Why Venture Capital Funds are Now Including Treasury Clauses in Term Sheets

As part of post-crisis cash management, venture capitalists are now putting treasury clauses into the term sheets they give their startups. Cash management is an all-time focus right now and there are extra precautions being taken by VCs to ensure the money they are giving to startups is protected from another major bank crash. It’s a sign of the times as well as being a smart move.

Post Crisis Money Management

Having gone through the Silicon Valley Bank crisis and the First Republic crisis, venture capitalists care more than ever about where your company stores its money. They are now inserting some sort of treasury or money management clause onto the term sheets they give to their startups. VCs are now saying there either needs to be some type of ratified investment policy for the funds they provide, or that the company needs to keep their money in two banks.

We’re seeing that a lot now here at Kruze and we are also seeing them mandate specific banks such as J.P. Morgan and Bank of America. There’s a lot going on here, but it’s all fallout from the SVB and First Republic crises.

Startups Now Have Two Banks or More

What we are seeing within our client base at Kruze is how many startups have gone from one bank in 2022 to now, in mid-2023, that everyone has at least two banks. It isn’t one hundred percent of all clients but the vast majority of clients now have two banks, and a lot of them even have three!

In some cases startups will have a cash management tool such as Arc (a sponsor of our podcast) Treasure FI or Meow that sits next to the two banks. And one of those banks will most likely be a “too big to fail” bank such as:

J.P. Morgan

Bank of America

Wells Fargo

These are the massive US-based banks that would cause the system to fall apart if they failed, which makes them safe bets.

VCs want startups, at the very least, to have an ‘escape hatch’ backup bank that your startup can use in case of another crisis. They fundamentally don’t want to take any risk at all and prefer you keep their money in those huge banks.

Online Cash Management Systems

The other thing that startups are doing, aside from using a secondary bank, is they are typically setting up an account with an online bank/online cash management system like Brex or Mercury. We are seeing that happen quite a bit now and part of that is because those systems are a little bit easier to set up and a little bit easier to use compared to the big monolithic banks.

Remember: You are going to need a mix of both. We are seeing some companies keep a chunk of their operating cash, say two or three months worth of money, in their online bank and then the vast majority of their cash in the bigger ‘too big to fail’ banks. That or they are buying Treasuries directly.

Safety in Money Market Funds and Treasury Bonds

The final safety measure that VCs are sometimes requiring, and startups are taking, is buying into money market funds that hold short-term government bonds. These are very low-risk and highly liquid.

Setting up Secondary Accounts

It is important to know that you can’t just walk into a large bank’s branch and set up your second account off the cuff. We have had some companies try to do that and it’s been a bit of a disaster.

These super massive ‘too big to fail’ banks are not used to working with startups. They ask for crazy things like the VC’s EIN numbers, which the VCs are never going to give you. They will ask “why do you have $10 million in cash if you’re a tiny company?”. The startup world is very different from the world of retail and commercial banking and the bank branches aren’t really set up that well for this new trend.

However, the good news is that almost all the big banks, J.P. Morgan included, have a dedicated startup-centric banking team that we put our clients in touch with. They make it a smooth and easy process. So make sure you’re going in through that kind of team instead of just walking into the bank.

Make Sure You’re Not Doubling Up

The final thing to consider, if you’re using an online bank (or two online banks), is to make sure they aren’t part of the same underlying bank. For example Mercury and Brex use a common bank that actually provides the banking service and the cash management services to both of them.

Make sure you’re not double-dipping in case one of those online services, like Evolve or Choice Bank, has problems. You don’t want to have a huge concentration of cash in a single bank because you’re working with different online banks that use the same backend provider.

It can be slightly tricky to know who provides banking services to whom, as they don’t always advertise clearly who they’re working with, but please remember to check that out.

VCs Have the Power!

So a lot is changing and adapting following the SVB and First Republic crises. It’s a very interesting moment because the VCs can dictate a lot. The fact that they are putting treasury management conditions into their term sheets is a really big deal and a complete change from where we were before the bank failures.

If you have any questions on VC term sheets, valuations, startup investing, startup accounting, taxes, or venture capital, please contact us. You can also follow our YouTube channel and our blog for additional information on accounting, finance, HR, and tax for startups!