things I can see:

1. way more deposits than they historically managed, with no-where good to put it.

2. failure to do what banks do, which is arbitrage their position, putting a huge amount into long-term low interest bonds

3. looking for loopholes in liquidity & stress tests, and reporting exemptions that might have raised earlier alarms

#3 is inexecusable but the other points are in the "bad at your job" category.

It is unclear if any other bank could have handled it either.

It took two factors.

3x the money you manage in 2021 specifically

Have well networked clients that carry out a bank run together.

Their problem was that they tied up too much of their money in illiquid low-yield bonds. Pure mismanagement.

this is the ultimate cause, but they also used loopholes to avoid reporting obligations other banks complete, and did not highlight the liquidity issues or stress-test that say... increased withdrawals might highlight. These aspects should be investigated deeper.

agree. it's always such systemic / procedural lapses that allow problems to go unnoticed

I don’t think it’s so much “high risk” as it is “non-traditional.” In a normal new business, you have a factory, and all the machinery is assets, and if it goes under you can sell the physical trucks and widget presses.

That’s just not how America has worked for a long time now, and I don’t think most folks would describe American businesses as any riskier than in say Serbia.

This isn’t a “bad guy” story, as far as I can tell.

> I don’t think it’s so much “high risk” as it is “non-traditional.”

Funny how tables have turned recently. Now it's other way around more often. If your start up is actually manufacturing something, a physical item, the banks deem the business as non traditional... Go figure...

> This isn’t a “bad guy” story, as far as I can tell.

I agree. There are no bad guys here. There's just a bank that took and chance and it bit them.

If there are bad guys it’s the VCs who coordinated the bank run. Even still, each of them was acting rationally and not maliciously, but they’re all savvy enough to know that racing for the exits is going to kill the bank.

If SVB's activity can be described as "yield chasing", there is no way clients, whatever their actions were, deserve more blame than the management.

Eh, if “clients” and “management” were totally distinct, I’d agree. My understanding, and I’d welcome correction from those more knowledgeable, is that the SVB was hardly independent from the VC powerhouses.

It's not even about getting a loan.

It is about having a company checking account for payroll and somewhere your investors can put money.

Happy SVB customer (until this week) for my venture backed startup.

The big banks refused to even open an account for my startup. Our business model is incredibly common but due to it being "fintech" we could not open an account.

SVB still had a decent amount if KYC stuff and paperwork but would allow us to operate.

Another banking platform we used literally reversed the incoming wire from our lead seed investor, even though i called the bank before telling them to expect a large deposit.

SVB was great to work with. The people are fantastic. The big banks on the other hand...

In other words, SVB was willing to shoulder a greater amount of risk than the more staid banks. There's nothing wrong with that at all -- but taking on more risk is taking on more risk, and sometimes you end up getting burned by it.

Not to single you out JohnFen, but I'm seeing this take in many places, and it is very wrong. The risk here is being attributed to the wrong place. A startup checking account should be low risk, it is just plain cash as it comes in from sales and/or funding round investments. No derivatives, no funky illiquid stuff, just cash. The activities of the startup _may_ be risky, and it can totally fail because of that...by running out of cash, that should be safely and easily available in a deposit account. A startups cash can hit zero, but they expect to be able to access it so that it can hit zero!

So the argument that by the mere fact SVB banked startups as customers was more risky than big banks is not quite precisely right, as big banks have business accounts and plenty of startup customers too. But as other comments have mentioned things were often made quite hard for them there, and SVB was the better product to startups...as just a literal checking account for day to day operations.

The giant risk management failure was in how SVB managed the deposits and indeed the mismatch of the assets it held against them. We all know the long dated UST issue now. Their deposits ballooned so quickly over the last 18mo, the mistake was to put them into such long locked up bonds immediately. A better approach could have been to assume that money could "come out as fast as it came in", and to have held shorter duration securities, shorter maturity bonds, money market funds, repo market commercial paper etc. Then as the steady state pattern emerges post this influx of deposits, then make a better risk management based decision of what proportion to now put in longer dated assets, medium dated assets and shorter dated ones.

And above this specific risk, clearly in hindsight, there was an overall systematic risk in having a non-diversified customer base who all consume the same information sources, highly networked and correlated with each other in their behaviour.

I was not commenting about the SVB collapse and what risks were involved with that. I was commenting generally about exhibitapp's experience.

But that is not what happened here AFAIK. They got burned by being too conservative and investing in government backed securities.

I think from their perspective, they thought they understood tech better than other banks, so thought that they could better analyze the risk (thereby not misclassifying many companies as risky) and use that as a competitive advantage. Right now, it does not look like that part of their business model failed at all.

>They got burned by being too conservative and investing in government backed securities.

Just because one is conservative, does not automatically mean one is not taking on risk.

