Garry has an incentive to say the sky is falling because the sooner this is resolved the less pain it’ll cause, but to say this is an industry extinction event is a stretch.
Even if the extremely unlikely scenario plays out and companies are unable to make payroll, employees are very unlikely to walk out, it would make an inconvenient situation (no pay) much worse (terminated) in an already challenging economic climate. Anybody with the financial means to walk away because payroll has been missed is someone with the financial means to ride out a few weeks waiting to be paid.
We will see many startups fall in the next few weeks + months, and many will attribute it to the failure of SVB, but SVB’s failure is a symptom of the broader economic environment, not a cause, and the same factors that caused SVB to fail are already hurting startups — like the difficult fundraising environment at the moment. SVB will be an easy scapegoat, “we didn’t fail, it was SVB’s fault!”
Most any startup that attributes its failure to SVB’s collapse would have been dead in a few months anyway.
Do keep in mind that at least in California unpaid wages are one of the only things that pierces the corporate veil, so management and investors are on the hook for them personally.
editing to add citation: California Labor Code Section 558.1
As Garry wrote, companies would furlough before closing up shop. You get your paycheck, and then you're told you're furloughed until FDIC does their thing. This protects the company and the founders.
This may be better or worse for workers than being laid off.
That would certainly be better, but companies generally have more expenses than payroll. Lets say hypothetically I'm a healthy cloud computing provider startup and a bunch of revenue comes from startups. If those companies can't pay me, then I can't pay my own costs. That means I have to shut down and all the businesses on my platform get screwed over too.
Bigger companies will be able to float resources for a bit, but if it takes the FDIC more than a few months to sort it out there will be large second order effects.
I hope this hypothetical stays hypothetical, if the FDIC can announce that SVB has been acquired and all the deposits will be honored this will all be moot. But any company with a large deposit at SVB should probably be working off the assumption that they're going to have to make that $250k of insured deposits last for a while. At least until new information is released.
$250k will be in every account Monday morning, agreed on that.
It's everything above $250k, which is substantial, and which companies need, that will take a while to sort out. It's true that everything above $250k isn't covered by insurance, which means they may not get it, but SVB has assets, those assets will get sold, and first up to those assets is those who had bank accounts and to make them whole.
These are Chicken Little scare tactics, and it is disappointing he chose that.
I wonder how much of YC's reputation was destroyed yesterday by this self-serving attempt.
It is unlikely that these companies won't have access to enough of their deposits to make payroll, and even if that rare case occurs there are many many alternatives available to them-- bridging from their VCs, from private lenders, etc.
Tan yesterday sounded a lot like that Zero Hedge guy back in 2009.
> If this happens the companies will immediately close up shop.
If their bank accounts get frozen for a week, they'll just lay everyone off and then hire them all back a week later with a signing bonus to cover their missed days. No one is going to permanently shut down their company because their bank is closed for a couple days.
Maybe a few lucky executives will accidentally get their vesting accelerated, and a few startups that were on the brink of collapsing anyway might be pushed over the edge, but beyond that life will go on as usual.
If you are a director of a company facing such a situation, it's what you want to do. Because if you don't, you become personally liable for the missed payroll. Do you want to close up shop and say "this startup died because of SVB, on to start another one", but keep your car and your house, or do you want to risk losing literally everything you own and then end up with loads of new debt on top of that.
Depends if you think the eventual outcome is worth more. People used to second-mortgage their house to start small businesses where the best-case payoff is much less than these tech companies-- some of which are apparently the next Google or Facebook according to the head of YC on CNBC yesterday
Ahhhh. So maybe this explains why David Sacks is absolutely foaming at the mouth on twitter at the moment? Crunchbase says he sits on quite a few boards.
He even managed to use the occasion to throw Ukraine under the tank treads, again.
So ... San Francisco USD has had payroll system issues for more than a year which have continued to cause staff to sometimes not be paid, and sometimes be underpaid. robbiet480 said that the _corporate_ veil is pierced and so manager and investors are personally on the hook for SVB-related payroll issues. Should school principals, the superintendent or London Breed be personally on the hook for making up shortfalls? Are they literally committing a crime every pay cycle that the bugs in the payroll system continue?
I suppose if you were about to h it a pedestrian while driving your car you could always bail out and claim you weren’t in charge of the vehicle, although that might be a bad example given Tesla’s shenanigans.
