A Bank of One's Own

A fun fact about startups, if you've never worked for one, is that employees don't typically get equity in the company. They're granted options, meaning they have the option to buy equity when they leave, usually within 90 days. This can cost tens or hundreds of thousands of dollars, paid out of pocket – even if the chance of an exit is still uncertain or years away – if they want to participate in the startup’s potential financial upside.

The first time I had the option to buy equity, I did the math and realized it came out to half of what was my modest savings account. I had earned very little in my career up til then, and I didn't have family or friends who could help me with that kind of money. I kept my savings in a traditional Big Bank, had no personal banking relationship, and had no idea how I'd even go about getting a loan, though I was sure I wouldn't qualify for one.

My only other option, I learned, was to work with an employee equity "fund" – essentially, loan sharks – that lend money to startup employees if they don't have the cash to buy their options. In exchange, they would take more than 50% of my payout, if it ever came to pass. After weighing these options, I decided to choke down my fears, cash out my savings and buy myself one big chip, which I placed in front of the roulette wheel and held my breath as it spun.

Not everyone makes the choice I did, nor even have the option to do so. Some employees can't afford to buy their equity at all, so that when their startup is acquired or goes public, they earn nothing from the outcome, looking on in silence while their colleagues become millionaires. The people who find themselves in this situation are, of course, disproportionately those who work in lower-paying roles, and who don't have family or friends to borrow from.

Tech has gone mainstream in the sense that its end products are ubiquitous, its most famous (and infamous) founders are canonized in movies and TV shows, and working at a startup feels just a little bit passé now. But that's just the shiny side of tech, the part that everyone else gets to see. When it comes to the mechanics of making all this work, behind the scenes, tech is still a cottage industry, with surprisingly little connection to the outside world.

Nearly everyone who participates in startups – founders, employees, and investors – has at some point had to take a good hard look at their personal bank account and figure out how to reconcile their iridescent dreams with the concrete dust of reality. While the somewhat controversial practice of secondaries (selling part of one's equity to an outside buyer for cash, before the company has exited) became more popular in tech's recent, fatter years, most founders spend years toiling away at a company with no knowledge of whether it will ever all be financially worth it. Meanwhile, founders must still progress through the humble stages of a human life: they get married, buy houses, have babies, send their kids to school, become caregivers to aging parents. When a founder goes to the bank to get a mortgage, it's difficult to explain to someone at, say, Bank of America that yes, their savings and income don't look very impressive, but they do have a lot of equity in a promising company – which, by the way, isn't yet profitable, but it will be! (Maybe.) A Big Banker doesn't look at that story and see a potential high earner. They just see someone who is incredibly cash poor and risky.

Investors aren't exempt from the pains of the financial system, either. Several years into my time in San Francisco, someone explained to me how, as a partner at a venture capital firm, they were expected to commit personal capital to the fund, which is often several percentage points' worth of the total fund size. This could amount to hundreds of thousands, even millions, of dollars.

"Boo hoo," you might think. "Pity the poor venture capitalist who can't afford to buy into their fund." But this person did not come from a wealthy or privileged background. They were relatively young. They didn't have family who could advance them the cash. They were exactly the type of person that we plaster on conference panels and brochures as an example of the kinds of people we all wish there were more of in venture capital. But the only way they were able to participate in that world, and serve as a role model for others, was by quietly borrowing from a bank that understood what it meant to be a young venture capitalist with carry, but not enough savings.

Silicon Valley Bank is not a bank for rich people. It's a bank that served the needs of a very particular ecosystem with a very particular set of financial circumstances, which enabled decades of creativity and entrepreneurialism to thrive. It was an integral part of the less glamorous side of tech that people don't like to think about and certainly don't want to talk about, even amongst themselves – truthfully, writing this piece makes me nervous and uncomfortable.

I've seen a number of people ask why so many startups banked with SVB, as if this should have been a red flag somehow. The answer is not that tech doesn't want to work with traditional banks, or because they were greedy and looking for better rates. They banked with SVB because it's one of only a handful of banks that was willing to align its financial products with the holistic levels of risk that are required to work in startups. And the types of people who need access to these services aren't necessarily the rich kids with wealthy parents; they're precisely the people who don't have access to capital anywhere else. The real world is not kind towards people who don't have money or pedigrees that want to start, fund, or work at early stage companies. The real world wants those people to work a steady desk job and not ask too many questions. That's why tech needs a bank of its own.

I am not, by the way, a customer of Silicon Valley Bank, nor have I ever been. I also have no interest in defending SVB as a firm; from public information so far, it seems they made a series of poor judgment calls that could have prevented the events that unfolded, which makes their demise all the more tragic. But I am still deeply saddened by the news this week, because I know SVB as a bank that helped remove the friction that entrepreneurial people feel in every other part of their lives whenever they try to interact with the "default world."

I'm perplexed, then, to see so many people gleefully celebrate the collapse of an institution that helped level the playing field for people from all backgrounds. It seems that people simply saw the words "tech" and "bank failure" and decided they knew how this story should end. But what triggered this chain of events had, ironically – and I cannot stress this enough – little to do with the inherent risks or impracticality of startups, but SVB’s bad decisions combined with the hiking of federal interest rates: the brutal constraints of the "real world" encroaching once again upon tech's constructed version, like flames creeping at the edges of a newspaper.

There ought to be more, not less, institutional support for entrepreneurs, creatives, and dreamers to get the help they need. More importantly, we ought to celebrate, not vilify, the idea that people ought to be able to do whatever they put their minds to. I don't want to live in a world where people can't do interesting things because they're told they're not rich enough to qualify for those dreams, or that their financial situations are too weird to fit the traditional banking system. Whatever happens to Silicon Valley Bank, or to the startup ecosystem more generally, I hope that dream continues to survive somewhere.