Discussion

TZubiri: If the value proposition is better interest rates, it sounds like Palus would get that by giving up their cut, what would be your monetization strategy then?

Lionga: Any higher yield comes from higher risk. If any startup feels the startup is not risky enough and really wants to have higher yield for higher risk just put the money in a Bond ETF that suits your risk appetite. Crazy that YC funds things that make a simple thing more complex and more costly for zero upside.

_hugerobots_: This would be a really nice product to start ups outside the US tech belt. Hubris of treading water in longterm a-series SUs elsewhere, this could be a viable solution if accessible.

lowkey_: Not the OP but curious why you think so?If this gives an extra 1% per se, I imagine that is more worth it to a company fresh off a large fundraise with a ton of cash in the bank.Startups otherwise are lean and won't hold enough cash to get a meaningful return from the 1%.

hahahacorn: Is this available for Non Profits?I've had an easy time setting up treasury accounts with Rho & Mercury for 2 co's, but the latter gave me a no-go on an account for a non profit.

mushufasa: I spent time looking into this a couple years ago as a startup founder with this problem. We are in the finance space so I saw how bad the treasury options were with our bank, given their fee cut versus plain T-bonds at the time. I looked into which brokerages allowed us to setup self-directed accounts (many banks don't offer that for businesses at all). I found the "correct" approach. But then there would be more paperwork and back and forth to set up that new account, then manage transferring money around when we needed it, logging into a different system. On a ski trip a friend in finance told me "you're being dumb, if your bank offers you a treasury plan with a one click button, even if it's not perfect, click that button now!" So I did.Then, the benefit of saving 1-2% extra versus spending my time trying to actually running the business and doing things with our money in the real world, has meant I have never looked back. 1-2% on millions of dollars is significant but it's not nearly as impactful as finding Product-Market-Fit in your actual business.All this to say: I'd be in your target market but I'm simply not interested in a "marginally better" treasury system versus just going with my bank's options that make it easy for me.

andrewljohnson: We use Mercury’s treasury account to get yields on cash, and what appeals to me is it is easy to manage. I don’t have to worry about setting up processes to move money around and it’s integrated with my bank account, and we wouldn’t want to switch even for a higher yield… the operational burden is more important to us than yield.I think the yield is about 3.2% based on how we set it up to be as liquid as possible. We could have accepted less liquidity for more like 3.8%

uniclaude: Far from me the idea of criticizing a founder starting something to help other startups. That's amazing. However, the post is not really accurate! Are you sure that all these MBS pools have the same government backing as Treasuries? Ginnie Mae, Fannie Mae, and Freddie Mac are not equal. Are the additional risks (spread risk, liquidity mismatch, and risks related to the mortgage structure that even Regan discloses!) worth the tiny extra yield above money market funds? Startups have to deal with uncertainty all the time, that's the nature of business. Principal loss, and liquidity issues are not things you should have to deal with as a startup. However, providing options to startups is always great, and I think this is a great direction!Again, I hope this doesn't come as negative, but I'm not sure this is making the risk clear. I am not sure I would suggest my portfolio companies to risk their treasuries unless I am sure they're fully understanding the risks associated. Do you intend to provide anything else?

I_am_tiberius: Did YC finally stop investing in AI companies only?

zie: At .49% expense ratio, plus whatever your cut is, it won't be a very cheap product. Even SPAXX, the default holding of cash at Fidelity is cheaper at .42% ER.There is no free lunch in investing, so that extra yield comes with extra risk. Be that duration, credit, etc. That's not to say MBS's don't have their place, but I would never claim people's mortgages as equivalent to cash in any shape or form. Your website claims MBSF is safe for 3+ month durations, but that is not the avg duration of MBSF held securities, so you are encouraging duration risk.I haven't read the full prospectus on MBSF, so I'm not an expert on that product, but it seems expensive and complicated, which is not what you want for cash and cash-like things. This should be a hard pass for literally everyone.Meanwhile you can hold something like ICSH[0] or SGOV[1] with expense in the .09% or lower range(i.e. for every $10k we are talking $9/yr or less in fees). SGOV is 0-3 month max duration, so it's perfect for holdings in the 3 month time-frame. If you need longer time frames you can buy govt bond ladders in whatever time frame you want.What your product should have been: You specify duration for each of your buckets, and then you pick appropriate, cheap index-based investments that are cheap and easy to reason about for each of the buckets.0: https://www.ishares.com/us/products/258806/ishares-liquidity... 1: https://www.ishares.com/us/products/314116/ishares-0-3-month...

quickthrowman: You’re still exposing yourself to duration risk, right? What’s the average duration of your short-term MBS portfolio?MBS bonds pay a risk premium for a reason, you’re virtually free of credit risk, but you’re assuming interest rate/duration risk (not particularly relevant if duration is low, I’m not familiar with the duration of short term floating rate MBSes)Also, what happens in a Silicon Valley bank type scenario, let’s say you have lots of withdrawals and you have to liquidate at under face value. Who eats the loss?

