SVB bankruptcy makes founders liable for outstanding wages

The collapse of Silicon Valley Bank has left startups scrambling to find emergency loans and pay employees amid fears of personal liability for unpaid wages.

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

“We had companies doing an RIF [reduction in force], and said ‘You don’t work here on Monday’. They might put them on hold, but if it’s taking three to six months for you to receive your deposits, you need to act now,” said Matt Cohen, founder of early-stage venture fund Ripple Ventures.

According to legal experts, founders want to act quickly because of a Californian law, according to which individual executives can be held personally liable for outstanding wages.

“If you’re a board member and the company isn’t able to do payroll on Monday, and California law makes the directors personally liable for the salary, what if you can’t do payroll,” a senior attorney said at Silicon Valley Company.

The prospect of being personally on the hook for employee payroll costs has focused the founders’ minds, he added.

As startups crave cash and run out of options, lenders have begun touting short-term financing arrangements that could buy them some time.

Brex, a fintech that provides cash management accounts to startups, announced late Friday that it would offer emergency bridging loans. Since then, the company says it has received more than $1 billion in loan requests. Brex has not detailed the terms of its loans.

Lenders also reach out directly to venture capitalists and their portfolio companies. 507 Capital, which bills itself as a “financial solutions” provider. . . in unusual situations,” investors contacted over the weekend.

“If one of your companies needs bridging capital as a result of their SVB commitment, please do not hesitate to contact us. We’ve generally considered offering 30-50% advances at healthy interest rates with no equity in the start-up’s business,” it said.

The collapse of SVB painfully exposed the bank’s importance to the day-to-day functioning of Silicon Valley startups.

Such is the role of SVB in the tech ecosystem that some companies that have never opened an account find they have funds in the bank because the companies managing their payroll processed payments through the lender.

Rippling, a payroll company, emailed customers due to payroll next week, saying: “Your account has already been debited from an SVB account with this payment. These funds are currently under the control of the Federal Deposit Insurance Corporation.”

A start-up boss whose funds were not channeled into the SVB is grateful to be watching the scuffle from the sidelines.

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

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