A $500 million term sheet in 12 hours: How Rippling struck a deal as SVB was melting down
As a serial entrepreneur who has famously endured some ups and downs, Parker Conrad thought he'd seen it all. Still, he never imagined that there would be a run on Silicon Valley Bank that would upend Rippling, his six-year-old workforce management company, a run so severe that Rippling would liquidate $130 million in money market funds that its customers needed for their payrolls.
He also didn't imagine that in the span of 12 hours, Rippling would be able to secure $500 million in fresh funding to protect his company in the event that the markets spiraled even more out of control.
Yet both things happened in short order, enabling Rippling to avert disaster and also quite possibly changing the 1,800-person company forever. Now, a week later, Conrad suggests he’s still processing it all, saying there wasn’t really time to panic; there was too much to do.
Everything everywhere all at once
As with so many customers of the 40-year-old bank, Conrad first heard that there was trouble brewing last Thursday morning, March 9. Conrad received a call from a founder friend around 10 a.m., asking “‘Hey, what are you guys doing about SVB?’” Conrad recalls now. “I was like, ‘What are you talking about?’ and he said they’d gotten a call from an investor at Valor Equity Partners who told them they should move their money out of SVB.”
Conrad’s initial reaction was, "That seems crazy; I haven’t heard anything about that.” Then he started looking more closely at his laptop, where on Twitter, moving money out of the bank had very suddenly become the talk of the startup world.
With SMS messages starting to appear from Rippling’s own investors on his phone, Conrad quickly opened a Slack channel titled “SVB risk,” inviting the company’s finance team but hesitating briefly before looping in the company’s CTO, Albert Strasheim, and other engineers. Says Conrad: “I didn’t want to panic anyone or set off a crisis internally until we were sure there was an issue.”
By 11:30, it was clear; there was an issue. As Silicon Valley Bank’s longtime CEO, Greg Becker, launched a Zoom call to provide context around an 8-K filed by the bank the previous day, a growing percentage of Rippling’s engineering team joined the Slack conversation from different parts of the country to hash out a way to move the company’s banking and payment rails away from SVB to JPMorgan.
The good news for Rippling, which manages an array of services for its customers, from payroll to device management to corporate cards: it had already moved some of its banking business to JPMorgan nine months earlier. “It wasn’t out of any specific concern with SVB,” says Conrad. It just seemed wise to create some redundancies in its infrastructure, he says. Besides, Rippling had also launched a global payroll product in October and JPMorgan appeared to have “a lot more global capabilities,” he says.
Still, the team thought if ever push came to shove, they could move their payroll business, which processes roughly $2 billion in payments each month, away from SVB “within about two weeks.” Now, that window was, well, out the window.
“We didn't really think even at that time that SVB was going to fail, or that the payments were not going to go out,” Conrad says. The team thought more likely scenarios were that another bank would buy SVB, or that its risk profile might change by necessity or that there might be PR blowback on Rippling if it continued to be affiliated with a beleaguered bank. As of Thursday night, “We thought, we’ve got at least a week to move over even in the worst scenario.”
Most people don’t think about how their paychecks make their way from their employer to their bank, but it’s not a straight shot. Rippling debits its clients’ accounts early in any given week, providing enough time for the funds to settle or clear. SVB has historically received Rippling’s instructions to pay out those funds to employees, then forwarded those payments on to the Federal Reserve, which has then sent out the money to the employees’ various banks as part of the broad interbank system called ACH. Yet funds debited early last week and that appeared to have been sent out overnight last Thursday evening never made it to the Federal Reserve.
Conrad woke up to the bad news at 5:30 a.m. Friday morning. Jumping out of bed, he walked downstairs to the kitchen with his open laptop in hand, cleared away Legos on the kitchen table, and sat down as “ops team” members at Silicon Valley Bank described a backup owing to the many wires and payments the bank was processing at the same time.
There was not a liquidity issue, they reiterated. The payments would go out.
Conrad was still sitting in his kitchen at 9 a.m. when he realized they would not.
It was then that the announcement came out: the FDIC had seized Silicon Valley Bank, meaning Rippling needed to figure out, fast, how to access funds and get them to people who needed those paychecks. Specifically, Rippling needed $130 million to pay roughly 50,000 employees. Along with setting up some preliminary payment rails with JPMorgan, it also had capital in money market funds with the bank. It began liquidating them.
