SVB collapse leaves founders liable for unpaid wages

The collapse of Silicon Valley Bank has left start-ups scrambling to find emergency loans and pay staff as founders fear being held personally liable for unpaid wages.

The bank’s closure on Friday has locked in client deposits, the vast majority of which are uninsured, and starved start-ups of funds to cover basic operations.

“We’ve had companies doing an RIF [reduction in force], saying ‘You’re not working here on Monday’. They might hire them back, but if it takes three to six months to get your deposits then they need to act now,” said Matt Cohen, founder of the early-stage venture fund Ripple Ventures.

According to legal experts, founders are keen to act quickly in part because of a California law under which individual executives can be personally liable for unpaid wages.

“When you’re a board member and the company is not actually able to make the payroll on Monday, and California law makes directors personally liable for salary, then what if you can’t make payroll,” said one senior lawyer at a Silicon Valley firm.

The prospect of being personally on the hook for employees’ wage bills had focused the minds of founders, he added.

With start-ups in increasingly desperate need of cash and short of options, lenders have begun touting short-term financing arrangements that might buy them some time.

Brex, a fintech that provides start-ups with cash management accounts, announced late on Friday that it would offer emergency bridge credit. Since then the company says it has received more than $1bn in loan requests. Brex did not detail the terms of its loans.

Lenders are also making direct appeals to venture capitalists and their portfolio companies. 507 Capital, which describes itself as providing “financial solutions . . . in unusual situations”, contacted investors over the weekend.

“If any of your companies require bridge capital due to their SVB exposure, please don’t hesitate to contact us. We have generally been considering offering 30-50% advances at healthy interest rates, with no equity in the start-up’s business,” it said.

The collapse of SVB has painfully exposed the bank’s importance to the day-to-day functioning of start-ups in Silicon Valley.

Such is SVB’s role in the tech ecosystem that some companies that have never opened an account are discovering that they have funds stuck in the bank because the companies managing their payroll ran payments through the lender.

Rippling, a payroll company, emailed customers meant to be making payroll next week, saying: “Your account was already debited for this payment into an SVB account. Those funds are currently under the control of the Federal Deposit Insurance Corporation.”

One start-up chief executive whose funds were not caught in SVB is grateful to be watching the melee from the sidelines.

Sebastian Leape, chief executive of Oxford university-backed company Natcap, submitted documents to open an SVB UK account this week, but the bank was slow to process the paperwork.

“I can’t get over how lucky we are,” he said. The company had planned to deposit all its capital at SVB. “It would have been game over.”