The startup and financial ecosystem has been rocked by the biggest failure of a bank since the financial crisis. Silicon Valley Bank, the 16th largest bank in the US, was shut down by California banking regulators and put through insolvency proceedings in the UK by the Bank of England on Friday March 10th 2023. Clients of the San Francisco bank, who are mainly early stage businesses in the technology sector, could not access their accounts or banking services. Whilst investors and technology companies were scrambling to raise funds, FDIC and the Bank of England were looking to establish a rescue deal for SVB and SVB UK. Fortunately, the banking crisis was averted on Monday morning of the 13th and it was announced that client deposits would be returned whole. This article provides some context to the SVB crisis and the steps startup founders can follow to meet their legal obligations during a crisis such as payroll.
What happened to Silicon valley bank?
Warnings about Silicon Valley Bank first appeared in an article by the Financial Times published on the 23rd of February 2023 which scrutinised the bank's unrealised $15bn loss. The bank had put the majority of its deposits in long term US treasuries at a time when interest rates were low. However, the rapid rate hikes by the FED led to the value of the bank's bond portfolio drop by $15bn. A slowdown in startup funding also meant that less deposits were being made into Silicon Valley Bank. The collapse of Silicon Valley bank was triggered shortly after the bank announced that it had sold $21bn of its bond portfolio at a loss to fund redemptions.
On Wednesday 8th of March 2023, the CEO of Silicon Valley Bank then announced that the bank was selling $2.25bn of shares to cover the losses. This led to a loss of confidence in the bank and triggered a bank run which saw $45bn of outflows from the bank on Thursday the 9th of March 2023. California regulators then decided to shut down the bank on Friday and hand the bank insolvency procedure to the Federal Deposit Insurance Corporation (FDIC). In parallel, the FDIC also started to look for potential acquirers of the bank's assets. An insolvency procedure for Silicon Valley Bank UK starting Sunday evening subject to no meaningful further information or intervening event was then requested by the Bank of England shortly afterwards. As part of the insolvency process, Silicon Valley Bank UK would stop making payments or accepting deposits.
What's the difference between Silicon Valley Bank and Silicon Valley Bank UK?
Silicon Valley Bank UK Limited is the UK arm of the US bank, Silicon Valley Bank. Whilst Silicon Valley Bank UK is separate from the US entity, the Bank of England decided to apply to the Court to place Silicon Valley Bank UK Limited into a bank insolvency procedure.
Why is this important for the tech eco system?
With the collapse of Silicon valley bank, account holders will potentially lose their uninsured deposits. The protected limit is $250,000 in the US and £85,000 in the UK which means that any deposits held with the financial institution above these amounts are uninsured. Uninsured depositors may recover some of their deposits once the bank insolvency procedure is completed. However, only 3% of the customer deposits were protected by a deposit insurance scheme which means that the process might take a while. The collapse of Silicon valley Bank is meaningful because it serves about half of all venture backed tech and life sciences companies in the US and 60% in the UK. Companies which don't bank with Silicon Valley Bank are also affected because payroll providers like Rippling use some of SVB's rails to make payments. Moreover, many investors bank with Silicon Valley Bank which means that funding rounds might be put on hold until bank deposits can be recovered.
How was the Silicon Valley Bank collapse averted?
Federal regulators announced in a joint statement on the Sunday 12th of March that deposits would be safeguarded and that Silicon Valley Bank deposits would be transferred to a bridge bank. On the next day, the Bank of England and British government announced that Silicon Valley Bank (UK) Ltd had been sold to HSBC and that clients deposits would be protected. No taxpayer money was used in both transactions.
What to do if you've been affected by the collapse of SVB
Whilst the SVB insolvency procedure is underway, the founder and investor community has been rallying together to share tips on how to navigate through this crisis. The following steps are suggestions for founders regardless of whether they bank with SVB or not.
Communicate with your employees and investors
Investors and employees reading the news will want to know if your company banks with Silicon Valley Bank or not and if so whether the collapse will affect your liquidity directly or indirectly. Sharing an update on the situation will help investors and employees understand the situation. If your company has been affected, you might want to monitor the SVB website for updates or join Whatsapp support groups to keep up-to-date with the latest updates. Founders should also communicate with their legal and financial advisors to understand their options. Mountside ventures and Odin have also collated resources to help founders affected by the collapse of Silicon Valley Bank UK.
A number of platforms, financial institutions and companies have started to offer emergency funding solutions to companies which have deposits trapped in Silicon valley bank. Whilst the insured deposits will be available as soon as Monday morning, startups may want to open new bank accounts and raise funds quickly.
Investor funds can be raised quickly through an advance subscription agreement (ASA) or a convertible note. The main benefits of these financial instruments is that a share price does not need to be agreed straight away and minimal legal work is required. This means that funds could be raised quickly through these instruments subject to the founder finding investors who are willing to invest.
Another option is to take out emergency credit lines to provide short-term liquidity. Platforms like Uncapped (email@example.com), Tranch and Muse are offering loans to UK businesses affected by the collapse of Silicon Valley Bank UK.
How to pay your employees and invoices
In the UK, company officers and directors are liable for unpaid wages. Moreover, late PAYE and National insurance payments to HMRC will incur penalties which start respectively at 1% and 5% of the unpaid amounts. Unpaid invoices to creditors can also incur interest.
Help from the government
Whilst the US or UK government haven't stepped in to help either Silicon Valley Bank or Silicon Valley Bank UK, both governments are actively monitoring the situation. In particular, the UK government is assessing the impact of SVB financial group on the financial system and the economy by asking customers of the US bank to send an email to HM treasury (EST@HMTeasury.gov.uk) listing:
- Name of Firm
- Amount on deposit at SVB UK
- Monthly cash burn if that is a consideration
- Whether the firm banks only with SVB UK or has access to other UK banking facilities
The submissions will be treated in confidence and will help the UK government identify how to support the affected businesses.
HM Treasury announced on Sunday 12th that they were working on a plan to ensure that the liquidity needs of Silicon Valley Bank UK customers were met.
If your company has not secured additional funding and is unable to meet payroll, you may need to consider making redundancies. If you're still unable to cover your employment and operating costs, you may need to consider winding down the business and liquidating assets. Software businesses won't typically have meaningful assets to liquidate but medical or hardware businesses might. The proceeds from the liquidation will be used to pay the company's debts. Anything which is left will be distributed amongst shareholders. Finally, in the UK, the company will be struck off the Companies House register.
Take care of your mental health
The crisis is mentally draining for founders, regardless of whether they're directly affected by the Silicon Valley Bank insolvency or not. Whilst the situation continues to unravel, it's important to have peers who can support you and be your sounding board. Founders need to understand that they did nothing wrong to have held accounts with Silicon Valley Bank who have traditionally been one of the most startup and founder friendly banks to work with. This means that founders shouldn't be afraid or scared to ask for help from other founders, investors or advisors.
In conclusion, the collapse of the Silicon Valley Bank has been a traumatising experience for entrepreneurs and investors across the world. Fortunately regulators and central banks in the US and the UK were able to act swiftly to protect the trust in the banking system and technology sector. Whilst the suggested steps can help founders navigate the crisis, there is only so much they can control or do to overcome the situation. Founders can also benefit from the additional resources below.
- A Whatsapp SVB support group with over 1000 founders
- Common questions answered by the US law firm Cooley on the access of funds after the failure of an FDIC-insured bank
- Companies helping affected startups run payroll
The opinions on this page are for general information purposes only and do not constitute legal advice on which you should rely.