Startups are Excluded from Paycheck Protection Program

One of the ways that the U.S. government is attempting to help businesses affected by COVID-19 is through a business loan program called the Paycheck Protection Program. It is a temporary loan program that provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the Paycheck Protection Program. Startups are excluded from obtaining these SBA loans.

Tech Crunch reported that is seems that non-profits and faith-based groups are eligible to apply for the Paycheck Protection Program. Most venture-backed companies are still not covered.

At its essence, the issue for startups seems to be centered on the board rights that venture investors have when they take an equity state in a company. For startups with investors on the board of directors, the decision-making powers that those investors hold means the startup is affiliated with other companies that the partner’s venture firm has invested in – which could mean they’re considered an entity with more than 500 employees.

In order to be eligible for the Paycheck Protection program, a company must have fewer than 500 employees. The company must also meet the affiliation rule which excludes most small businesses from qualifying as small businesses if they are owned by a private equity firm – by “affiliating” all of the company’s employees with those of the private equity firm’s other portfolio companies.

There’s been some confusion regarding which types of businesses can get a PPP Loan. On April 2, 2020, House Minority Leader Kevin McCarthy (R-Calif) told Axios that venture capital-backed startups will become eligible for $350 billion in PPP business loans. But, things changed after that.

The Treasury Department released information clarifying who can apply for a PPP Loan. “All businesses – including nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors – with 500 or fewer employees can apply.” There’s no mention of venture capital-backed businesses.