JackFr: They said “short duration” not “short term”. The real risk is from spread duration rather than simple interest rate duration, and assuming they don’t lever up, that should be minimal.The beauty of MBS floaters is that you’re relatively insensitive to prepayments because to a first approximation they’re always priced at par.From an investor standpoint, as they say, you’re making maybe SOFR + 1.5%. That’s not a very sext return. But let’s say your banks repo desk is willing to finance the purchase at 5% down. Then you can lever up your investment 20x and now you’re a big shot making SOFR+30%, which is very sexy. But what’s that, when your lever like that, a tiny decline in price wipes out your entire stake (Welcome to 2008).

quickthrowman: Thanks for the informative reply, that makes sense.

sam_palus: These are good points.On the government backing: it's a fair nuance to point out. In a technical sense, Ginnie Mae has the explicit full faith and credit guarantee while Fannie/Freddie are GSEs with an implicit one (and are under government conservatorship). But in practice, the distinction isn't really meaningful. In practice, the federal government has always guaranteed these loans (even in 2008, when they were under the most stress they've ever been, and there have been significant reforms as a result). There's no reason to think they'll ever stop. The scenario where the GSE guarantee fails is essentially the collapse of the US economy well beyond anything we saw in 2008 (in which case frankly we all have much bigger problems).On the risks you mentioned: 1) Principal loss: given the guarantees re credit risk, and the fact that we use short-duration floating rate instruments to protect against price risk, this shouldn't really be a concern. 2) On spread risk: there can be slight variation in spread, mostly affecting yields; this is why we say "4.5-5%" yields given there's some variability in that range (but all far above money market). 3) On liquidity: agency MBS is the second most liquid fixed-income market in the world after Treasuries. In nearly all circumstances, liquidity is 1-2 business days. This product is really meant for long-term cash reserves; our idea is that companies should stop treating 6+ month cash the same as next month's payroll.Ultimately we encourage founders to do their own research and understand what they're doing with their money. We wouldn't ask anyone to put short-term cash in a MBS portfolio (in the future we'll probably offer some other options too). But for long-term cash they're sitting on, the extra yield can be meaningful to the business: on $5M, it's an extra $50k-75k per year, or half a junior engineer's salary. Given the minimal risk, I think it's worthwhile for a lot of companies.

sam_palus: The 4.5-5% yields we quote are net of expense ratio. Then our cut is 0.25%, comparable to the 0.15% to 0.6% charged by Mercury, Rho, etc. And we're working on bringing that expense ratio down as we scale.Functionally speaking, short-duration floating-rate agency MBS trade at such a stable NAV that they're perfectly sufficient for long-term cash, and many large companies trade these.MBSF is complex in the way that basically any fund is complex, but the strategy it employs is actually quite simple since it only trades a single asset class. Yes the expense ratio is higher than some other funds but the additional yields more than make up for it.ICSH and SGOV are great funds too, and make sense for shorter-term cash, but they pay significantly less than we do.Broadly speaking, our product is meant for exactly the kind of cash strategy you're thinking about: multiple buckets with duration spread accordingly. At the moment, our platform is just for the long-term bucket. But in the future, we might add additional shorter-term buckets too (maybe even with ICSH or SGOV).

collingreen: Startup founder: at this point you need to overcome the stigma of fly by night fintech wrappers sitting on top of banking and the exceptional, outsized risk that creates for consumers a la synchrony and things like yotta essentially losing millions of customer money with no recourse because a discrepancy between those two layers. 1% higher yield is nowhere near juicy enough for me to literally bet the company on and that's close to what would happen if you lost my entire last round (or locked it up 6 months beyond when I need it). Starting with yc companies as a trust indicator is helpful although yc switching to a shotgun "fund hundreds of companies per batch" approach means the yc label carries a LOT less weight than it used to (since they are no longer paying much attention to any one investment).I like smart finance plays and I hope you can do that and stand out from the glut of finance bros who have (and continue to) muddied the water (poisoned the well?) with this approach of "tech on top if actual finance companies".Good luck out there!

