Cash policies for startups

I heard a rumor on a call the other day that some startups are starting to keep balance sheet cash in higher yield instruments such as corporate debt. This is apparently becoming trendy again as private companies do $25+ million rounds and end up with a bunch of cash on their balance sheets.

This scares the shit out of me. As a high-growth startup, I think you should be focusing on maximum protection for your cash, even if the yield is 0 percent.

In 2001, we had several companies lose over $1 million (including one that was public that lost $7.5 million) in corporate bonds, which were being pushed on startups by the various banks as “safe.” We also had at least one case of a mess in the 2008-2009 time frame with someone with one of those fancy auction-rate securities that froze cash for a while (they eventually got it).

And when I say “lose,” I mean the cash just vaporized. I remember seeing the email about the public company that had $7.5 million disappear from its balance sheet. No one on the board was even aware that cash was tied up in corporate bonds, let along risky yield-seeking ones. It was a powerful signal, at which point I actually spent time learning about the corporate debt market. It’s a good case of “It’s nice until it isn’t, and then it’s really not nice.” It’s probably even more severe today.

Don’t fall into this trap. It’s worth double-checking your cash/treasury policy at your next board meeting and making sure your board knows where your cash is. And, more importantly, if you are the chief executive, knowing where your cash is.

Be careful out there. The scary monsters are starting to hang out at the bar again. They look really cute, cuddly, and intriguing, until they don’t and chomp down on a random body part.

Hint: U.S. Government Treasuries are good.

This story originally appeared on Brad Feld. Copyright 2015