Still, it needed to generate a payments file that it could send to JPMorgan by 12:30 p.m., and it needed the paths the team was creating to work reliably the following week, too, given more people were expecting payments on Monday.
Meanwhile, customers were, understandably, growing furious. Wrote one angry small business owner on Twitter: “@Rippling, where are our direct deposits for payroll? No one got paid today! You've drafted it out of our account, so you have our money. #rippling #shady #missingmoney #SVBBank.” Another customer told the San Francisco Chronicle of Rippling on Friday: “Their response and transparency has been appalling.”
Conrad apologized to client employees and promised to reimburse related overdraft charges. He posted updates on Twitter as he learned of them. He checked in every 60 seconds with the 50 or so Rippling engineers tasked with sending the final payments file to JPMorgan in time.
He was also thinking about next steps. Even if Rippling was able to get these employees paid, what would happen next week? Rippling would need to send out $300 million more in a worst-case scenario. Rippling could maybe secure a line of credit; another alternative was to sell more of Rippling. He text messaged with his board members; most of them were in the same boat as Rippling, they wrote back to him. Their money was locked up at Silicon Valley Bank.
He reached out to Neil Mehta of Greenoaks, another early and ongoing investor of Rippling who did not have money at Silicon Valley Bank. In fact, Mehta had written his portfolio companies back in November, warning them that Silicon Valley Bank was in a precarious position because it was invested in too many long-term, low-interest loans.
From dawn to dusk
Says Parker now, "We're still in a position where there are a bunch of investors that seemed to be very interested in owning more of Rippling and have been trying to buy more in various fashions." He didn't think raising money would be an issue, but it would be far from standard in nearly every way. As he told Mehta: "I want to raise some money, but I want to tell you up front that the main condition here is we need to close over the weekend, and you need to be in a position to wire the full amount first thing Monday morning. And what you've got to understand is that we're going to send it right out the door to cover customer payroll. That is the intention."
Mehta, as Conrad tells it, said, "Let's do it. And we negotiated over terms, and I signed a term sheet before 9 p.m. on Friday night. And so effectively, the total fundraising process from initial phone calls at 9:30 a.m. to a signed term sheet was just under 12 hours. Then the rest of the weekend was just a Herculean effort to get documents drafted and we signed everything early Monday morning. Then they wired the money."
In between, of course, a lot happened. Becker and Silicon Valley Bank's CFO, Daniel Beck, were sent packing.
Rippling's engineers were able to get that file off to JPMorgan in time last Friday afternoon. (They were 21 minutes late, but the bank apparently waited.)
The Federal Reserve also announced last Sunday around 3 p.m. PST that Silicon Valley Bank’s depositors, both insured and uninsured, would receive help in a manner that would “fully protect” them, it said in a statement.
We asked Rippling what the deal with Mehta looks like, given it was done under duress and agreed to so quickly. A Rippling spokesperson describes it as "light structure -- senior to other equity holders."
We asked Mehta if he also received warrants as part of the emergency package, and he says Greenoaks did not. Instead, he talks about the "incredible ambition" of Rippling and calls Conrad a "man of integrity." Though Conrad might have tried backing out of the arrangement, instead, says Mehta, Conrad called him three minutes after the Federal Reserve made its statement on Sunday, reaffirming it.
Conrad says of the episode that "there was no chance we were not going to move forward with the deal. One of the very important things about the whole venture ecosystem is the sort of the sacredness of a term sheet, and getting to a handshake on a term sheet. I know that if the FDIC had not backstopped depositors, it's possible that there would have been a bunch of other bank failures on Monday." It wouldn't have mattered to Greenoaks, Conrad insists. "I know that on Monday morning, Neil would have wired me his last dollar even as the world was ending, based on the commitment that he made Friday."
Rippling has now raised $1.2 billion altogether. The $500 million Series E values the company at $11.25 billion, the same valuation it was assigned when it closed on $250 million in Series D funding back in May. (It also buys Greenoaks another 4% or so of the company.)
Others of the company's earlier backers include Kleiner Perkins, Sequoia Capital, Coatue Management and Founders Fund.