Important Updates for Startups on the PPP and the CARES Act
After PPP is finished, I don't think bankers in the US will ever again acknowledge the letter P as a letter in the alphabet.
— samir kaji (@Samirkaji) April 7, 2020
To guide startups through the confusion, Dreamit interviewed three leaders helping startups secure emergency funding from different perspectives as bankers, attorneys, and investors. You’ll learn insight to guide your PPP application process from our discussion with Jim Marshall (Silicon Valley Bank, SVB), Kathryn Hickey (PilieroMazza), and Duncan Davidson (Bullpen Capital), which is viewable in its entirety below. Please note, this page does not cover the basics of the CARES Act and we encourage founders to read What Startups Need to Know About PPP and The CARES Act for broader context.
The information on this page was updated on April 6th, 2020.
What are the immediate do’s and don’ts for startups?
Do’s:
Be ready to submit your application this week.
Read rules around qualification, baselines, and forgiveness.
Apply through your company’s primary bank, or consider community banks and non-bank SBA-lenders for faster processing.
Expect quick loan application processing once banks formalize their processes.
Work with specific investors and your law firm on affiliation to address specific problematic covenants, if your company is VC-backed.
Don’ts:
Apply through multiple banks, it could disqualify your application.
Have your investors sign a blanket affiliation waiver.
Expect affiliation rules to be further relaxed for the PPP program.
When will most FDIC-insured banks start accepting PPP applications?
For banks offering the PPP program, you’ll need to wait until their application portal is live. Application portals have been live already at some banks since Friday, April 3rd, 2020. In select cases, banks (e.g. Wells Fargo) have already closed application portals in response to high initial demand and the bank exceeding their overall lending ability. If your bank’s application portal is not yet live, it is likely they will start processing PPP applications this week. Wondering if your bank’s portal is live? Banks that have gone live include Bank of America, Wells Fargo, J.P. Morgan Chase, and many community banks, among others.
Jim (banker from SVB): SVB is not yet processing PPP applications, but our portal is expected to go live on Tuesday, April 7th, 2020. We’ve had about 8,000 companies express interest in this program, and we think that number could be upwards of 12,000 companies when we go live. SVB has put a team of 200 people together to operationalize the PPP program. Independent of the SBA, last week we announced SVB Debt Relief, a venture debt principal deferral program. This separate program defers principal payments for at least six months and is available to any SVB client with loans less than $10 million. Current SVB startups can apply through April 24th, 2020, by logging into their accounts and signing a simple one-page loan amendment agreement through Docusign.
Kathryn (attorney from PilieroMazza): Most banks are opening applications today, though a few rolled out last Friday with mixed success. We’ve spoken to founders who started submitting applications at 9 am ET April 6th, while others are rolling out mid-afternoon Monday and into this week. Through the end of today and into tomorrow, we’re going to see the kinks being worked out of the system and applications starting to be processed.
What SBA-lenders give me the fastest chance of approval?
It is advised that you apply through your bank that handles the primary checking account for your company. If you’re intending to apply through a new bank, you may experience delays as banks are inclined to start servicing existing customers first. Given the PPP’s imperfect rollout thus far, if your primary bank is large, you may have a more difficult application experience with slower approvals. If you have a venture lender that’s not your deposit bank, some founders have seen success going through non-bank SBA-lenders. You could get approved faster through those SBA-lenders or community banks without requiring additional processes big banks go through.
UPDATE over $1,800,000,000 #PPPloan now processed by @SBAgov mostly all from community banks. Big banks taking in large amounts but not yet submitted in these numbers! #CARESAct #SmallBusiness
— Steven Mnuchin (@stevenmnuchin1) April 3, 2020
Duncan (investor from Bullpen Capital): The bigger the bank, the worse the application experience. For instance, one of our startups applied to J.P. Morgan Chase today and was asked to attest to a ridiculous statement: that their VCs didn’t have other companies applying for SBA loans. However, we have a lot of companies that are SVB customers and they are enjoying the process as opposed to being scared of it. We have seen founders go through top SBA-lenders (like Newtek) versus going through the big banks. You have the choice if you have a venture lender that’s not your deposit bank. You could get approved faster through those SBA-lenders or community banks without the complex ‘Know Your Customer’ (KYC) requirements that big banks go through.
Steve (host, and investor from Dreamit Ventures): I spoke to a Dreamit company that got rejected from Bank of America for not having an existing lending account. The founder tried instead to go through their local community bank and got accepted immediately.
Jim: You have to be an SVB client in order to qualify because we have to go through KYC rules. We need to prioritize serving our existing clients but are working with non-clients that have expressed interest to open new accounts.
How do I find out my bank is an SBA-approved lender?
Most banks have COVID-19 and PPP pages on their website. Reach out to your relationship manager at your bank to find out if they’re participating or do a search online. There’s a list of SBA-approved lenders available, but this list is not fully up to date. Smaller regional websites will have more up to date lists. It’s important to note, as part of the CARES Act legislation, the PPP program has been expanded to include more than just SBA-approved lenders.
