Startup cash management and FDIC insurance

 

 

In the wake of the SVB and FRB failures, startups with millions of dollars in VC funding are asking us how they can get more than the standard $250,000 in FDIC insurance. A number of banks and fintech companies offer products that attempt to offer greater FDIC coverage.

We’ve updated this article after SVB was successfully taken over by First-Citizens, one of the larger banks in the US. SVB seems to be functioning as we would hope - a large number of our clients still use them and are happy with their current level os service. 

Understanding FDIC insurance, and keeping a startup’s cash safe, is a big part of cash management, and startups and founders need to know how to handle cash reserves.

Different financial institutions have different products to try to offer safer accounts. In this article, we’ll lay out the different types of products and the different amounts of protection those products try to offer. We also have a checklist on opening a new bank account, which helps provide tactical advice on how to set up a new account.

In writing this article on how to get more than $250k in FDIC insurance, we relied on information provided to us by the financial institutions or information on their websites. Make sure you talk with the institution that you choose to work with to make sure any specific product makes sense. And each one has nuances that we won’t be able to cover here, so talk with them before moving your money. We are not investment advisors, and this article isn’t meant to be taken as investment advice. Some of our executives have investments in companies in this space, including ones we talk about here, and when you use our links you may get better pricing and we may get referral payments.

 

 

 

 

 

 

 

Options to get more FDIC insurance

Financial Institution Amount Insured Product Details
Bank of America $6,000,000 Insured Savings Account Spreads $ across many banks
Bridge Bank $150,000,000 Insured Cash Sweep Spreads $ across many banks
California Bank of Commerce $50,000,000 Demand Deposit Marketplace Spreads $ across many banks
Citizens Bank $130,000,000 Insured Deposit Spreads $ across many Banks
Comerica Bank $130,000,000 Insured Cash Sweep Spreads $ across many Banks
Pacific Western Bank $150,000,000 Insured Cash Sweep Spreads $ across many banks
SVB $155,000,000 Insured Cash Sweep Spreads $ across many banks
Arc $2,750,000 Arc Gold Spreads $ across many banks
Vesto $5,000,000 Sweep Account Spreads $ across many banks
Mercury $5,000,000 Mercury Treasury Spreads $ across many banks
Rho $75,000,000 Treasury Management Account Spreads $ across many banks
Brex $6,000,000 Brex Business Account Spreads $ across many banks

 

 

 

 

 

 

 

Options to access government-backed money market funds and Treasuries

Money market funds are regarded by most investors as one of the safest, lowest-risk, and least volatile investments. Money market funds assemble portfolios of cash and cash equivalents, like short-term US Treasuries. However, money market funds aren’t bank deposits or bank obligations, and they’re not guaranteed by any bank or covered by FDIC insurance. This is different than money market accounts, which are typically FDIC insured. Money market funds are more liquid than other investments, and you can withdraw funds quickly.

Financial Institution Investment Product Additional Information
JP Morgan Asset Management Liquidity Funds Several money market funds focused on stability and liquidity
Bank of America Merrill Lynch Bank Deposit Program Offered through Merrill Lynch
Pacific Western Bank Money Market Sweep Money market funds offered through Federated Hermes
Silicon Valley Bank Money Market Account Offered through Silicon Valley Bank, a division of First-Citizens Bank & Trust
Brex Money Market Funds Offered through BNY Mellon
Mercury Vanguard Fund Offered through Apex
Rho Prime Treasury Account Managed by RBB Treasury, LLC
Vesto Money market funds or T-Bills Custodied at BNY Mellon Pershing
Meow US Treasury Bills Offered through BNY Mellon Pershing
Treasure Financial Treasure Managed Income Actively managed money market fund
Arc Money market funds or T-Bills Offered through BNY Mellon Pershing

 

 

 

 

 

 

 

How to get more than $250,000 FDIC insurance

Some financial institutions have developed products that can help startups manage their risk and protect their venture capital. Not all of these provide FDIC insurance, but they should be safer than simply holding cash. In general, these products fall into three main categories:

  • ICS accounts – Insured Cash Sweep accounts. that open $250,000 accounts for a client across multiple FDIC insured institutions, which should provide insurance for the entire amount. The idea is that even if a bank(s) fails, the client will have the coverage. These are sometimes also called networked deposit services. You set them up through your main bank/institution, and then they do the work to spread out the deposits.
  • Short term government debt. This is often done using what is called a Bond Ladder. It’s a portfolio of bonds, usually government debt, that is timed to mature in sequence as you need the cash. Many providers have extremely short-term government bonds, so that the cash is available very quickly with low principal risk. These are generally not insured, but if they rely on government debt should be safe (read about how bonds change in value when interest rates move).
  • Money market funds. There are mutual funds that typically invest in short-term securities, like Treasury bills and certificates of deposit. Money market funds are investment vehicles, unlike money market accounts. Money market accounts are FDIC-insured up to the $250,000 limit. Money market funds are not, but they are reasonably “safe” based on the lower-risk types of securities in their portfolios.

