I'm not sure how true this is. I worked at a startup that took in over $100m in investment, and I was curious so I asked the cofounder how they protected that. According to him the money was divided up into chunks smaller than $249k, pushed off to a custom entity made just for the purpose, and then invested in bonds or CDs on a rotating basis.
I'm sure a lot of startups will be in trouble, but those that are working with decent investors probably had help protecting the assets.
The FDIC covers $250k per depositor, not per account, and specifically does not cover bond investments. Either your startup created 200+ entities to pull this off (good luck with the rest of compliance) and didn't do bonds at all, or the founder is misled.
What SIPC does is similar to FDIC but it basically comes down to "If you buy stocks via Vanguard, Vanguard guarantees that those stocks actually exist and that if they fail you get them, and SIPC helps with that".
> Either they created 200+ entities to pull this off
That's literally what they told me they did, and what I was trying to say happened here. It's possible he was misled, but he seemed pretty knowledgeable about this. The money initially came from Softbank, who helped with the process.
Also, $250k per depository per bank. You can also distribute the money across multiple banks to get higher insurance levels.
Assuming legitimate operations, this strategy is highly atypical in corporate finance. There is no scenario where this setup has less cumulative risk than keeping cash reserves spread evenly across the top 2-3 banks. For a startup, this is a red flag about the founders' priorities, risk management, and ability to find professional advice.
As an intuitive measure, extrapolate this idea to Apple or Microsoft, which keep ~$10B in cash on hand and also need to protect it.
To be fair the founder was really incompetent, and the money was pretty much wasted. When the company finally sold it was well worth what my strike price was.
Why didn’t they just use https://en.m.wikipedia.org/wiki/Certificate_of_Deposit_Accou...? I haven’t used it I just read about it in a Taleb book but it seems like it would be much easier than creating all the accounts yourself and you can interact with just one bank account instead.
I'll be honest, there's a chance that this is exactly what they did but that they didn't understand it or describe it properly. My main point was that there are ways to get protection beyond the FDIC limit, and your link shows a pretty reasonable way to do that.
They either made the story up based on what they read on reddit or you are making it up now based on what you have read on reddit. There is a third possibility that that person being incredibly dumb and they actually believed what they read - but I give that a slim chance.
Why would someone lie about that? Having 30 bank accounts does not confer any prestige upon you. There are companies that do this for people (https://en.wikipedia.org/wiki/Certificate_of_Deposit_Account...) and if you Google "FDIC sweep" or "insured cash sweep" there are a bunch of banks talking about how they support automatically moving money out when an account gets more than $250000 in it.
What's more likely being lost in translation is that they have an insured cash sweep account and explained how that works, and who exactly is creating the 30 bank accounts is what's being misunderstood in this game of telephone.
Making sure that if there's X in cash or cash equivalent at noon on March 9th, 2023 PST there's still X in cash or cash equivalents at noon on March 10th, 2023
