Capital Reserve Strategy: How Much Should You Keep in the Bank?
Most founders allocate capital to product, growth, and operations. They forget about reserves. That's how you end up out of cash when a problem hits.
You're 18 months into your Series A. You've hit your milestones. You're on track to raise Series B in 6 months. You've allocated your capital tightly: 45% product, 50% growth, 5% ops. Every dollar is deployed.
Then your largest customer churns. Your top engineer quits and takes 2 teammates with him. Your office lease dispute turns into unexpected legal fees. Suddenly, you have three emergencies and no cash to handle them.
This is why capital reserves matter. It's the difference between a bump in the road and an existential crisis.
Capital Reserves Defined
Capital reserves are cash you set aside specifically for unexpected challenges, emergencies, and opportunities. It's not earmarked for operations—it's a safety net.
Why Reserves Matter
Three reasons:
1. Crises Happen
Major customer loss, key person departure, security breach, unexpected legal liability. These aren't if—they're when. You need cash to handle them without spiraling.
2. You Make Better Decisions with Optionality
When you're out of cash, you make desperate decisions: acqui-hire, down round, dilutive financing. When you have reserves, you make strategic decisions.
3. Unexpected Opportunities Appear
A strategic acquisition target becomes available. A key hire becomes available but needs a signing bonus. A partnership opportunity needs upfront investment. With reserves, you can move fast. Without them, you miss it.
The Paradox
Keeping reserves feels wasteful. It reduces your ability to spend on growth. But reserves let you take more risk elsewhere—knowing you have a safety net, you can spend more aggressively on product and growth.
How Much Should You Keep?
This depends on your stage and risk tolerance:
Seed Stage
Suggested Reserve: 15-25% of capital
Rationale: You're searching for PMF. Crises are common and unexpected. You need liquidity.
In practice: If you raise $500K, keep $75-125K in the bank. Spend the rest on product.
Series A Early
Suggested Reserve: 12-18% of capital
Rationale: You've achieved some traction. You have more visibility into runway. Less uncertainty.
In practice: If you raise $2M, keep $240-360K in the bank.
Series A Late / Series B Early
Suggested Reserve: 10-15% of capital
Rationale: You're scaling, visibility is higher. Next round is closer. Less need for reserves, more ability to deploy.
In practice: If you raise $5M, keep $500-750K in the bank.
Series B+
Suggested Reserve: 5-10% of capital
Rationale: You're stable, you can access capital if needed. Reserves are less critical.
In practice: If you raise $10M, keep $500K-1M in the bank.
Profitable / Sustainable
If you're profitable, your reserves are your operating cash flow. The more you operate profitably, the less you need reserves (because you generate cash). Typical profitable companies maintain 3-6 months of operating expense in cash.
Adjust for Your Risk Profile
The numbers above are baselines. Adjust up or down based on these factors:
Increase Reserves If:
- You have customer concentration: 50% of revenue from 1-2 customers = higher risk
- You're in a downturning market: Fewer exits, slower fundraising = need more cushion
- You have high burn: High burn means you run out of runway faster if something breaks
- You're between rounds: If Series B is 6+ months away, keep more reserves
- You're raising capital-intensive builds: Hardware, infrastructure = longer payback = more risk
Decrease Reserves If:
- You have strong visibility: Contracts in hand, revenue locked in = lower risk
- You can raise capital quickly: If you have investor relationships and can close rounds fast, need less reserves
- Your burn is low: Low burn + long runway = less critical
- You're next-round confident: Series B is locked in, just waiting for close = can be more aggressive
Common Reserve Mistakes
Mistake #1: No Reserves at All
You allocate 100% of capital to product and growth. Every dollar is deployed. This is aggressive, but one crisis and you're dead.
Mistake #2: Over-Reserve and Under-Deploy
You keep 50% of capital as reserves "just in case." Now you're underfunded on growth and product, and you can't hit your targets.
Mistake #3: Treating Reserves Like Cash You Haven't Allocated Yet
You set aside "reserves" but then spend it on hiring because "we need this person." Reserves aren't decisions you haven't made yet—they're money you won't spend.
Mistake #4: Not Rebuilding Reserves After Using Them
You tap reserves to handle a crisis. Then you don't rebuild them before next crisis hits. Use your first profitable month to rebuild.
Pro Tip
Put your reserves in a separate account or CD ladder with 3-6 month terms. This makes it slightly harder to spend impulsively and you earn some interest.
How to Implement This
Don't overthink it:
Calculate Your Reserve Target
Use the table above for your stage. Pick a percentage. Calculate the dollar amount.
Set It Aside Immediately
Transfer the reserve amount to a separate account. Label it "Reserves - Do Not Touch."
Allocate the Rest
Now allocate the remaining capital to product, growth, and ops per your capital allocation strategy.
Review Quarterly
As you burn capital and your reserves decline, track whether you're still at target. Adjust if needed.
Need help building a capital reserves strategy?
The best founders balance growth ambition with prudent reserves. At Eagle Rock CFO, we help you stress-test your assumptions and build a capital strategy that lets you sleep at night.