 

 

 

 

 

 

 

Companies that offer more than $250,000 in FDIC insurance

These are banks and fintech companies that say that they offer greater FDIC insurance coverage – or other products that should be quite safe. It is up to you to do your own due diligence; we’ve spoken with executives at most of these companies, but this is not investment advice. Do you own homework. And note that we’ve done our best to keep the interest rates up to date, but given how frequently the rates have changed you need to check with the financial institution to confirm the actual, current rates.

Bank of America. Bank of America is one of the biggest banks in the world, and is said to be ‘too big to fail’ – hopefully we never have to test that! They have dedicated treasury/cash management teams to help startups with several million dollars in the bank. We don’t recommend just walking into a branch and trying to open an account - you want an intro to the technology coverage team, as they will not only make it easier to get the account set up, they will help you get into the products that work for VC-backed startups, not small businesses or consumers. Specific products at BofA that offer greater FDIC coverage are:

  • Insured Saving Account. These cover up to $6 million dollars; the bank opens FDIC insured accounts across multiple banks for the client, offering greater FDIC coverage.
  • Treasury and money market funds. While these are not FDIC insured, they can invest in low-risk government securities, and are held through custodial accounts, meaning the assets belong to the client and not the bank.

Bridge Bank. is a division of Western Alliance Bank, with over $61 billion in deposits.

  • Insured Cash Sweep® . Bridge Bank also participates in the IntraFi network of financial institutions, and can distribute your cash to other banks in increments of less than $250,000, providing it with FDIC protection up to $150 million. Bridge Bank provides consolidated statements and online access to review your funds.

California Bank of Commerce. California Bank of Commerce is a regional bank and is publicly listed. They have a product similar to the ICS accounts that other banks have.

  • Demand Deposit Marketplace. Companies can use this for up to $50,000,000 in funds, and similar to an ICS account it spreads the cash across multiple FDIC insured banks. The Demand Deposit provides full access to your cash on a daily basis.

Arc. Arc is a cash management and lending provider to VC-backed startups. They recently launched their product “Arc Gold” to help companies automate treasury management and better balance coverage, liquidity, leverage, and returns.

  • For startups with up to $2.75 million: Arc Gold’s automated treasury management services offer a combined $2.75 million in FDIC coverage through Arc’s partner banks and sweep networks.
  • For startups with over $2.75 million: Arc Gold allows customers to invest additional funds in Money Market Funds and government-backed Treasury Bills that earn up to 5.49%.
  • Arc now also has a product called “Arc Platinum,” which produces an even higher interest rate net of fees than most other banks that we have seen, although there is a $500 a month fee. Arc has indicated that they will waive this fee for select Kruze clients, so if you work with us ask us about this new product.

Mercury Treasury. Mercury, a financial institution focused on startup banking, offers startups with options to protect their money beyond FDIC insurance. Mercury isn’t a bank, they are a fintech company that works with Choice Financial Group and Evolve Bank & Trust, Members FDIC, to offer startup specialized services. The program includes:

  • For startups with up to $5 million, Mercury customers have access to a sweep network of banks which automatically spreads the deposits across different banks without requiring the startup to open and manage separate bank accounts. Startups can monitor their accounts using Mercury’s online dashboard.
  • For startups with more than $5 million in their accounts the ability to move funds into Mercury Treasury accounts. These accounts invest your money into money markets products, which is largely composed of Treasury products guaranteed by the US government. Funds are held in an account in the startup’s name by Apex Clearing Corp, a FINRA-registered broker-dealer. Even if Mercury faces liquidity risk, your funds would be safeguarded at Apex.

Rho. Rho is a digital banking platform that works with startups to manage their day-to-day business activities. Rho’s banking services are provided by Webster Bank, an FDIC-insured bank with over $70 billion in assets. Regular accounts are protected by FDIC’s $250,000 insurance, but Rho also offers other services that protect larger sums:

  • Treasury Management Account. Rho’s Treasury Management Account allows startups to diversify their funds across a network of over 400 FDIC-insured banks, providing up to $75 million in FDIC insurance coverage. Startups can manage their funds through a single platform while spreading cash across the bank network.
  • Prime Treasury. Rho helps startups invest in low-risk securities through the Prime Treasury program. Rho’s program will follow your startup’s investment policy, or help you create one if you don’t have one. The program will actively manage a high-grade portfolio that could include FDIC-insured cash, US Treasuries, bank certificates of deposit (CDs), and investment-grade corporate bonds based on the policy you set.