The government isn’t that simplistic that they’d accept that as a legal defense if they were going to enforce the law. Possibly if the executive could prove that they were defrauded by another exec or vendor with liability and they resigned as soon as they had information to that effect which coincidentally was on pay day, they could pull it off. Even then though as a corporate officer they have liability over how the company operates when they choose the people to do the job. As the other poster pointed out the liability for payroll pierces the corporate veil and that means they can’t just bail out and use the corporation as a legal shield.
Labor law generally applies where the employee lives. Otherwise companies would just incorporate in <fucked country> and be able to do whatever they want.
Yes, Delaware has no jurisdiction over events that take place in California, or vice versa. A delaware corporation hiring an employee in California means that it is subject to the laws of California solely when it comes to its relationship with that employee.
Well an amendment in 2017 to the General Corporation Law of the State of Delaware added Section 115 which explicitly permits Delaware startups to adopt in its certificate of incorporation a requirement that all internal corporate claims are exclusively held in front of a Judge in Delaware. Several cases in California have upheld this. So it's not exactly a crazy question to ask if this would work for YC startups employees.
On the one hand, of course in this case it applies. On the other hand, let's not pretend CA government doesn't sometimes pass things that aren't very effective.
Realistically this encourages immediate furloughs, layoffs, firing or bankruptcy proceedings. There isn't a world where the companies actually get to the stage of "unpaid wages", there are many steps they can take to avoid getting into that legal boondogle.
Normally, yes. But in this case isn't it the upcoming payroll that's the problem? That work has already been done by employees, so the wage is already on the books. If they can't come up with the money, they'll have unpaid wages no matter how many people they fire. Right?
Sure, but then they'll just furlough or lay off everyone. So employees get one payroll paid out, but then they don't get anymore, and the company and all the economic activity it produces are gone too.
If your company is economically unviable, it's going to eventually fold anyway; that's not the workers' fault. But if it's profitable and just has fallen temporarily behind in payroll, then it's not like it has to pay back wages all at once, it can make arrangements to pay them back over a period of weeks or months. But what it can't do is just decide not to pay people for the work they have performed.
People are acting like there's some set of circumstances that makes wage theft reasonable. Situations where management forces the employees to work for free under threat of being fired are exactly why the corporate veil should be pierced in these matters.
It seems like there are circumstances that make it reasonable, though. And this isn't wage theft. This is where through no fault of the company, their bank closed down and their money is no longer theirs. It is in no way reasonable to make the company owners destitute over two weeks of pay. The corporate veil should remain here.
Just because a company is unviable today doesn't mean it will be unviable a year from now, that's the whole idea behind investing. If this had happened to Google in 1999 (a year before they would eventually make money through advertisements) Google would likely not be able to make payroll, pay their server bills, or keep their office lights on.
Second, even if the company is profitable, they might rely on income from other companies screwed over today. Those companies might not be able to pay their bills. If I'm Sentry, Render, Mongo, or any other number of companies that gets most of their revenue by providing services to startups, I'd be worried right now. Even big cloud providers like AWS and GCP will likely take revenue hits. Big companies can float resources while this debacle gets sorted out, but small companies cant. I'm sure there are a bunch of startups out there that had $2 million in the bank which would give them a good 18 months of runway, and are now trying to prioritize cost cutting measures to help make that initial $250k of insured deposits last as long as possible. And that's permanent lost revenue for those companies.
Third, I'm not saying wage theft is reasonable (it's not), and I don't think anyone else is either. I'm simply trying to point out that piercing the veil isn't some magic bullet here. If a company has to close up shop that's probably the worst of all worlds. Employees lose their jobs with little notice and no severance, office owners need to find new tenants (in an already tough office real estate market), healthy companies seeing ripple effects start belt tightening as well. And in the event that the full (or majority of) deposits from SVB are eventually released to the bankrupt company, where do you think that money goes? Right back to the shareholders. Employees are still screwed.
Piercing the veil makes sense in a typical situation where a company has gone bankrupt and they need to find a way to meet their final obligations, but it's a little more complicated in this situation. There are plenty of healthy companies that will be healthy again once the FDIC is able to release deposits.
> Even if the extremely unlikely scenario plays out and companies are unable to make payroll, employees are very unlikely to walk out, it would make an inconvenient situation (no pay) much worse (terminated) in an already challenging economic climate.
I don't understand how you can say this is an unlikely scenario. It is very likely, because a large number of startups are using one bank and that 250k won't cover much of their burn rate.
It also puts you in a terrible position to raise bridge rounds and other financing. Every investor and lender isn't incentivized to give good terms.
