Don’t apply for a PPP loan unless your affiliation issues are resolved

Wiliam Carleton Contributor

William Carleton leads the Tech, Video Games & Emerging Media practice at McNaul Ebel Nawrot & Helgren PLLC in Seattle.

Many presume that the SBA’s “affiliation” rules will prevent venture-backed startups from applying for loans under the Paycheck Protection Program (PPP) of the CARES Act. I think that’s unfortunate, because the potential benefits of a PPP loan are compelling. For sure, you’re prudent to assume that, if you’ve closed on one or more preferred stock financings, your startup will indeed have an affiliation issue, based on protective covenants found in your charter and investor agreements; but you may be pleasantly surprised to hear of ways to amend your startup’s governing documents that, at least arguably, do not do essential violence to minority investor protections.

Because the terms of the PPP are so compelling – a loan that becomes a tax-free grant if spent on payroll, rent and utilities (in essence, for earlier stage startups, your burn) – it simply has to be looked at as a financing source. If the initial problems with the SBA’s rollout of the PPP can be fixed, this program may be the best way out there to mitigate the uncertainties that arise from the global pandemic. The brutal reality is that your next priced equity round is significantly further down the road than you had planned.

At the same time, no one wants to re-trade on essential terms with their startup’s preferred stock investors. The affiliation “fixes” should, if they are to be feasible, focus on preferred stock class voting thresholds or the makeup of voting groups in your charter and/or to selectively eliminate preferred director veto power in your Investors’ Rights Agreement.

Let’s step back for a second and address another common misperception: it’s important to understand that an affiliation analysis is distinct from application disclosure requirements driven by the PPP’s 20% owner threshold. The 20% threshold pertains to the scope of information an applicant needs to provide, what representations need to be made, and the like. An affiliation analysis, by contrast, speaks instead as to whether the applicant even qualifies as a “small business.” For the most part, this means, will the SBA deem the applicant to have fewer than 500 employees. If your business is “affiliated” with other startups in your VC firm’s (or firms’) portfolios, your company may be deemed big, not small, and so not eligible for the PPP.

https://ift.tt/eA8V8J Don’t apply for a PPP loan unless your affiliation issues are resolved https://ift.tt/3aXfaiS