We totally agree! And that's why we specifically designed Palus to be as easy to use as possible. It's a one-time setup that takes five minutes. We optimized our UX for founders to spend as little time using it as possible, so they can focus on finding PMF instead.
Even for a Series A company, putting $5M into Palus should yield an extra $50k-75k per year, just for having your money sit in a smarter place. Put another way, it should cover six months of a junior engineer's salary for free.
For five minutes of setup, we think most founders will find it worthwhile.
This is actually something we've done quite a bit of research into developing! What you're describing is very similar to repo lending in institutional finance.
We ultimately decided against implementing it for our initial product, since we're specifically focused on companies' long-term cash reserves which by definition shouldn't require immediate liquidity. But in the future, if our customers want it, it's definitely something we can build.
Thanks! In general we optimize for simple UX and would rather connect to your banking app than replace it. That does help keep feature demand down. But our goal is to grow along with our customers, communicate closely with them, and add the features they need as they scale.
They're more of a traditional banking product. They seem to have a great high-yield checking account (3%), which is a great place to keep short-term cash. But for long-term holdings that you won't touch for months, a higher-yield product like Palus makes more sense, earning closer to 5%.
For what it's worth, we don't try to replace products like Crescent (or Mercury, Brex, etc.) at all. They're great for day-to-day banking. Instead we connect to your account there and optimize for really simple UX. We're working on setting up automatic sweep to/from Palus to make it even simpler.
We're up-front with founders that Palus is meant for longer-term cash, not money you'll need on short notice. Even then, our liquidity timeframe is typically 1-2 days.
I'm curious about your experience dealing with your board. We haven't heard that issue from our customers yet, but thus far we mostly just target up to Series B (mainly since, once companies are taking venture debt, they're typically required to hold their money at specific banks).
What were you trying to invest in, and what did they push back on?
To add more context: yes, US Treasuries are exempt from state tax, and municipal bonds are tax exempt too. It's pretty rare for startups to hold them directly; they usually hold money market funds. It varies between different MMFs, but they can be partially state tax-exempt depending on what percentage of the underlying assets are federal bonds.[1] For instance, Vanguard shows you how much of each of their funds is tax-exempt here: https://investor.vanguard.com/content/dam/retail/publicsite/...
However, this tax exemption is usually priced in: muni bond funds, and MMFs that hold lots of tax-exempt assets, tend to return less than funds which are not tax exempt. For the majority of startups that operate at a net loss, tax-exempt funds are probably a bad choice, since you're earning less yield and the tax exemption likely doesn't affect you.
[1] The rules around this also varies from state to state; for instance, in CA, CT, and NY, you can only get any tax exemption if a fund is at least 50% tax-exempt in each quarter of a given year.
I definitely see your point. Our thesis with the MBS product, in finance terms, is that most startups can afford to take on a bit more liquidity risk on their long-term cash (on the order of a couple of days) to get significantly better yields without taking on credit or price risk on their principal.
We've had discussions about offering products in the future with higher yields that carry more risk. Most founders we've talked to are very risk-averse on their company treasury, but if our users tell us they want access to different instruments with different risk profiles, we're happy to meet them where they are.
This is really only an issue for startups with effectively zero revenue.
Your company gets classified as a PHC (and is subject to additional tax) if investment income, including interest, is more than 60% of its revenue. This isn't something most startups need to worry about if you have any revenue.
QSBS is based on intent, if the IRS thinks more than 80% of your assets are used for investment purposes and not for actively running your business. Basically it's so people don't use a small business tax exemption as a loophole for their investments. But the IRS absolutely considers idle cash in your company treasury as part of running your business, or else any startup that's raised money and didn't immediately spend it all would be considered an "investment vehicle," which they obviously don't.
Moreover, any of these potential issues would apply equally to a startup doing anything with their treasury, including putting it in a money market fund as most startups do. So we're not introducing any new tax risk. But of course, if any startup thinks these might be an issue for their business, they should talk to their tax advisor.
Agree on getting tax advice. But because QSBS is such a gift to VCs I really don’t want to jeopardize it particularly when a bunch of startups are raising $20m on $0 revenue, so the balance sheet is basically just cash. At ~5% that’s $1M/yr of interest, which can easily be the only income the company has. If that cash is sitting in an investment portfolio instead of boring cash equivalents, it feels like you could start getting into weird territory with the 80% active business asset test. The probability is Low but the impact for us is massive.
Agreed, QSBS is too valuable to be cavalier about.
The active business asset test is about "intent and substance" and not balance sheet line items. I think it's very clear in this case that you'd be using it as a cash equivalent, since floating-rate agency MBS have a comparable risk profile to money market holdings (short duration, government-backed, highly liquid). And economically they're serving the same function: parking working capital safely until your business needs it. And frankly, I think accessing those assets through a treasury management platform, rather than a brokerage account, helps establish intent and substance.
That's my view on it at least, and I know many companies use these assets for long-term cash without issue. But I'm not a tax expert.
I do really appreciate you bringing this up though, and I'll reach out to our tax lawyer to get a proper written opinion we can share with our customers. Of course it's not a replacement for getting your own tax advice, but I think it'll be helpful regardless.