You’re conflating the amount insured and the amount that will be recovered. SVB has failed as a bank, it hasn’t failed as a place to have money. The money still exists, and while there’s a hole created by recovering immediate access to that money, it represents a very small haircut — maybe a few percentage points for each customer.
sure it may (in the long term) be a few percentage points of a loss. The problem is the timeline on which you get access to it. If you are a larger company, 250k won't cover much of your payroll. No banks are going to rush to buy these low interest securities unless they get a steep discount.
A company spending millions of dollars per year on payroll will have the relationships necessary to weather a storm like this. SVB made some very poor investment decisions but they didn’t light the money on fire: it’s not going to take years to liquidate. There is huge upside opportunity for buyers of assets from a distressed bank: the assets are worth less than what SVB paid (hence the crisis) but are not worthless. We will have to wait and see, and perhaps my optimism is naive, but I struggle to see a situation in which these remaining assets can’t be liquidated in the coming weeks. Even pre-crisis, SVB held less than $200bn — that’s a small amount of money in the context of the US banking system. Apple alone has, what, $100bn?
The FDIC has taken control of the bank. In their last bond offering SVB lost 1.8bn$ from a 21bn$ sale. 8.5% seems like more than a haircut... and 8+% to get the money you need now is a steep cut that will result in larger consequences.
8% might seem like a stubbed toe, but these are _bonds_. You aren't suppose to lose anything. 8% inflation, 8% from bank failure and add-on the additional losses from non-bond related issues... S&P500 at 1% for the year but from mid-2021 it is down nearly 10%.
> It also puts you in a terrible position to raise bridge rounds and other financing. Every investor and lender isn't incentivized to give good terms.
Why wouldn't a lender lend in this scenario? It's almost zero risk.
It wouldn't be a good negotiating position if there was no other lenders, but there would presumably be plenty of lenders interested in providing a "small" bridging loan in a situation like this. And those lenders will have to compete.
Smells like blame shifting to me.
He shouted the sky is falling.
Maybe it was, maybe it wasn't.
SVB was a pretty big bank and was clear in its representations.
Maybe he shouldn't have played Chicken Little, initiating the precise scenario the bank warned against.
I wonder if he even realizes what much of the rest of America _already_ thinks of Silicon Valley, and how much more he damaged the perception of SV / YC by basically asking for a government bailout while the ink was still wet and before any payrolls etc were missed (and which may not even happen)
Gonna be some new faces at some board meetings soon!
And by new I mean a buncha old guys from Wall Street or private equity who are going to buy a seat at some “disruptors” and then explain how things are going to work now.
On top of that: there is no meaningful risk that these startups will not be made whole in the coming weeks. Given the absence of risk, there will be plenty of lenders competing to provide these companies with liquidity for a relatively small slice of the pie, should it even come to that.
> there is no meaningful risk that these startups will not be made whole in the coming weeks.
Wow, two very bold claims here:
1. they will be made whole
2. in a few weeks
For 1. I think this is very unlikely to happen. Absolutely account holders will get some money back, but I would be pretty surprised if it was 100%. Regarding number 2. I would be even more shocked if anything more than the FDIC insured amount was returns within "a few weeks".
However you are claiming that there is "no meaningful" probability these will not both happen. Do you care to elaborate on this more because I have heard nobody with any experience in this space making claims like this?
If they sell SVB to another bank, it will probably guarantee 100% of it because the alternative makes all customers of small banks a lot more nervous about their accounts.
The FDIC will cover the portion that they couldn't recover from bank assets. The depositors will be made whole (up to $250k), but it may take some taxpayer money to do that.
The subject of OP's post is the non-insured deposits.
No one, yet, has expressed doubt on the credit of the FDIC.
Sub 10% of SVB's deposits were insured. Meanwhile SVB's HTM bonds have taken a 20%+ loss which will, barring an acquisition, cause non-insured deposits to take a 19%+ haircut.
Combined with an indeterminate period of waiting. So start ups with cash in SVB should expect to lose 20% and find alternative sources to make payroll, pay payroll taxes, and pay suppliers. I expect we will see many startups close us shop when founders are unwilling to bail out their own company's balance sheet with personal money.
In 2008, when startups started to fail, many colleagues left to work for large old established firms. Some others left banking on ne started new ventures. Turnover accelerated.
If we go through an event of the same magnitude, the economy and people will adapt, because history taught us so.
SVB’s failure is only a symptom of the wider environment in as much as it failed because of a focus on handshakes over proper management. The comments on the FT are illuminating: bankers can’t understand how they didn’t hedge for interest rate risk.
