The $2 trillion stimulus law could leave startups out in the cold. Here’s why Silicon Valley is worried.

mrtopstep

woman looking at phone sad

  • While the new coronavirus-spurred stimulus law offers help to all kinds of companies, startups may be barred from tapping into one of its more generous provisions.
  • The law sets aside some $350 billion for loans to small businesses — companies with 500 or fewer employees — that come with low interest and the prospect of forgiveness for companies that maintain their workforces.
  • The vast majority of startups would seem to qualify for the loans, because they have fewer than 500 employees.
  • But they may get tripped up on rules that look not just their own workforces but those of affiliated companies, which may include other startups with the same venture backers.
  • Click here for more BI Prime stories.

The $2 trillion stimulus package President Trump just signed has provisions designed to help businesses ranging from sole proprietorships to giant corporations weather the coronavirus crisis. 

But people representing Silicon Valley and the venture-capital industry are worried the law could leave one class of businesses at a big disadvantage — startups.

The package offers payroll tax relief and loans to small businesses — defined as companies with 500 or fewer employees — at low interest rates and the prospect of forgiveness. Many startups would seemingly qualify for those loans; some 97% of those for which employment information was available had fewer than 500 employees, according to date from the National Venture Capital Association and PitchBook. But such companies may in fact be ineligible due to existing rules governing how businesses must calculate their number of employees.

“We’re very worried that a lot of startups and workers at startups are going to fall through the cracks here,” said Justin Field, senior vice president of government affairs at the NVCA.

The financial assistance would be especially welcome by some startups which lack the cash flow and reserves of larger, established tech companies. Several startups in Silicon Valley have begun laying off staff in recent weeks.

The stimulus package allows businesses of all sizes to defer paying their payroll taxes for this year for as much as two years. More importantly, though, it sets aside some $350 billion in loans for small businesses. The loans, which can be for as much as $10 million per company, can be used to pay workers, rent, mortgages, or utility bills. The law caps the amount of interest that can be charged on them at 4% and will forgive loans to companies that maintain their workforces through June 30.

Startups may have to count other startups’ employees as their own

The problem for startups comes from the fact that the loans are due to be administered by the Small Business Administration and are subject to the agency’s rules. Under its existing loan eligibility regulations, the SBA requires that companies include not only the workers they employ directly but also those employed by any companies with which they are affiliated.

Here’s where things get dicey for startups. The SBA considers a company to be affiliated with a second company if the second company owns a controlling stake in the first company or if an investor owns a controlling stake in both. Under the SBA’s rules, an investor can be considered to have a controlling stake if it owns as little as 20% or so of a company, if it is the largest investor or one of only a handful of investors with similarly-sized positions. A company that is controlled by an investor or another company would have to include in its employee count not only its own workers, but those of its controlling investor and those employed by any other company the investor controlled.

At least nominally, many venture-backed startups are likely to run into problems with those affiliation rules. Many startups are controlled by one or two investors, or at least they would be considered to be under SBA rules. And many of those investors have controlling stakes — as defined by the SBA — in lots of other companies. Thanks to such arrangements, a startup that may have 50 or fewer employees could, under the SBA’s rules, be considered to have well in excess of 500, when its own workers are combined with all those who are employed by all the other startups in its investors’ portfolios.

Silicon Valley is hoping for waivers

Unless something changes, “many startups with under 500 employees but who have equity investors will not qualify for emergency relief to deal with payroll, paid sick leave, and other operational challenges due to the coronavirus,” Natalie McLaughlin, a spokeswoman for TechNet, an organization that represent Silicon Valley and the venture industry in Washington.

TechNet and the NVCA are pushing for the SBA to issue waivers from the affiliation rules to allow startups to qualify for the loans. Alternatively, Congress could address the issue in follow-up legislation.

Regardless, many startups would seem to need the help. Numerous startups have had to lay off staff in recent days and weeks as the pandemic-triggered downturn has worsened. Earlier this week, for example, TripActions, a corporate-travel startup laid off nearly 30% of its staff.  Compass, a real-estate brokerage backed by SoftBank, laid off 15% of its staff this week. 

In addition to loans targeted specifically at small-businesses, the stimulus package offers loans to companies of all sizes. But those loans don’t come with the promise of forgiveness and place certain restrictions on companies such as limiting how much they can pay their executives and high-salaried workers.

Got a tip about startups or the venture industry? Contact this reporter via email at twolverton@businessinsider.com, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.

SEE ALSO: How Sequoia Capital’s $100 million bet on a little-known video-chat app turned into a $2.3 billion venture capital grand slam because of the coronavirus

Join the conversation about this story »

NOW WATCH: Most maps of Louisiana aren’t entirely right. Here’s what the state really looks like.

The post The $2 trillion stimulus law could leave startups out in the cold. Here’s why Silicon Valley is worried. appeared first on MrTopStep.com.