sam_palus: Fair! Growing user trust is definitely one of the biggest challenges building in this space.For what it's worth, we don't hold users' funds ourselves; we use an SEC-regulated custodian (Alpaca) with the assets legally held in your name. And we're working on building transparency measures, like detailed views into your account's specific holdings of underlying assets with verifiable attestations, third-party auditing, and frankly any other measures that our customers would want us to.I know putting company money into a new product requires a lot of trust. Like any product you're still exploring, I'd encourage you to start small, try us out, and grow your position over time as we earn your trust. And if it helps you trust us, I'd be happy to get on a Zoom call or meet IRL.

mogonzal: Hey Andrew thanks for the feedbackWe know that the main barrier to switching is just time and ease of use, so we deliberately built this to have the same operational burden as using your current treasury productPalus links straight to your bank account just like Mercury, and we'll also allow you to set up rules for moving money around!That said, if there's any other features that really keep people tied to their current products we want to know about it. Our goal here is to build something that actually cares about the fact that you're a startup with limited time to care about yields, and not just throw your money in a generic fund and forget you exist

sam_palus: Very well put. And yes, to your point, we don't lever up.And yes, SOFR + 1.5% isn't very sexy, but we're competing against existing treasury product that use money market funds and pay SOFR (or less, after fees). So that 1.5% is meaningful.

mogonzal: Lucky for both of us, the value prop isn't just "we are offering better interest rates on the same instruments because we gave up our cut"It's actually "we found a way better set of instruments for long-term cash that allow us to offer better interest rates without giving up the cut altogether"That being said, we do think the current treasury products can be a little predatory with their rates. For example, Rho charges a variable rate that peaks at 0.6% for any deposit of $2M or less. We think that's crazy so our margin is a flat 0.25%, no asterisks or fine print.

sam_palus: The bond funds offered in existing startup treasury products aren't suited for startups' long-term cash reserves. They either offer low-yield money market funds, or bond funds that aren't well suited for capital preservation on the order of months the way startups operate (see here for an example of VFSTX, the fund offered by one of the leading startup treasury products today: https://totalrealreturns.com/n/USDOLLAR,VFSTX?start=2021-01-...)Our goal is to make sophisticated treasury management easy for startups. With Palus, they don't need to manage a brokerage account, or handle treasury ladders, or anything like that.

kristianp: > Agency MBS holders suffered no credit losses during the crisis, and post-2008 underwriting standards became even stricter.I suppose the Agency MBS holders still had losses during the GFC. Would your clients wear any losses in MBS price of there's another housing downtuurn or recession? Why not diversify into other bonds as well?

sam_palus: Agency MBS holders who weren't levered or forced to sell never realized losses during the GFC. There were short term paper losses on some MBS, but it was overwhelmingly on long-duration fixed-rate MBS and incurred by people who held 5+ year duration bonds and had to sell early.Short-duration floating-rate MBS, like the ones we use, were fine. And since regulations have gotten much stricter as a result of 2008, that was very much a worst-case scenario.We specifically chose agency MBS because their yield and risk profile fits startup long-term cash needs very well (no credit risk by definition, stable NAV preventing principal risk, consistent premium over money market, and easy but non-instant liquidity). Essentially their safety reduces the need to diversify across bond types. It's also worth pointing out that MBS already are quite diversified, since each one is a pool of thousands of mortgages spread across different locations, borrowers, and property types.We might offer non-MBS options in the future, if customers ask for it, but we're not there yet.

AlotOfReading: You should write more pieces like this and display them more prominently than an HN thread.Your market is founders who have put money in an MMF and stopped thinking about it, not the people evaluating different optimization strategies day-to-day. So acknowledging the risks and saying "here's exactly when you should consider us" is exactly the kind of thing that helps overcome that uncertainty hurdle that results in choosing the simplest, safest option.Founders should obviously do their own research, but that's asking the customer to proactively expend effort digging through future marketing copy to evaluate your product. They're not realistically going to do that as well as they should and the people who don't need to probably aren't your target market.

sam_palus: Yeah that's a great point. We do have some pieces up already (https://www.palus.finance/info/safety) but plan on adding way more.Honestly this HN post has been really insightful in knowing what questions founders will want us to answer.