In banking, interest rate risk is the exposure of a bank’s current or future earnings and capital to adverse changes in market rates. If they put all their money into govt backed securities, they also took on portfolio risk.

I'm pretty sympathetic to SV bank here, but wonder if it was an option to Simply hold cash as a less risky option still when their Business tripled in 2021. They were in a very unique position. When it's all gets Unwound, it will be interesting to see what was going on internally with their decision making and if their Chief risk officer was on board with this or not.

A bank would be better to not take the deposits than hold it all as cash though.

interesting, why would that ever be the case?

Cash on hand would clearly help with a bank run and could be slowly invested in treasuries over a longer duration.

It was not conservative at all! They invested short term deposits in long term bonds (MBS)

that's how banking works. and also why you have depositor insurance

Yes, my comment was about exhibitapp's experience, not the SVB collapse.

> The big banks refused to even open an account for my startup.

> Our business model is incredibly common but due to it being "fintech" we could not open an account.

what's the name of your startup?

https://www.fastcompany.com/90864382/silicon-valley-bank-was... :

> In many cases, startups exclusively banked with SVB because doing so was listed as a covenant of their debt!

> So CEOs across the tech sector on March 9 faced a hard choice: You can pull your deposits from the bank in order to save them, but then you would be in breach of covenant, and at risk of default on your venture debt. Of course, the alternative was that you risked losing everything if the bank failed. Many chose to hold tight as SVB’s outright failure seemed outlandish even a few short hours ago.

[this is a copy/paste of a comment I made on another thread]

Here a 1h answer: https://www.youtube.com/watch?v=pYrlCv-bwDk

If you want foreign currency accounts, there are two options Silicon Valley Bank or HSBC. HSBC requires deposits of $2mn to open foreign currency accounts, svb does not.

One thing that always surprised me about SVB was how bad the UX/UI of the site was, for a company so close to all these companies at the forefront of web technology. The signup process was abysmal.

>What did SVB provide that Citibank, JP Morgan, Wells Fargo, Bank of America, etc. not provide?

Would it be fair to characterize most answers as a generally larger appetite for risk? Anybody familiar care to comment?

From what I've seen - a fancy feeling. deposit your vc money and they'll give you a huge credit line and a bottle of champagne.

To paraphrase an old saying: When you owe your creditors $1M and can't pay, you're in deep shit. When you owe your creditors $1B and can't pay, they're in deep shit.

I don't understand why people are blowing this out of proportion. SVB had $100 billion of securities that are now worth about 70-80 billion. That plus short term securities means they've got $100 billion liquid against $170 billion in deposits. So ~60% of deposits are coming on Monday.

They've got an additional ~70 billion in loans that are likely less liquid to fill the remaining 70 billion of deposits. It's less certain how much these are worth but they're at least worth something.

Net result is that depositors are losing 0-40% of their money. Much more likely that it's 0-15%. Which sucks but it's not going to kill an otherwise healthy company.

> I don't understand why people are blowing this out of proportion

The media is blowing this out of proportion bc it generates clicks.

The investors are blowing this out of proportion bc in the slim chance that the FDIC doesn’t get this resolved over the next week, their companies are at risk. And, helping their companies avoid that albeit small risk is their job.

I agree with you though. The most likely outcome is that almost everyone gets access to most of their funds next week.

Bullshit. I saw what happened 12 years ago and I can see what is happening now. No one is blowing anything out of proportion and least of all if they are they are not the reason I am nervous about my near and medium term situation. Many others here are the same.

The 16th largest US bank disappearing in 24 hours is not a molehill, particularly when it is the one that is the source of the check you depend on in existing in 6 days. Hope is not a strategy.

It becomes a bigger deal with you need to pay your bills now and you can't access your money. Maybe for months.

Again, likely ~60% of the money is coming Monday with more trickling over the next few weeks.

It would be unusual for every person to get literally 60% of their balance (exactly) in perfectly liquid form. Some will have 100% (usually those with smaller balances), some will have zero %, or up to some amount (a million or so?).

The big risk is that things stay frozen while this gets figured out (weeks to months), which will have major knock on effects if people don’t have alternative sources of liquidity.

People put money in the bank because they need it liquid (generally!).

That said, your overall point is correct, and previously the way this has been handled FDIC wise is that they have another, larger bank buy them out to provide the short term liquidity while asset sales happen.

The ~60% is the easy to value marketable assets SVB owned. The FDIC will do the accounting over the weekend and pay out whatever they calculate is covered on Monday.

The loans SVB made are less liquid and are harder to market. The FDIC will try to find a buyer and may agree to backstop some losses to get a deal done. This won't take more than a couple weeks and might get done this weekend too.

