The CARES Act was recently signed into law, making a number of federal economic relief options available for businesses and individuals. With the plan now in place, there is a clearer (though not complete) picture of what these various programs mean for startups specifically.
Decoding these relief options and how they apply to the startup community was, understandably, a top ask from our portfolio companies. So, that’s what we did. For the third topic of our series of webinars related to COVID-19, we discussed the Federal Stimulus, its impact on venture-backed companies, and shared suggestions on how to pursue the appropriate option.
Important caveat: we are not accountants (except our Partner, Ira) and nor are we lawyers trained on this subject matter (though, we did ask two excellent lawyers from Michael Best to co-host with us). We’re VCs. And, things are moving really fast as more information becomes available. Please consult your finance leaders and legal counsel if you choose to pursue any of these options.
The details of the programs are hashed out in the webinar and presentation. While we’ve highlighted the major programs below, many more questions, with far more details, are answered at these links:
Listen to the full webinar here. (60 minutes)
View the full presentation here. (18 slides)
There are five main programs that seem most relevant to startups and their impacted employees. See here:
Families First Coronavirus Response Act, March 16
Both of the major employer-focused pieces of the Families First Coronavirus Response Act apply to all employers. The act did two things:
- Require all employers under 500 people to offer 2 weeks paid sick leave, and 12 weeks FMLA to all employees, regardless of status, and with the expansion of eligibility. These are both reimbursable from the federal government on your next payroll tax filing, subject to a cap.
- Expand unemployment insurance benefits — benefits are now four months (up from three), and all filers receive an extra $600/week. Additionally, eligibility has been expanded to cover workers who are furloughed, cannot work, have hours substantially cut, gig economy workers, and the self-employed.
The CARES Act is the official name for the $2 Trillion stimulus package signed into law on Friday, March 27, and contains three major programs that impact startups. Of note: use of either the payroll tax deferral program or the refundable employee retention tax credit excludes eligibility from the Paycheck Protection Program (PPP) loan, so please be careful about your choices.
- Payroll tax deferral enables employers to defer the remainder of their Social Security payroll taxes for 2020. The 6.2% tax can be deferred, 50% to the end of 2021, 50% to the end of 2022.
- The Refundable Employee Retention Credit is for employers who have been shut down or lost more than 50% of revenue — it provides a refundable credit of 50% of wages paid to employees, with a cap of $10k per employee over the affected period. For companies of more than 100 employees, this only covers employees who are not working but still paid. This is reimbursed on the next payroll tax filing.
However, early math shows that the PPP loan is much more lucrative than the employer social security tax deferral + the refundable tax credits combined for startups. So, it probably makes sense for startups to wait for the PPP loan.
- The PPP loan is for companies with fewer than 500 employees that can certify an impact of current economic conditions on the ability to maintain ongoing operations.
- Companies are eligible for a loan of up to 2.5x average monthly payroll over the last 12 months, capped at $10M, at a 2-year term at a 0.5% interest rate, with no payments for the first six months.
- The loan will be forgiven in the amount of 8 weeks of fixed expenses — payroll, rent, mortgage, utilities — from the loan origination date. This is reduced for declines in employee count or salary cuts of more than 25% for employees making less than $100k.
- Applications are via the Small Business Administration (SBA) and administered through 7(a) lenders. We advise you to start talking to lenders you’re familiar with. The requirements have been relaxed so that there is no personal guarantee, no proof of repayment necessary.
- However, a key requirement around “affiliation” has not been relaxed — please be careful about ownership and control documents. Check out the above webinar and presentation links for more details on the affiliation rule.
More information about the PPP loans continues to emerge — on Tuesday evening, the SBA and Treasury posted more information about the program — see Guy’s tweet thread for details:
Lenders can begin taking applications on April 3.
The application form and lender FAQs imply a simple underwriting process, as long as you were in business as of February 15, 2020. This may make the affiliation rule process easier to overcome, but we aren’t yet confident of this.
Based on this, our immediate recommended course of action:
- Find lenders: Talk to SBA lenders ASAP about when they expect to implement. Most will be catching up on things just as we all are, but if they don’t have a view in the next few days, move on to the next. Initially, we recommend working with lenders who understand venture, like SVB, WellsFargo, BridgeBank, Comerica, and CBIC. However, if the underwriting process ends up being as simplified as (a) prove operations on a certain date and (b) prove payroll, you would be wise to also speak with other/local banks who may not see the same rush of now well-informed startups the venture banks will see.
- Audit your legal documents: Check for potential tripping of affiliation rules in your protective provisions based on guidance from the NVCA.
- Develop a legal doc plan: If you believe you may run afoul of the affiliation rules, develop a plan with your counsel to amend your docs, but do not yet execute pending determination of whether affiliation will indeed be examined by lenders
- Communicate to your investors: Talk to them about (1) the potential need to adjust protective provisions and (2) the potential need for them to sign the application. Share the sample application so they can have their own counsel review. You don’t want VCs to slow down your application.
- Gather info, do calculations, fill out the draft application: Centralize all the monthly payroll info needed to do the calculations in the application as well as three years of financials, audits (if any), filed taxes, current cap table, corporate formation docs, general liability insurance, and physical leases. Do the calcs. Fill out a draft application form.
- Once lenders have found their stirrups, pick one and pull the legal document amendment lever if needed. Then apply.
As more becomes clear, we’ll continue to provide clarity to the best of our ability.
In addition to the above, and all of the other outside resources available, we suggest following the National Venture Capital Association (NVCA) for regular updates and in-depth analysis on this topic. The NVCA has done a phenomenal job impacting the legislation and how it applies to startups, in addition to interpreting the information as it gets released.