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

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

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.

Leave a Reply

Your email address will not be published. Required fields are marked *

TopBack to Top