It's when they get their money that matters, it may takes months. Can't pay employees, cloud bills, vendors, etc until then. The most they get out on Monday is $250k, how long it takes the government to make good on the receivership certificate is unknown. Startups will likely have to take an additional line of credit from somewhere fast.

> The most they get out on Monday is $250k, how long it takes the government to make good on the receivership certificate is unknown

This isn’t quite accurate. The FDIC statement said they would make an advance payment on uninsured deposits within the next week.

So, there’s a guarantee that there is some money beyond 250k coming in less than a week. My guess is the other commenter’s analysis is close. The FDIC will determine the absolute floor of the value of assets that SVB had, and that will be the basis of the advance payments.

That will be the foundation of liquidity that companies will have while they wait for the rest of the process to conclude.

it will definitely take longer than even months to fully resolve, but the regulators are well aware of the risk of a slow resolution spreading panic beyond the true magnitude, causing a self-fulfilling prophecy. A delay of a few days in getting paid causing mass financial hardship should be a damning indictment of our collective lifestyle more than anything.

> I don't understand why people are blowing this out of proportion.

SVB collapsed and is the largest bank failure since the 2008 financial crisis.

It is unlikely to cause contagion (though some disagree) which means luckily the Fed won't raise interest rates to mitigate that risk (unless they also think there's risk of contagion, like some experts do).

While I generally agree about people blowing this out of proportion, here's a hypothetical:

SVB seems to have had a very concentrated set of customer relationships. For example, a startup might do its banking at SVB, and the startup's founder might do his/her banking at SVB. That include taking loans to buy houses as cars--because traditional banks don't "get" borrowers who look like a founder.

Now that startups can't make payroll (and some of the founder's personal deposits might be frozen), what if startup founders start defaulting on their loans?

So SVB's successor has to write down those assets... which makes it harder to pay out the deposits... which triggers more defaults... which results in writing down more assets. That could turn into a very nasty death spiral, particularly if it creates contagion that spreads to other banks.

You serious? Something tells me you wouldn't be so cavalier about losing 15% of your personal liquid assets.

Cashflow, what is it, how does it work

Apparently we're blowing this out of proportion.

What proportion is valid when the same problem keeps happening?

Ok. But who is ever going to put money in SVB after this.

Nobody? The bank no longer exists…

The bank formerly known as SVB is no longer, it's now called "Deposit Insurance National Bank of Santa Clara" as a sort of temporary organization.

SVB is gone. Forever.

> I don't understand why people are blowing this out of proportion.

I don't understand why people like you don't see the writing on the wall.

Fractional reserve banking is the problem. If you don't see it, I don't have time to explain it.

This is a cowardly way to disagree

Think your response is brave? At least someone is speaking up for the minority.

No.

I don't disagree with you, but if you're going to bother disagreeing, explain your position.

I sincerely hope you get to live in a world without modern banking and you get a chance to reflect on how dumb this outlook is

At this rate, we're all headed for a world without modern banking, caused by modern banking.

Keep defending the establishment, they'll never save you.

Yeah fractional reserve banking that has existed for many 100s of years 'caused' the situation we are now in. Pretty damn good track record.

How do you know it’s a business insider article? It uses “freaking out” in the headline.

If, as others have stated throughout this thread, that startups typically couldn't get bank accounts at regular big banks, where would they go now?

It's not that startups CANT bank at regular banks, it's that regular banks had less operational understanding than SVB.

However, I've used BofA, Chase and WF for startups and it all worked fine. But we were only raising few millions.

Certainly seems like an opportunity.

Read a stat only 2.7% of SVB’s deposits were under the $250k FDIC insurance threshold. Wasn’t sure if this was in $ or customer accounts terms.

If the latter, that’s a good predictor of the probability bank runs at other institutions.

When the VCs started advising their portfolio cos to pull out, it toppled the dominoes very fast. If SVB had a higher retail account mix, this probably would have been a slightly different outcome.

One report said depositors tried to pull out $45B before it went down. It would many HNI retail depositors doing a simultaneous withdrawal to trigger a failure. Not impossible, just much lower probability of that occurring.

If anyone has experience here: not paying wages is not the same as "letting someone go", "laying them off", or "firing" them, right? So if you have employment contract that has a signing bonus that needs to be returned if an employee willingly leaves within a time period but then the employee stops getting paid they can't leave the job without being on the hook for that signing bonus, right?

It’s complicated and depends heavily on the jurisdiction.

In order for it to be involuntary termination, what you’d likely need is a situation in which you have worked and not been paid for that work and the employer refusing to do so. This would create illegal or intolerable working conditions, to which you’d then need to argue is constructive dismissal.

But you should speak to a qualified employment attorney.

This sounds like something that you should not take any advice offered for free over the internet. There are a lot of nuances in employment law and location specific parts.

Constructive dismissal and furlough are some terms you can research for more info.

At least once in a while, I feel better for not having a job.

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