> Even if the extremely unlikely scenario plays out and companies are unable to make payroll, employees are very unlikely to walk out, it would make an inconvenient situation (no pay) much worse (terminated) in an already challenging economic climate. Anybody with the financial means to walk away because payroll has been missed is someone with the financial means to ride out a few weeks waiting to be paid.
Even if employees don’t walk out, they can file a wage claim and collect penalties. Any retaliation for filing a wage claim is illegal and would result in more penalties.
FDIC isn't stupid; they're issuing IOUs and these companies can borrow against the IOUs. It's not like this is a minor bank failure; everyone knows about it.
“Receivership certificates” aren’t really IOUs (they are more “defunct entity owes you”). The DFPI takeover and FDIC receivership is, effectively, a kind of “bankruptcy” for the bank.
> these companies can borrow against the IOUs.
What amounts to an IOU from a bankrupt entity is…not very good collateral for a loan.
> It’s not like this is a minor bank failure; everyone knows about it.
Right, and everyone who isn’t already exposed wants to stay out of the blast radius, not jump into it.
Oh come on, uninsured creditors will get back at least 90c on the dollar when the dust has settled. Likely 100c. So yes, they can absolutely use the IOU to cover short term expenses.
Dude. Could you please tell us how much money the thousands of depositors (both individuals and companies) who were above the FDIC limits at IndyMac Bank lost in total, when the bank was taken over by FDIC in 2008?
And lessons were learned! This is not 2008 repeating itself. SVB is unusual in how much exposure they have on interest rates, on both sides of the balance sheet. There is no contagion, and the bank is still an asset worth many billions.
The liquidity problem gets solved by merging this bank with a bigger and more liquid bank. The insolvency problem is solved by wiping out the stockholders and bond holders will get a haircut. I get why people panic, but the issues here can be resolved cleanly and speedily.
Wiping out stockholders has no effect on solvency, since stockholders only have a claim on residual assets. Bondholders getting a haircut or being wiped out addresses solvency, stockholders getting wiped out is just a side effect of dissolution without surplus assets.
Technically true, but when a distressed bank gets sold where does the money go that's paid by acquiring party? Stock holders are last in line. Employees who are due wages are first in line. We can guesstimate how large the hole is and how much SVB is worth. The money that would otherwise go to stockholders during an acquisition will now be used to fix the balance sheet.
Yup. And that was even after the FDIC limit was raised from $100k to $250k, and amazingly was even made retroactive back to January 1, 2008, to try to help those poor people out.
They're going to send out some money this week, but the value of the IOUs will depend on how much they can sell the bank's assets for. Certainly less than face value. It's going to be hard to borrow against that.
Their assets were higher than their liabilities. This is a liquidity problem, not a solvency problem. Everyone got their money from Lehman Brothers, and everyone will get their money from SVB. But not everyone is going to get it right away, because it is invested.
the ious are actually receiver's certificates, and as i understand it, borrowing against receiver's certificates is a commonplace thing to do in cases like this
> Anybody with the financial means to walk away because payroll has been missed is someone with the financial means to ride out a few weeks waiting to be paid.
I agree with the rest of your comment, but not the implication of this sentence. Riding out not getting payed is extremely risky with very low to no reward. Those that could ride it out are much better off quitting and making use of their time for interviewing - or anything but working for free.
Yep. I didn't get paid for a month once and road it out. I did get paid eventually, but in retrospect, I should've just left. There were bigger troubles down the line.
This. A company being unable to make payroll, even only one time, is a pretty huge flashing warning light that the company is very close to the edge of a cliff.
Yeah, I have years worth of runway and could probably retire if I wanted to live a more frugal lifestyle, but I don't work if I'm not getting paid period.
>> Anybody with the financial means to walk away because payroll has been missed is someone with the financial means to ride out a few weeks waiting to be paid.
Everyone should maintain the ability to miss a few paychecks. And everyone should know to start a job search the moment a company misses payroll or even looks like it might.
Even if the extremely unlikely scenario plays out and companies are unable to make payroll, employees are very unlikely to walk out, it would make an inconvenient situation (no pay) much worse (terminated) in an already challenging economic climate. Anybody with the financial means to walk away because payroll has been missed is someone with the financial means to ride out a few weeks waiting to be paid.
We will see many startups fall in the next few weeks + months, and many will attribute it to the failure of SVB, but SVB’s failure is a symptom of the broader economic environment, not a cause, and the same factors that caused SVB to fail are already hurting startups — like the difficult fundraising environment at the moment. SVB will be an easy scapegoat, “we didn’t fail, it was SVB’s fault!”
Most any startup that attributes its failure to SVB’s collapse would have been dead in a few months anyway.