The $349 billion Paycheck Protection Program seems to have something for every small business.
One notable exception: venture-backed startups.
To qualify for paycheck protection loans, companies must generally have fewer than 500 employees, so it seems logical that startups qualify. But here's the rub: Some companies are considered affiliates of other entities. In those cases, the number of employees is determined by combining all the affiliated companies. If a venture firm and its portfolio companies were to be considered affiliates, which is what the SBA has long assumed is the case, many would easily blow through the 500-person cap. That makes them ineligible for the loans.
So, without further guidance, VC-funded startups have to prove to the SBA that they should not be affiliated. That takes time, which is one thing startups don't have.
"It's a difficult manual process on a good day," says Justin Field, senior vice president of government affairs for the National Venture Capital Association (NVCA). "In these circumstances it may well be impossible." In many cases, he says, the SBA just won't have time to make a decision on individual companies until it's too late for the loans to do any good.
Banks are on the hook, too. The paycheck protection loans come with a 100 percent federal guarantee, meaning the banks will get their money back even if the borrower can't pay. But if banks don't administer the program properly--including abiding by the affiliation rules--they could lose the guarantee.
One factor in determining if companies are affiliated is if one controls the other. Venture investors can typically veto the merger or dissolution of a company. The model certificate of incorporation maintained by the NVCA, for example, contains just such a provision. It's not clear if that would constitute control.
"We are interpreting that this type of provision is not indicative of control or of affiliation, but the rules are imprecise," says Matthew Moisan, counsel with law firm Lowenstein Sandler.
On March 27, the NVCA submitted a letter to Treasury Secretary Steve Mnuchin and SBA Administrator Jovita Carranza asking for clear guidance on the affiliation rules. On Wednesday, House Majority Leader Nancy Pelosi and Representative Ro Khanna sent a letter to the administration, also asking for guidance.
A recent story in The New York Times estimates that in just a few weeks, about 50 startups have laid off or furloughed about 6,000 employees. That pales compared to the 6.6 million people who filed for unemployment for the week ended March 28, but it may also be only the beginning. Says Field: "Every day that goes by, people are losing faith and resorting to layoffs."