Will banks run out of funds to service PPP Loans?
It depends on the bank’s capitalization level. Each bank has to look at its ability to fund these loans. The larger the bank, the more their capability to fund these loans. This is an important problem for the banking community. By lending as part of the PPP program, banks are worried they’d exceed lending ratios and thereby violate bank rules. Last week, the federal government issued an important waiver given to the banks to avoid violating solvency rules and that’s when they began to open their portals. If you’re looking to see how heavily your state supports aid to small businesses, here’s a great updated list and state-by-state breakdown.
What is the timeline loans should be processed?
PPP loan processing and approval are designed to be quick. Nobody in the background is reviewing your application. You, as a company, are self-attesting to the accuracy of the application, affiliation, and other required elements. The CARES Act intentionally removes a number of lending restrictions to ease rollout. Once banks smooth out these processes, funds will likely be available the same day. However many bankers are not committing to a specific processing and loan funding timeline. Loans will be processed until the program’s application deadline on June 30, 2020.
Kathryn: We’re anticipating that the processing of applications will be much faster. Companies should still be able to apply through the end of that term. The application is less than two pages and can be processed quickly. Once the approval is processed, we’re anticipating funds will be available virtually the same day. The whole program has been designed to provide financing as quickly as possible. For example, the government is not requiring that the SBA send investigators to examine each applicant’s eligibility. Instead, they are putting the burden on the applicant. This means you have to be confident in your ability to uphold “good faith” throughout the application process.
Jim: We’re going to do our best to process. This is happening in real-time. We have up until June 30, 2020, to process and fund these loans. Follow @SVBfinancial or visit online for updates on expected processing times.
Should I apply to multiple banks for PPP Loan approval?
No, do not apply to multiple banks at the same time. This is a technical violation of CARES Act guidelines and could compromise your approval. PPP loan applications cannot be concurrent. If your first application is rejected, you can submit another application through a second lender.
Kathryn: We’ve been advising clients to only submit one application at a time. When you apply, there is a requirement that certifies you do not have another application pending for the same purpose. We read that as saying, “this is not permitted under the CARES Act, submit one application at a time to make sure you’re not in technical violation here”.
Duncan: If you apply twice, you’re going to get tossed out of both.
Can I apply for both Economic Injury Disaster Loan (EIDL) and PPP?
Yes, you can apply to both EIDL and PPP at the same time. Pre-existing EIDLs lent before the program can be refinanced into a payroll protection loan (PPL).
Kathryn: You are allowed to have an EIDL application pending at the same time as your PPP application. It is possible to refinance the EIDL into a PPL. There is a provision in the PPL that permits this but it technically only applies for EIDLs that you had before PPLs became available. You can still apply for both EDIL and PPL, but you can only refinance pre-existing EIDLs.
Do I qualify as a small business for PPP?
Loan eligibility is based on your number of employees (fewer than 500 US resident employees). There are some exceptions to the 500-person cap. You may have a higher employee-threshold under NAICS-code for your industry, which can go up to as many as 1,250 employees.
Why can affiliation rules disqualify my company for the PPP program?
Affiliation rules mainly apply to venture-backed companies with an investor that has effective control. The company is deemed “affiliated” with the investor and all their portfolio companies. Affiliation rules matter because they could push your company beyond the 500-person threshold needed to qualify as a small business.
How is effective control determined under affiliation rules?
Your company will be affiliated with any investor that has more than 50% ownership of it. Investors with a minority share can still be deemed to have effective control depending on their protective provisions.
Kathryn: You will be affiliated with any owner that has more than 50% ownership of your company. For VC-backed companies, where the investments are more likely to be minority stakes, then you look at the investor’s blocking rights (e.g. blocking a quorum, or preventing a shareholder/board action). The rights founders have to worry about are negative covenants or blocking rights pertaining to day-to-day decisions of the company, when those decisions are subject to a blocking-right controlled by one specific investor. This could be through shareholder voting rights (set through a super-majority that gives that investor a block) or at the board-level (on certain decisions that require board approval like the consent of each preferred director).
What investor-protective provisions trigger affiliation rules?
There are certain protective provisions that the SBA has held are too close to controlling day-to-day operations and will likely trigger affiliation. These can include a single investor’s blocking right against the company incurring debt above a certain threshold or the approval of dividend payment. If a single investor has these protective provisions, it’s likely your company will be affiliated unless those problematic rights are waived.
Kathryn: Founders should ask, “are there any investor-protective provisions that require special preferred director votes in order for those actions to be approved?” If yes, you must analyze the substance of the rights themselves. For certain actions, your investors are allowed to have veto authority without it triggering affiliation. The investor-protection provisions below are all ones that the SBA has deemed permissible provisions that will not trigger affiliation.
Approving a sale of the company
Approved a bankruptcy or dissolution
Approving the creation of a new class of stock
Approving the admission of a new stockholder
There are problematic protection provisions giving founders trouble that the SBA has held are too close to controlling day-to-day operations and therefore likely to trigger affiliation.
