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by gorm
1174 days ago
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But why were these companies holding so much money in an uninsured account? I heard something mentioned about SVB incentivizing them somehow? I can't understand why these companies didn't put the money in short term treasuries instead of keeping the money uninsured. If they needed short term liquidity it would not be a problem. Did SVB have an obligation to give them floating interest rate without properly adjusting for the risk? It's not possible that all these companies didn't expect a yield curve inversion as it was obvious it would happen. |
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If you're a business with 30 employees all making 150k/yr you have 375k in payroll costs every month. Holding even 1 months payroll in cash puts you above the FDIC limit of 250k. Normal people rarely need more than 250k in cash so the ratio of business to normal people in customer base matters.
To make things worse let's say you're VC funded and you don't have monthly revenue to put towards your payroll. Instead you have X months of payroll/runway in cash in an account being slowly drawn down. Now you might have 1 year of payroll in cash. Nearly all of that is uninsured.
Quick googling shows me that SVB was only 15% insured. Likely because of their focus in startups with large balances vs regular ppl with low balances. For context BOFA is 40% insured and JP morgan is 35%.
https://time.com/6262009/silicon-valley-bank-deposit-insuran... https://www.forbes.com/advisor/banking/bank-of-america-revie...
But I do see your point, short term treasuries probably would make sense for startups right now. With a 4.2% rate on the 1 month treasuries it would make sense to setup a ladder with bonds coming due as you needed them. But in the very recent low interest rate past this probably wasn't worth the hassle for many startups.