Over a hectic four days in early March, Silicon Valley Bank went from venture capital cornerstone to defunct, sending shockwaves through the startup ecosystem. As the SVB saga unfolded, founders scrambled into contingency plans for working capital.  Seemingly overnight, many startups’ cash accounts were indefinitely inaccessible, and payroll was only days away.

Fortunately, within 48-hours, the FDIC announced that it would backstop all SVB deposits in full, giving relief to many whose accounts totaled well-above the $250,000 guaranteed limit. Even startups with most or all of their company funds in SVB escaped capital losses and continued business uninterrupted, albeit with some heartburn.

But it may not always be the case that the government will backstop a lender. And, with over 3,000 regional banks in the US, many with balance sheets similar to SVB’s, more banking strife may be on the horizon. Founders and investors alike should heed the SVB saga as a warning to make sure that their company’s cash management practices are sustainable under different market conditions, counterparties are sound, and company funds are adequately protected against bank and market risk.

Below are a few best practices that startups should consider to ensure that they manage their cash and investments safely and effectively.

Establish a formal cash management and investment policy

Establishing a formal policy is a good way to avoid mismanagement. Policies should set the guidelines for managing risk both in banking and brokerage relationships and should be tailored to balance the trade-off between capital preservation and investment returns. They should be reviewed regularly and be informed by an assessment of the company’s ongoing financial health and the volatility of the credit markets and banking sector.

Limit the amount of capital at risk in a bank

The FDIC insurance limit is $250,000 for deposits held at any given bank, an amount well short of the cash balances of most start-ups in the tech and bio-tech sectors. This means that it may be necessary to spread deposits across accounts at multiple banks. Other cash management strategies that mitigate insurance risk include the following:

  • Banks in some states including Massachusetts offer excess deposit insurance above the FDIC’s $250,000 limit through the Depositors Insurance Fund. When combined with FDIC insurance, depositors in these banks often achieve full deposit coverage.
  • Many banks offer deposit placement or sweep programs. These programs divide a company’s bank account into smaller tranches each below $250,000 and then distribute or sweep these tranche amounts into separate accounts at other banks. This ensures that no single bank relationship exceeds the FDIC ensured limit.
  • Many banks also offer money market mutual fund sweep programs. These programs automatically sweep money above preset target amounts from a company’s bank account to a preselected money market mutual fund. When the bank account drops below the target, money can be automatically swept back to the bank to return to the target level. Money market funds are not FDIC insured but are highly stable and liquid investments making capital risk low.

Re-consider your brokerage relationships

Like FDIC coverage, the Securities Investor Protection Corporation or “SIPC” exists to help restore brokerage customer cash and securities positions held by bankrupt or distressed brokerage firms, protecting each customer up to $500,000 for securities and cash (including a $250,000 limit for cash only). Just like it may help mitigate risk by maintaining multiple bank relationships, it may also be prudent to consider spreading investments across multiple broker-dealers to stay within the insurance limits.

Cash is the lifeblood of any start-up and the SVB saga is a stark reminder that founders and investors alike need to take seriously the risks inherent in the financial system and among their various financial counterparties. To be safe, it’s important to plan against downside risk and carefully vet banks, brokers, custodians, payroll providers, and other financial third-parties with whom company cash is entrusted. Rather than simply planning against the last crisis, the goal should be a more holistic, resilient risk management approach.