Meow. Meow is a business banking platform that provides access to high-interest business checking accounts and US Treasury Bills.

  • High-Interest Checking Account. Meow’s high-interest checking pays higher yields than standard checking accounts, and is currently paying 4.80% APY. Banking services are provided through Third Coast Bank SSB and are insured to the standard FDIC limit.
  • US Government Treasury Bills. Meow’s platform allows startups to move funds into T-Bills to take advantage of today’s higher interest rates. Treasury Bills are short-term debt securities backed by the US government, and Meow’s accounts are held by BNY Mellon Pershing.

Treasure Financial. Treasure is a cash management platform that helps companies manage their cash reserves more effectively. Treasure allows small companies to take advantage of sophisticated portfolio management, and directly invest in government-backed securities. For amounts that exceed the $250,000 FDIC limit, Treasure recommends:

  • Government-Backed Money Market Funds. These are mutual funds that invest only in short-term government securities, offering stability and liquidity. Treasure’s funds are actively managed to focus on performance.
  • Treasury Bills. T-Bills are short-term (four to 52 weeks) government-backed securities, and Treasure helps companies buy these securities and manage the maturity dates to optimize the maturity dates to match a startup’s needs and runway.

Brex. While primarily known as a credit card platform, Brex offers startups a business account option.

  • Brex Business Account. In partnership with nine FDIC-insured banks, including JPMorgan Chase (read our comparison of JP Morgan vs HSBC), Brex is able to spread your funds across its network, providing $6 million in total FDIC coverage. Your full amount is always available for withdrawal. Startups that use our affiliate link get expedited access.
  • Money market funds. For balances over $6 million, Brex offers money market funds, which invest almost exclusively (99.5%) in US government-backed securities. The money market funds are AAA rated and administered by BNY Mellon. You can use Brex’s online dashboard to adjust your allocations and access your funds at any time.

Citizens Bank. The 13th largest bank in the US, Citizens Bank offers extended FDIC insurance through a network of associated banks.

  • Insured Deposits. Citizens Bank will place client balances that exceed $250,000 through two networks of FDIC-insured banks: IntraFi and R&T. The product increases the basic FDIC insurance up to $130 million. Customers have full liquidity, interest income, and transparency through an online portal.

 

 

 

 

 

 

 

Notes on FDIC insurance

Insured sweep accounts have been around for more than 20 years, and there are more than 3,000 banks in the IntraFi Network. However, the insured bank sweep program has not been tested. So products like the ICS and similar products that we mention above are likely to be safe - but since the FDIC has never been forced to put it to the test, it is possible that the FDIC would not play ball.

Remember that company officers are fiduciaries, and have a responsibility to manage the company with care and diligence. So putting that money in a bank account seems prudent, right? Bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC), which insures funds in bank accounts. The FDIC was established after the Great Depression to guarantee that money in banks was safe, and it also regulates the deposit institution.

 

 

 

 

 

 

 

FDIC and startup’s cash video

FDIC insurance is restricted. The FDIC insurance standard amount is $250,000 per depositor, per insured bank, for each account ownership category. And if your startup is one that’s raised millions, $250,000 of insurance isn’t enough to protect that amount.

 

 

 

 

 

 

 

FDIC insurance vs SIPC insurance

SIPC (Securities Investor Protection Corporation) insurance and FDIC (Federal Deposit Insurance Corporation) insurance are two types of insurance that protect investors and bank account holders, respectively. Some cash management products offered by banks and other financial institutions offer SIPC insurance, not FDIC insurance. The two insurances are quite different. Here are some of the key differences and similarities between the two:

  • Insured events: SIPC insurance covers losses due to the bankruptcy of the brokerage firm or unauthorized trading by a broker, but it does not cover losses due to market fluctuations or bad investment decisions. FDIC insurance covers losses due to the failure of the bank or savings institution, such as insolvency, bank robbery, or natural disasters.
  • Limits of coverage: SIPC insurance has a maximum limit of $500,000 per customer, while FDIC insurance has a maximum limit of $250,000 per depositor, per account ownership category.
  • Types of accounts covered: SIPC insurance covers cash and securities held in brokerage accounts, while FDIC insurance covers deposits held in bank accounts, such as checking, savings, money market accounts, and certificates of deposit (CDs).

 

 

 

 

 

 

 

Will your startup ever need FDIC insurance?

If you had asked us prior to March 2023, we wouldn’t have thought that using a major bank like SVB would ever mean that a startup needed to worry about FDIC insurance.

We would have been wrong!

Thankfully the government came through in a big way, and supposed not just the $250,000 but the entire amount deposited with SVB. However, expect a lot of political blowback on this, and so it’s not safe to assume your funds over the $250k will be safe in the next crisis.

