Thousands of startups were left scrambling to meet payroll when Silicon Valley Bank imploded earlier this month, locking clients out of their accounts. Although the Federal Deposit Insurance Commission soon took over the bank, announcing it would protect all depositors, the initial uncertainty had businesses panicking. After all, fulfilling payroll obligations is the bare minimum in the employer-employee relationship.
Failing to pay employees “is the highest breach you can have of employers,” says Eynat Guez, CEO of payroll software company Papaya Global. “This is the most important liability and the heart of the relationship. I can tell you, ‘We have amazing employee benefits, great brands, and so on.’ In reality, if I don’t pay you correctly and on time, you’re not staying regardless of the job.”
(Papaya Global has an account with Silicon Valley Bank that is not its main business account.)
That’s the exact scenario Vanessa Pham, an SVB client and CEO of Asian seasoning startup Onsom, found herself in, she told CNN.
“We started actively planning around the worst-case scenario, just to be as prudent as possible.” As a first-time founder, she said the bank’s collapse was an “incredible learning journey,” which taught her the importance of diversifying where she keeps her money. “Going forward, we’re going to be thoughtful about how we’re storing our funds.”
As the adage goes, don’t put all your eggs in one basket.
“At a minimum, you should have two banks,” Hemant Taneja, CEO and managing director of VC firm General Catalyst and a Silicon Valley Bank client, tells Fortune. “But the bigger you are, it’s not a bad idea to consider having three.”
General Catalyst shared with Fortune the guidance it offered portfolio companies on effective cash management strategies in light of recent bank failures. Its best practices for diversification include having at least one account with a Big Four U.S. bank—Bank of America, Citi, JPMorgan, or Wells Fargo. Taneja says the other account should be with a bank that “understands the nuances of supporting venture-backed startups because they’re not traditional small businesses.” Leaders should also carefully track which account they use for payroll, so they’ll know which parties are affected if a crisis hits and can move quickly to address payment issues.
Guez, the payroll software CEO, recommends fully integrating all bank accounts—new or old—into the company’s payroll system. That way, a company’s backup account is already set up to wire paychecks to employees’ bank accounts, rather than having to redo that logistical process in an emergency. Additionally, payroll intermediaries, like Papaya Global, have to jump through regulatory hoops before a company can disburse funds to employees, which also slows down the payment process.
“It’s not as clear-cut as just connecting [payroll] information or taking money from another bank account and sending the funds,” Guez says. She likens the contingency planning to that for a server crash: “You need to look at payroll and payments exactly as you look at IT, assuring that if you have one server down, you can go to the next server, so you’re not in a place where you don’t have the ability to work.”
Taneja adds that another salient realization from the Silicon Valley Bank turmoil is that in today’s environment, where companies have a plethora of vendors, frozen accounts can result in a cascade of missed payments. That happened with HR software company Rippling, which manages about $2 billion in monthly payroll from SVB accounts. When its accounts were frozen, Rippling’s clients could not pay their employees, creating a ripple effect of missed paychecks and agitated workers.
Leaders must apply the same due diligence reserved for banks to payroll and other tech partners.
“You want to make sure the payroll provider is building a resilient operation, just like you want to make sure your banking partner is,” Taneja says.
