How Startups Can Apply for Paycheck Protection Loans

How Startups Can Apply for Paycheck Protection Loans

Venture-backed startups have been largely cut out of the government's $349 billion paycheck protection program. That program lets a small business ap

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Venture-backed startups have been largely cut out of the government’s $349 billion paycheck protection program. That program lets a small business apply for a government-backed loan to cover 2.5 months of payroll–and the loan can be forgiven if the business’s headcount stays the same during an eight-week period.

Now, based on Monday’s guidance from the SBA, there is a way that startups could access that money. But in some cases, their investors will have to give up some important rights.

“This is great guidance, as it ensures a fast, inexpensive process for the companies,” says Matthew Moisan, counsel in the technology group at law firm Lowenstein Sandler.

VC-funded startups were left out of the initial program because of affiliation with their investors. Companies generally must have fewer than 500 employees to participate in the program. But the headcounts of an investor and all their portfolio companies are generally combined, making many otherwise small businesses too big to participate. The reasoning is that the investor controls the portfolio companies, and therefore, they’re really one company. This is called affiliation. The company can argue otherwise, but that’s a slow process. 

On April 2, the SBA told banks that borrowers, not the banks themselves, were responsible for figuring out if two companies were affiliated. Without this guidance, banks would have to go through all of a company’s legal documents and make a judgment about affiliation. Then they’d have to hope that the SBA’s judgment eventually matched theirs. If the SBA did not agree, the bank could lose the government guarantee on the loan.

Then, on April 6, the SBA said that if an investor has the ability to block actions by a startup’s board of directors, the investor and the startup are still considered affiliates. But it presented an alternative: If the investor “irrevocably waives or relinquishes” these rights, the business would no longer be an affiliate. That gives the startup a better chance of meeting the headcount requirement and provides a path for the startup to apply for the loan program.

“We are watching most closely the impact on the early-stage investors,” says Justin Field, senior vice president of government affairs at the National Venture Capital Association. “The first money in often needs these controls, because they’re taking the greatest risks on the company.” A single seed investor may be able to unilaterally prevent a company from merging with another or may have veto power over the use of the funds they’ve just invested. But now, if they’re willing to give up those rights–something that seems likely if it means saving the company–they could keep their startups’ headcounts from being combined, and give their companies an additional financing option.

Published on: Apr 8, 2020

This article is from Inc.com

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