There’s another aspect to large financial institutions that affects your cash management decisions. Money market funds are not “guaranteed” like deposit accounts, but the reality is that many of these funds are huge. One money market fund with J.P. Morgan has over a trillion dollars under management.

And that puts these large financial institutions into the “too big to fail” category. The federal government does not want a bank to fail and for people to lose deposits at all. And as we saw in 2008, the practical playbook for the government is to take control of a failing bank or deposit institution before it goes bankrupt, initially through the Office of Thrift Supervision (OTS), and now through other federal agencies, including FDIC, the Office of the Comptroller of the Currency (OCC), the Federal Reserve, and the Consumer Financial Protection Bureau.

The failing institution will typically be sold to a healthy bank. For example, in 2008 the OTS took control of Washington Mutual (WaMu) and sold it to J.P. Morgan Chase. J.P. Morgan Chase acquired the banking subsidiary of WaMu minus any unsecured debt and equity claims. So the federal government cushioned the purchase so that J.P. Morgan Chase would take control of WaMu’s banking business and make sure the depositors did not lose money. And this happened repeatedly – failing institutions were quickly taken over and merged with healthy banks.

That’s really your final layer of protection. In the event of a crisis, the federal government will step in and make sure your money is protected up to the $250,000 level - and if the recent past is any guide, even more of that if the money is with a legit bank. So FDIC insurance is important, but in practical terms, the federal government will execute a number of tactical options before a depositor needs to worry about FDIC insurance. So while we get questions about the FDIC limit, it’s probably not going to apply in most cases. If you have other questions about cash management for your startup, please let us know.

Answering some common questions:

 

 

 

 

 

 

 

What is FDIC Insurance?

FDIC Insurance, or the Federal Deposit Insurance Corporation Insurance, is a U.S. government-backed protection mechanism that ensures the safety of depositors’ money held in banks and thrift institutions. This coverage ensures that, in the unlikely event of a bank failure, depositors will receive their funds up to the covered limit.

 

 

 

 

 

 

 

The Origin of FDIC Insurance

The concept of FDIC Insurance was born out of the economic turmoil of the early 20th century; specifically the bank runs that happened during the Great Depression. Let’s take a brief journey through its history:

  • The Great Depression’s Aftermath: During the early 1930s, the U.S. witnessed a series of bank runs and failures. In response to this financial chaos, and to restore faith in the banking system, the U.S. Congress passed the Banking Act of 1933, which, among other measures, led to the establishment of the FDIC.
  • Protection for Depositors: The primary goal was to protect depositors by providing insurance for their deposits. It also was hoped that the insurance would make a bank run less likely, as depositors would not rush to a bank to take out their money if they knew the government would make them whole if there was a failure. Initially, the coverage limit was set at $2,500, but over the decades, this amount has increased several times to its current limit of $250,000 per depositor, per institution.
  • Evolving Role: Over time, the FDIC’s role has expanded. Beyond just insuring deposits, it now plays a critical part in supervising financial institutions, ensuring they adhere to specific standards related to risk management and consumer protection.

 

 

 

 

 

 

 

Why is FDIC Insurance Essential for Startups?

For startups, especially those with a significant amount of cash on hand post-funding, understanding FDIC insurance is crucial. Here’s why:

  • Safety of Funds: While startups focus on growth and innovation, ensuring the safety of their operational funds is paramount. VCs, employees and customers want to know that the company they invested in, work for and purchase from is not going to go under if there is a banking crisis. FDIC insurance provides that layer of security.
  • Earning Trust from Stakeholders: Knowing that a startup’s funds are insured can give investors, employees, and partners added confidence in the company’s financial stability.
  • Navigating Financial Decisions: As startups grow and make strategic financial decisions, understanding the nuances of their bank’s insurance can guide choices around where and how to store funds.

 

 

 

 

 

 

 

Does FDIC cover business accounts?

Yes. If a bank participates in the The Federal Deposit Insurance Corporation, cash held by businesses are covered up to the standard $250,000 amount. Note that checking, savings, CDs and a few other account types are covered, and a rough rule of thumb is that only a quarter of a million is covered per bank for a business client.  

 

 

 

 

 

 

 

Why are VC funds adding treasury clauses to term sheets? 

A venture capital term sheet summarizes the material points of a potential financing agreement between a VC fund and a startup. Since the 2023 banking failures, however, VC funds are including an additional condition as one of the components of the term sheet: a treasury clause. Treasury clauses require startups to take steps to protect their funding in the event of another bank failure. A startup might receive several million dollars in funding, which far exceeds the FDIC insurance coverage of $250,000. So the VC fund may insist that the startup use more than one bank, or may require the startup to have an approved investment policy statement (IPS), that spells out how the startup will manage the funds it receives.