Approval for the company to incur debt above a certain threshold
Ability to approve the payment of a dividend
If you have problematic covenants in place, you have to determine if the blocking or veto right is controlled by a single investor. If a day-to-day decision is subject to the approval of the majority of the preferred stockholders, and no single stockholder owns more than 50% of that group of securities voting together as a class, then no single investor has a veto so your company won’t be affiliated with any one of those investors. On the other hand, if that decision requires a supermajority of 75% approval, and you have one fund that owns 30% of the company, then that fund has a block.
Duncan: Last week, Lowenstein came out with a good analysis stating that section 301 affiliation applies, not section 103. The guidance given by the SBA late Friday night agreed with that analysis. We’ve been following these two guidelines.
What protective provisions are VC firms willing to forgo to ensure that my company doesn’t get deemed as affiliated?
VC firms are generally willing to work with founders to resolve affiliation concerns. On a case-by-case basis, investors are willing to remove blocking language from company documents, lower their ownership percentage so they’re not in a blocking position, and aggregate their ownership across funds to a single fund manager.
Duncan: Founders have approached us with several affiliation concerns.
Circumstance one: go through your documents and take out statements like, “fund x can block, lead investor can block” and go to majority vote. Bullpen Capital has agreed to that.
Circumstance two: you have 70% super-majority voting, you want to lower a specific investor’s percentage so they’re not in a block position. Bullpen Capital has agreed to that.
Circumstance three: you need to aggregate the ownership of multiple funds to a single fund manager. Aggregate one fund manager’s portfolio of funds, but don’t go across different fund managers. For example, Dreamit Ventures has three funds, and those funds would get aggregated under the single fund manager ‘Dreamit Ventures’. Since they’re all a part of the common manager ‘Dreamit Ventures’, the ownership of all three funds would be aggregated together.
Should I have my investors sign a blanket affiliation rule waiver or work with each relevant investor to remove the problematic covenants?
Don’t have your investor sign a blanket affiliation waiver. You have to show good faith effort in working with the specific investor to address problematic covenants. You should not try to circumvent these rules by only temporarily removing covenants or using a time-based waiver.
Kathryn: We’ve gotten the question: Can we have a blanket affiliation waiver signed instead of identifying which of our covenants are problematic? This is difficult for investors to sign because they don’t have a clear understanding of which covenants they’d be giving up. You have to demonstrate to the SBA that you’ve made a good faith effort to be compliant. The surgical approach, working with a specific investor to remove specific problematic covenants, is best for both parties.
Duncan: Don’t do the “wink and nod.” That means having your investor agree to remove these covenants now, but behind the scenes making a deal to add them back in later. You have to be honest in the process and you can’t play a game like that. Don’t agree to it, it’s bad advice. I recommend to my companies not to do a time-based waiver. If the company gets through this chasm, and they raise another round, the next investor might figure out how to reimpose some of the waived provisions. You don’t want to look too clever in this context.
How do I amend my bylaws or shareholder agreement to adjust for affiliation-risk?
Removing problematic covenants can be accomplished as an amendment to company documents. You’ll have to consult with the parties waiving problematic rights and may need the approval of all owners to make the amendment effective. Founders can also issue a waiver document or limited-duration waiver in place of a full amendment, but the best strategy is to formally amend your company documents.
Kathryn: You have to speak to your investors to make sure they’re comfortable waiving what you are proposing. We’ve had companies with investors that are not willing to remove the problematic covenants. Consult with legal counsel sooner rather than later to identify the affiliation risks and focus on really just one or two rights that may be problematic. That will help focus the amendments you’re proposing. This can be accomplished by an amendment to those documents and you may have to bring in all required parties to make that amendment effective. Rather than a full-on amendment, some companies have used a waiver document that the investors sign which acts like an amendment or a limited-duration waiver.
Can I expect affiliation rules to be amended this week?
It is unlikely that affiliation rules will be relaxed further for the PPP program.
Kathryn: Last week, there was a lot of hope in the venture community that there would be some relaxation of affiliation rules for the PPP program. Everyone waited for the SBA guidance that came out on Friday, and it didn’t move the affiliation needle much, if at all. At this point, I do not think it is very likely that the affiliation rules will be relaxed. The SBA has doubled down. It’s still possible, but I think it would have happened this past Friday if it were going to happen at all.
Duncan: I don’t think further relaxation is necessary. Most of these companies that are really in trouble can use section 301 rules and guidelines to qualify.
If multiple-VCs are invested in a startup, will different investors work together on affiliation issues?
Yes, VCs are very aligned with this. If the company is in appropriate need of money, investors will work together here.
Where can startups get the most authoritative information on the PPP program?
Read Dreamit’s CARES Act overview which highlights important advice, application details, and other PPP tips for startups. The National Venture Capital Association’s (NVCA) official recommendations on this should be coming out shortly. Reach out to your lender. Ultimately the lender processing your application has their own views on how it should be completed.
Related guide published Friday, April 3rd.
By Elliot Levy, Healthtech Associate at Dreamit Ventures
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