Over the last few days, our team has had 200+ email and phone inquiries about the CARES act, and specifically around what it means for early stage VC backed startups. A lot of confusion out there, so here is what I know as of now:
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1/ First, it’s important to differentiate between the Economic Injury Disaster Loan Program (EIDLP) and the Paycheck Protection Program (PPP).
2/The EIDLP is an existing program (7B) under the Small Business Act, where the SBA (not banks) processes applications and make disbursements. There are some modifications to this program under the CARES act.
3/ Under EIDL mods, loans can be up to $2MM, no requirements for personal guarantees under $200K for those that w/20%+ ownership & it doesn’t require businesses to be around for a year (1/31/20 cutoff). loans<$10K can process/disburse in as less as 3 days (2-3 weeks standard)
4/ You cannot leverage both EIDL and PPP, unless the application is related to two different hardships (i.e. can’t both be COVID related).
5/Because of components like the PG for loans >$200K, this is not a tool for VC backed start-ups, which gets to PPP, which has been the focus for the sector (see here for the NVCA letter)
6/ PPP is a new program under the existing 7A program of the Small Business Act. These loans are made by banks that are approved by the SBA for participation & 100% gtd by SBA (75% under reg 7A).Note some lenders may be approved for the PPP, but not full 7A
7) Main components of PPP are loan sizes are lesser of $10MM and 2.5X average monthly payroll expense for last year. The use of funds is limited primarily to payroll, cost of group health care benefits, rent, and utilities. This is not a blank check.
8/ The program refers to a small businesses defined by the SBA, and must have <500 employees. This works for almost every startup, but the way the current document is written, there is a potential snag around the affiliation concept.
9/ For VC backed co's that are deemed to be under control by an “affiliate” i.e. VC firm, this could create a preclusive effect for qualification for PPP. Ambiguity around control wrt strength of voting shares, board seats, and ownership (50%+). creates potential/certain hurdles
10/ The reason these cause hurdles is that if any of the items list are correct, the makes the VC Fund an affiliate, and all companies that VC Fund has invested into and has “control” positions over are counted toward the 500 employee rule.
11) In other words, if VC Fund ABC has 30 companies with 20 employees each, this would preclude any of the portfolio companies from qualifying based on the interpretation of the language (still unclear if it relates to one fund or all funds in a VC’s family of funds).
12) unclear completely, but convertible debt may be viewed on an as-converted basis (let me know if anyone has clarity on this)
13) As of Friday, there are no definitive guidelines for the program as a whole, including how the loan forgiveness process would work. The SBA has 15 days to provide guidelines. The program requires application by 6/30/20 (although program in place through 12/31/20).
14/ It’s realistically 30 days before we start seeing money start flowing,& every bank will have own underwriting process, capacity, and application, and post loan monitoring requirements to comply with govt standards. Additionally many banks will offer just to existing clients
15/ The documentation/application process is not yet streamlined (albeit many are working on this) as things like employee, payroll, payroll tax, rent, mortgage interest (if applicable), and utility payments will need to be provided for verification of loan size and qualification
15/ We (FRB) are approved as a lender under PPP now, but as mentioned, are working hard to define policy, mobilize teams, get further guidance from the SBA on guidelines and application and monitoring requirements, and how we will execute. Much more to come here.
16/There will be a huge backlog of applications that will accumulate in queue. Best to start acting right now and getting materials gathered to stay in front. hope to see some clarity on VC backed this week.
16/ Net-Net, there is still a ways to go before startups can view this as a true lifeline. Affiliation and control definitions will have to be clearer, and must understand that for cash-burn efficient companies, the total funding may be limited given the parameters in the PPP.
*amendment. A borrower can apply for both the EIDL and PPP loan programs, however the funds cannot be used for the same purpose, i.e. the PPP funds need to be used for payroll, rent, and utilities while the EIDL could be used for other damages.
16/ Net-Net, there is still a ways to go before startups can view this as a true lifeline. Affiliation and control definitions will have to be clearer, and must understand that for cash-burn efficient companies, the total funding may be limited given the parameters in the PPP.
