MMA loans

Keep Financial, backed by a16z, offers cash bonuses to employees

Keep Financial, backed by top investors and two serial entrepreneurs, claims to have solved a financial problem for businesses and most importantly figured out how to put it into a product and sell it.

Kathryn Petralia and Rob Frohwein, two of Kabbage’s co-founders, have developed a way to offer forgivable loans, or what they call “acquisition cash plans,” that companies can offer to employees. By signing up for Keep, employers will be able to regularly distribute a cash bonus to employees, provided the employee agrees to stay with the company for a set period of time. It takes some of the concepts that have made stock options such a popular compensation vehicle for Silicon Valley while bringing them within reach of small businesses that may never consider issuing stock to employees.

Frohwein gives the example of a $5,000 bonus to cover the initial cost of a trader’s materials if he stays with a business for a year.

The loans are similar to employer repayable loans, which are offered in a variety of industries to cover tuition or continuing education, equipment needed for a job, or major life purchases such as a down payment on a house. In these cases, the employer usually administers the loan through a bank and covers the principal or offers employees cash bonuses to cover the payments.

Keep Financial does things differently. It is a licensed lender in 46 states, which underwrites the risk and manages the loan. This way, employers don’t have to go through a financial institution and track payments themselves.

According to Frohwein, the business model was a no-brainer. He first learned about employer-payable loans as a lawyer early in his career, when he represented a young doctor who was offered a loan that encouraged him to choose to work in a rural area.

After American Express acquired Kabbage in 2020, Frohwein was ready to start a new business, he said. He and Petralia started talking to HR managers to find out why they weren’t offering these types of loans to keep employees. “They all said, ‘Hey, if it was available to us, we’d do it in a heartbeat. It’s just really hard to execute,” says Frohwein. “And I thought, OK, we’re going to eliminate all execution challenges.”

Keep announced $9 million in funding in May, in a funding round led by Andreessen Horowitz. Launchpad Capital, Thomvest Ventures, Cambrian Ventures and Worklife Ventures participated in the round.

The sizable sum illustrates how much more readily available seed funding is than growth-stage funding right now, especially for a team with a strong idea and a track record.

“What stands out about Rob and Kathryn is how good they are at translating real-world experiences into financial services products,” said Launchpad Capital founder Ryan Gilbert. Andreessen Horowitz, general partner, Anish Acharya, cited the “massive and fragmented compensation market” as well as the reputation of the co-founders.

Anat Alon-Beck, professor of corporate law at Case Western Reserve University, agreed that a product like Keep fills a key need in a time of high turnover. “There is a clear market failure,” she said, referring to several research papers she has written about the economic factors leading to an increase in job jumps. “I’m often invited to give talks about this, and I always say that someone has to come up with a solution, and that person is going to make a lot of money.”

But there are obvious tax and legal implications that make it difficult to offer employee forgivable loans, and may explain why Keep Financial appears to be the only fintech to offer them. In the past, the IRS has taxed certain employer-forgivable loans as unique cash bonusesmaking the employee liable for tax on the full amount of the loan up front, rather than over time as vesting plans provide.

For a loan to be taxed as an acquisition loan, it must be clear that the employee is responsible for the loan if they leave their job. This, in turn, also has consequences: employees who have been fired or furloughed can find themselves on the hook for thousands of dollars.

But Keep has a unique way of funding loans that solves this problem, Frohwein told Protocol. Keep is the approved lender for the employee, who is informed of the full terms of the loan upon hiring. The employer establishes a vesting schedule with Keep and repays the loan when vesting milestones are met; at such times, the employee counts the canceled loan amounts as taxable income. The loans are interest-free as long as the acquisition plans are active.

If employees leave their jobs early, they must repay the “unearned” portion of the loan within 60 days without interest. Former employees also have the option of repaying the loan over one year at 5% APR, or over three years at 7% APR. Keep Financial receives this interest as income, although the company makes most of its money from fees it charges employers. The fee is an undisclosed percentage of bonuses the employer offers to employees through Keep.

Horacio Mendez, president and CEO of the Woodstock Institute, points to another potential pitfall: a lack of financial education can mean that employees not only run out of a loan when they leave early, but also may not see it coming. He points out that beyond any moral obligation, lenders must provide clear information about the cost of the loan under the Truth in Lending Act.

Frohwein said this is also a priority for Keep. “We plan to ensure, first, that employees understand their obligation to reimburse in the event of departure before they are acquired, and, second, [that they have] education on how they can use those funds to build wealth,” he said.

Keep’s Acquisition Cash Plans are its core product and will be complemented by an online portal where businesses and employees can check loans. Frohwein says he and Petralia could also develop complementary financial products, such as insurance when employees have to leave their jobs in circumstances beyond their control.

But the real question is, now that Keep Financial has cracked the code for forgivable loans, what’s stopping a bunch of other startups from copying their work?

Frohwein isn’t bothered by this scenario, daring the competition to try it. “People should copy us – copy the product, do it,” he said. “We have a lot of vision on how to scale this product, scale this business, and really help improve recruitment and retention.”