If you recently closed a fundraising round, congratulations—few founders make it to where you are today.
But now you're sitting on millions of dollars, and it feels a little odd keeping it all in your firm’s checking account. In your personal finances, you'd probably put excess funds like that in a savings account, maybe even a certificate of deposit: anywhere it could earn some interest.
But what do businesses do? Especially ones with millions of investors’ money?
The good news is that there are several smart, safe ways to earn yield on your cash without irking your backers or feeling like you're missing out on an opportunity to capitalize on high rates.
As you use your operating account to pay for regular expenses, you should have a firm idea of the minimum amount of money you want available in that account at all times. Your operating account shouldn’t be allowed to dip below this number for longer than it takes to transfer money back into it.
In our experience, founders should have three months of operating expenses immediately available to them. The amount is of course ultimately up to you as a founder, but three times your current monthly outflow gives you ample insurance against unexpected expenses. Keep in mind that as you grow, your definition of monthly outflow grows, too.
Once you've identified the amount you want to keep, you'll need to answer a few questions about any instrument you're considering as an investment product.
What's the rate I receive? Rate is how much you'll receive on your cash over time. Usually, you'll see this as annual percent yield (APY): how much your cash earns in a year, including compound interest.
How much risk do I incur? Risk includes not just the possibility of your investment losing value, but also less obvious hazards such as loss of access to funds due to financial stress or volatility.
How liquid is the instrument? Liquidity is how quickly you can access your money. Most traditional banking products, like checking accounts, offer immediate liquidity. But some instruments require you to wait, pay fees, or sell the instrument at a loss to get your cash back if you want it sooner than you initially agreed to.
How much effort does this instrument require? Effort is how involved you need to be for your cash to hold or increase its value. Banks, for instance, pay you interest automatically. Other instruments aren’t so easy and require extensive management, knowledge, or infrastructure to maximize value.
Let's see how the most common “cash safe harbors” stack up.
Checking and savings accounts at a traditional bank are the default place to park your cash. They offer instant liquidity and are risk and maintenance-free. Their only drawback is low interest rates, even when average rates are high.
Neobanks are firms that build software offerings atop a traditional bank. This software “wrapper” emphasizes ease-of-use and digitally-facilitated services that can be more convenient than a traditional banking experience. But since they're working with a traditional bank, their business and checking accounts are fundamentally the same. You'll often “pay” for the useful platform by forgoing yield on business checking or savings accounts.
Money market funds (MMFs), like those offered by Brex and Mercury, are popular with startups given their reputation for cash-like stability and decent yields. The reputation isn't entirely deserved, though. MMFs are inherently investment vehicles, which means the prices of the underlying assets can drop, and customer withdrawals can only be satisfied through asset sales—which, on their own, can lead to loss of value in times of stress. As a result, in times of market volatility, MMFs are liable to “runs,” something that occurred as recently as 2020.
A money market account (MMA) is a common, minimal-risk alternative to MMFs: they offer relatively high yields and even qualify for FDIC insurance—but they can make you wait up to seven days for your cash. Additionally, some have strings attached: Silicon Valley Bank's, for instance, will only offer the 3.05% yield on balances up to $4m. Any further deposits will ratchet your yield down to 1.00% for your entire balance, including the $4m on which you were previously earning 3.05%. You're responsible for ensuring this doesn't happen.
Lastly: treasuries, or “T-bills,” offer even higher yields than MMAs or MMFs and are fundamentally zero risk, being backed by the full faith and credit of the US government. The catch is that yield is paid only when a bill matures, and to achieve the yield we've listed, you'd have to invest in a three-month T-bill. The high yield is guaranteed, but only if you're able to wait three months at a time to access your cash.
Large corporations using treasuries for their cash reserves will have dedicated staff managing multiple, constantly-maturing T-bill investments to guarantee some liquidity, as well as facilitating trades if cash is needed sooner. Trying to replicate this at a startup means spending far more in valuable founder time (or actual costs on expertise and infrastructure) than what you'll earn in interest.
It’s worth noting that there are “T-bill funds”—managed mutual funds composed primarily of T-bills—that do for clients what large corporations’ in-house teams do for them, though your return will be diminished somewhat by the fees paid to the underlying funds. Your investment will still be susceptible to price risk, too: the mutual fund is constantly reinvesting as underlying bills mature, and if you want a large amount of cash back immediately, you'll be forced to sell bills that haven't fully matured yet at a discount. Cherrypicking just the mature ones isn’t an option.
The “ideal solution” hinges on how much a founder prioritizes each of the four criteria mentioned earlier: high rates, low risk, high liquidity, low effort. There is no perfect instrument that’s best-in-class for all four, but that doesn’t mean you have to just choose one.
We believe startups should put a premium on high liquidity and minimizing risk: above all else, your cash should always be available on short notice with no risk of it either losing value or temporarily being inaccessible. Startup budgets are especially prone to rapid change, and defaulting on bills—or being unable to make essential hires or infrastructure investment—can be devastating for an early-stage company.
After this, we recommend a focus on yield: after all, you're likely here because you want your excess cash to work for you. But always balance yield with the effort required to earn it. There's no sense in moving your cash out of a checking account to earn greater yield if the returns are immediately eaten up by a fund manager's fees or your lost time.
These beliefs informed how we designed the Mayfair high-yield cash account. We built it for liquidity—you can withdraw your money at any time in any amount. Your funds are a cash deposit that's eligible for passthrough FDIC insurance, meaning none of the risks of investment instruments. We bolstered it with the highest APY we could negotiate, then created software that reduces your administrative burden to a simple menu governing how money is transferred between your accounts. At Mayfair, you don't have to choose between high yield and low risk.