Venture-backed startups and their advocates are urgently asking the Trump Administration to ensure they have access to $349 billion in small business loans to assist companies hurt by the coronavirus pandemic.
The Paycheck Protection Program’s forgivable loans, part of the $2 trillion CARES Act stimulus package, are earmarked to help companies with fewer than 500 employees stay afloat. But the fine print of an “affiliation rule” implies that all the employees of a companies’ financial backers would count toward that cap.
That would leave many Silicon Valley companies and other startups that have raised venture capital out in the cold, said Peter Leroe-Muñoz, general counsel at Silicon Valley Leadership Group.
The advocacy group, as well as TechNet and the National Venture Capital Association, dozens of other organizations and Bay Area Congressional representatives, have asked the Treasury Department and Small Business Administration to clarify the language swiftly.
“It is imperative that equity-backed startups have the clarity to know that they can apply for these funds,” Leroe-Muñoz said in an interview.
It’s also extremely time sensitive. The program’s $349 billion is being parceled out on a first-come, first-serve basis.
“If (startups) are forced to wait for delayed rule-making, they could be at the end of a very long line of other organizations and companies looking for funds,” he said.
TechNet & @nvca led 126 groups representing 39 states in a letter to the Trump Administration urging them to clarify that startups & small businesses with equity investors will not be excluded from the emergency relief loan program in the #CARESAct. https://t.co/AJZRCVcMZ1 pic.twitter.com/a7ffjk9tPz
— TechNet (@TechNetUpdate) March 30, 2020
House Speaker Nancy Peolosi, D-San Francisco, and Rep. Ro Khanna, D-Fremont, last week wrote a letter urging Treasury to write new guidelines for startups “as expeditiously as possible.”
“From clean technology to sustainable agriculture to biotechnology, startups create high-paying jobs and make important contributions to America’s economy,” they wrote.
House GOP leader Kevin McCarthy, R-Bakersfield, echoed those calls. He said Treasury Secretary Steve Mnuchin had assured him during a phone call that a waiver to the affiliation rule would be written.
But Mnuchin has yet to squelch those fears.
On Friday, the Treasury issued a clarification that says startups are eligible for loans if big investors own less than 50% of the company. But the startup must certify that investors can’t control the company in other ways, such as by overruling the board of directors. Some startups take money with conditions that let certain groups of investors block sales or other moves, even if the board approves them.
Khanna, whose district includes Silicon Valley, said that test is too subjective and could make banks reluctant to lend given that startups are making legal judgments about whether they qualify.
“This is about preserving thousands of jobs at these startups,” he said.
Khanna said opponents of the loans often argue that bailouts will help wealthy venture capitalists, who could dig into their pockets to keep startups afloat. He said that argument ignores that the money will will cover payroll costs for average workers like office assistants, engineers and recent college graduates.
“I have yet to meet a venture capitalist or private equity firm that’s in the charity business,” Khanna said. “It’s not the venture capitalist or private equity that’s going to lose. It’s the startup that is going to have to lay off employees.”
People mistakenly think all startups are on the mega-scale of Uber, said Jonathan Nelson, managing director of San Jose’s Hackers/Founders, which is both a community for startup founders and a nontraditional funder. Startups can range from a couple of people in a garage to people who have raised less than a million dollars to the rare handful who have raised hundreds of millions of dollars or billions.
Many have just four to 12 weeks’ worth of operating cash on hand.
“A lot of lot of my friends’ venture capitalists are not writing checks right now,” Nelson said. “They’re waiting a couple of months to see how things pan out. Meanwhile a lot of startups will die.”
Thousand of venture-backed startups employ more than 2 million Americans, whose jobs could be threatened without the loans, Leroe-Muñoz said.
“Many of these startups are working on health technology and advanced medicine, the advancements that might very well help us address the current medical crisis,” he said.
Doug Rand, who was assistant director for entrepreneurship in the Obama Administration, said the issue could also hurt Main Street businesses, noting that many got capital from friends and family. If those people also own businesses that employ many, that could lift their investees above the 500-person threshold.
“The fact that there is ambibuity about who is eligible for these Paycheck Protection loans is disastrous,” he said.
Rand, now the co-founder of Boundless Immigration, a Seattle technology startup that helps immigrants obtain green cards and citizenship, said that the vast majority of startups need a lifeline.
“Any startup that isn’t in the business of videoconferencing is seeing a cratering of demand more or less overnight, and is looking at how to staunch the bleeding to keep the team together and avoid layoffs and furloughs,” he said.
The roll-out of the Paycheck Protection Program has been beset by various issues. Friday was the first day businesses could apply, but banks didn’t get guidelines on the program until the day before, leaving them scrambling to set up application portals.
Under the program, small businesses can apply for up to a loan of up to $10 million or 2.5 times their monthly expenses, whichever is less.
Loans will be fully or partially forgiven if businesses show they used the funds to keep or rehire employees and pay overhead. The program lasts until June 30.
The SBA and Treasury Department did not immediately reply to requests for comment.
“[W]e are gravely concerned that application of the current Small Business Administration’s … ‘Affiliation Rules’ to these companies will create confusion and delays in administering the program, and could effectively exclude many startups that are trying to survive this economic crisis,” the letter states. “Such a result would be contrary to the intent of the legislation to provide assistance broadly across all sectors of the economy. Without clear guidance enabling startups and small businesses supported by equity investment to access the loan facility, many of these startups may be rendered ineligible.”