TZubiri: As other users mentioned, that would probably raise concerns about risk. In terms of yields for startups I'm assuming we would be talking about zero risk assets, that is US treasury. But I'd be interested in learning about these alternative assets.

kjksf: Anyone can buy STRC with 10-11% yield, paid monthly. Full liquidity (i.e. can sell anytime).5% return is not competitive.

jdndbdjsj: I googled it. That is Strategy? Ponzi Saylor's company. Ooook.Why not buy Celsius (1) instead, even better yields ;)(1) https://en.wikipedia.org/wiki/Celsius_Network

jdndbdjsj: Good luck! Not being startupy or American I don't understand. But sounds like a schlep problem (see pg essays).If you ever want to pivot an idea I am suprised no one does is why don't long term bets e.g. 2028 president pay interest. When you bet on something almost certain in 5 years you always lose due to lost interest. Maybe bets can include interest or even be chucked in SP500 for duration.

tjpd: Isn't the issue of products like this that they present PHC risk, jeopardize QSBS - particularly at the earliest stages where revenue is de minimis?

mogonzal: That's totally fair. Risk is 100% the right concern to have when you hear about higher yieldsWe have a pretty comprehensive blog post about these assets (floating-rate agency MBS) and why we think they are a much better fit for startup treasuries. I encourage you (and anyone else reading this) to give it a read so that you understand exactly how they work and what the tradeoffs are: https://www.palus.finance/info/safetyThat said, we understand not everyone wants to spend their day reading our blog posts. So the best tl;dr we can give is that the higher yields do not come with a credit risk, but instead with 1-2 days of liquidity cost versus same-day for MMFs. Which is much more ideal for a startup's idle cash

sam_palus: 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.

TZubiri: Interesting, I think maybe an approach that would sell me more is actually leaning into the risk aspect a little bit. If you tell me that there is no beta increase, just pure alpha, alarms ring off, but if there is a slight beta with outsized alpha, then I think of it as a tradeoff that I am making, I am willing to take a little bit more risk for a higher return, which might in turn reduce longer term startup risks and allow me to increase my chances of winning by having an extra month or two of runway, now I'm comparing risks instead of thinking about just the risk you introduce.It helps that even if from Palus' perspective there is no increased beta risk compared to the market standard of treasury instruments, even if your thesis that the alpha comes from an inefficiency due to bad 2008 reputation, as a buyer there is still a non-systemic risk associated with going for a niche provider and trusting you.So when you consider that in the eyes of a buyer there's already a non-systemic risk inefficiencies based on lack of distributor trust, then it doesn't really make sense to keep systemic risk low, I think the play here would be to increase the systemic risk of the play to something manageable, since the customer is already paying a last-mile risk of trusting you as a distributor of the federal products.All of this might make it more tempting for clients to switch and choose you, otherwise if the choice is between 3.5% and 5%, it's not really a significant difference, however if the difference is 9% vs 3.5% and the risk is minimal, then maybe startups will bite, founders are already making wild bets, it isn't crazy to bet that there will not be a housing market crisis and that a provider won't scam you. If that happens tough luck, I guess.I would go even further and say that this bet could be tied into the vision or industry of the founder, for example if the founder thinks that things are basically the same as they always were and that AI won't change the market dynamics much, then that's not a strong sale because lightning may strike twice on the same spot.Or to put a simpler example, the industry itself might make it a good fit, if the industry is Real Estate that's the most obvious example, they are going bust anyways if there's a housing crisis. But if it's entertainment, or any other industry that depends on consumers having large discretionary income, they are probably going to fail anyways if there's a large consumer crisis.So yeah, tl;dr I think that the better play is to lean into the risk rather than trying to communicate that there is no risk.

sam_palus: 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.

verteu: STRC is much riskier (I'm having trouble imagining any scenario where it does NOT default.)

mogonzal: Tons of schlep blindness here for sure. That's the only plausible explanation for why existing treasury products have made it this farI'd say your long-term bets are earning interest... it's just going to the house and not to you

amluto: Is the income generated exempt from state taxes?

mogonzal: No haha they are not exempt. But neither are money market funds, which are currently the most popular choice for startups and SMBs

reenorap: US treasuries are exempt from state tax but you didn't mention them. And Municipal bonds have no taxes but a lower rate.