Cash Management for Startup Founders

What is this and who is this for?

You’re a startup founder who has raised between $1M and $1B, and you want to implement best practices around startup cash management. You’re looking for a simple and effective treasury management strategy that will scale with you and keep your board happy.

We’re the founders of Pilot, the largest accounting provider for startups in the US, and we’re three-time startup founders. These are the best practices we’ve distilled from our own experience across three startups, two public companies, and our own treasury management at Pilot ($170M+ raised.)

Important: this isn’t legal, tax, finance, or investment advice. Please get board approval for your specific plans.‍

Where should I keep my money?

Your goals are capital preservation (don’t lose money), liquidity (be able to access all of your money relatively quickly), and income (also known as yield)—in that order.

What that means is that you should first and foremost optimize for something safe and accessible.

Here’s what you should do:

• Open a primary bank account. This is the account you’re going to use as your main account. We recommend working with a startup-friendly provider for this. Your startup’s needs are different than your local dentist’s needs, and it will be much less stressful to work with a provider who actually understands your specific needs. This is especially true while the founders are still managing this directly.
  
  
• Keep 1–3 months of operating expenses in your primary bank account while keeping it fully within the FDIC insurance limit. Some banks offer “cash sweep” products to help with staying within the FDIC insurance limit.
  
  
• Have a secondary operating account at another bank. This is your backup account. Because it’s not your primary account, it’s OK for this to potentially be at a stodgier institution. Since you only plan to use this account as a backup, enough cash to cover two payroll runs should be enough for it to serve that purpose. Even for the backup account, it’s best practice to avoid having uninsured deposits in excess of the FDIC insurance limit.
  
  
• For the accounts above, some of the most popular institutions used by our customers include Mercury, Brex Cash, Chase, and Bank of America.
  
  
• Invest everything else in a money-market fund that invests in Treasury bills (which are backed by the full faith and credit of the US government). This is not to be confused with a money market deposit account, which is another kind of deposit account. The simplest option is to do this via the same bank that provides your primary bank account. See this post for more detail.
  
  
• Resist the temptation to maximize yield by investing in things other than a fund that only invests in government securities—it’s not worth it. Any bond fund or non-FDIC-insured investment product that has greater yield than a Treasury money market fund is also riskier than a Treasury money market fund. There’s no free lunch here.

This sounds simple, but that’s really all there is to it. Anything fancier than this is overkill until you have a full-time CFO and in-house finance team managing all of this for you.

What controls should I put in place?

The events of March 2023 notwithstanding, the way your startup is most likely to lose funds is not a bank failure—it’s embezzlement, fraud, phishing, or an error on the part of one of your employees.

If you work with enough companies, you will come across cases of companies losing money to embezzlement or other financial crime. This happens more often than you think, but you don’t hear about it because it’s embarrassing.

Here are the financial controls you should put into place:

• Minimize the number of people with bank account access, and especially minimize the ability to move money. Anyone who has an account should have as few permissions as possible. As an example, your bookkeeper—internal or external—should only have “view only” access, and should not have the ability to move funds.
  
  
• Implement dual approvers for all transfers (or at least large transfers). Many banks can be configured to require the approval of two authorized users for wire or ACH transfers over a certain amount. One person requests the transfer, and the other person approves it. For example, $10k might be a reasonable threshold for dual approval, but the exact number depends on your business. You need to be prepared to deal with the inconvenience of dual approval (a somewhat slower and more cumbersome process) above this threshold.
  
  
• …while avoiding single points of failure. Dual approvers are a great idea, but you also want the company to be able to transact business if one of those approvers is on a plane and can’t be reached. Make sure you’ve avoided single points of failure in your critical money-moving business processes.
  
  
• Document (and share) an approval policy for large purchases. The policy can be as simple as: “Purchases over $5k must be approved in advance by your VP; purchases over $25k must be approved in advance by the CEO.” Corporate card spending limits are a helpful tool here, but that alone won’t stop someone from signing a contract that commits you to a large expense you’d rather avoid. Make sure everyone understands and obeys these policies, and be strict about enforcing them.
• Keep an eye on the books. At the minimum, have your financial statements prepared monthly. Review them to confirm that your burn rate and runway are what you expect and that there are no unexpected large spikes in spending. (A budget and cashflow forecast are nice additions here.)

Frequently asked questions

Q: If I have a checking account and savings account at a given bank, do I have double the FDIC insurance?
No. The insurance amount is per-depositor, not per-account. (The nitty-gritty answer is, of course, slightly more complicated than this, but this is the level you should care about.)

Q: What’s the difference between a money market fund and a money market account (MMA)?
A money market fund is held in a brokerage account—an account your broker holds in your name. A money market account or money market deposit account is an account held at your bank, like a checking or savings account, and is subject to the FDIC limit.

Q: Brex and Mercury tell me I can get millions of dollars of FDIC insurance. How is that possible?
The FDIC insurance limit is $250k per depositor per bank, period. What Brex and Mercury (and others) are offering is a product that’s sometimes called “Insured Cash Sweep,” where the provider divides your funds up and deposits them at multiple different banks, each of which is holding no more than $250k.

Note that you receive the benefit of FDIC insurance while the funds are fully settled in the partner bank accounts and not “at all times,” so the exact timing and details here do matter.

Q: Do I need an investment policy?
Your board should approve anything related to how your company allocates its funds, so check with them before doing anything. If you’re doing something extremely vanilla like the arrangement described above, it’s unlikely you need something fancy. If you’re going to undertake riskier investments (which we don’t recommend), you should first have your board approve a written investment policy that authorizes them before making any investments.

Q: Should I invest in four-year Treasuries or another extremely-safe-but-long-term instrument to maximize yield?
We recommend against it. Per our notes above, your priorities are capital preservation, liquidity, and yield, in that order. If you’re investing in an instrument where you might need the funds sooner than the maturity of the instrument, you could end up selling the investment at a loss to meet your liquidity needs.

At the very least, we recommend having your board approve an investment policy that explicitly OKs this kind of longer-term investment if you’re sure that you want to invest in a Treasury security or a fund that is not “cash equivalents” (this threshold is typically “whether the Treasury bill matures in 3 months or less.”)

Q: Service XYZ lets me invest in money market funds that yield more than Treasury money market funds. Should I do it?
The short but dramatic answer is: absolutely not. Yield and risk are strongly inversely correlated: if something has a higher yield, that means there’s something riskier about the underlying asset, and it’s very easy to accidentally invest in something riskier than you intended. 

If someone is offering you a too-good-to-be-true interest rate, there’s a reason for that: it is too good to be true.

Q: Would you accept debt from a bank that required you to keep 85% of your cash on their balance sheet?
We strongly advise against keeping more than the FDIC limit at any bank if it can be avoided. (It’s very difficult to assess the health of any institution, especially a bank.) Sometimes you have no choice and this is a risk you have to take to continue to capitalize the business, but I wouldn’t be enthusiastic about it.

Q: I have another question that isn’t answered here. How can I get it answered?
Please get in touch with us by sending an email to info@pilot.com.