US: Startup founder, apply for the Payroll Protection Plan

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If you are Founder of a Startup in the US, please, apply for the Payroll Protection Plan. Now. Contact your EXISTING Bank

What is It?

  • An unsecured loan equal to 8 weeks of basic operating expenses
  • FTE payroll (capped at 100k annual salary per FTE)
  • includes 1099’s
  • Rents, mortgage and utilities
  • 0.5% interest rate
  • Grace period of 6 months
  • Due in 24 months
  • The loan maybe be forgiven in whole or in part if payroll is maintained and money spent in specific items (salaries, rent, mortgage, etc.)

More info here

How is it processed?

  • SBA certified banks are the conduit for processing PPPs
  • Most large banks are SBA certified
  • Banks will perform the due diligence mainly on cap table and employee records
  • each bank will design their due diligence check list and/or methodology
  • some banks will request K1s to understand who are the members of an LLC
  • access to virtual cap tables (Carta)
  • connect with payroll providers (ADP - TriNet)
  • the more automated the link the faster the due diligence
  • TriNet and ADP are already developing tools for “online” verification
  • If the application is not “verified” through the due diligence process it will be send to a “special case review”
  • additional processing time, reducing the likelihood of getting an approval in time

Why Act Now?

  • SBA Banks will be overwhelmed by demand putting several constrains in their processing
  • Act early
  • SBA Banks will process first businesses that are clients of them and that have a full know your customer updated files
  • Non customers or those without a current relationship will be waitlisted
  • Probably will miss the window
  • Given the number of small businesses in the USA, it is anticipated that the facility will dry up within the first month of availability
  • program starts on April 3, 2020
  • program is open until June 30, 2020

Some Additional Key Considerations

  • Payroll has to be in the USA, only US employees count
  • Majority owner of the business must have at least a Green Card or US Citizenship
  • Go to your bank (if not an SBA certified bank, it could become a problem)
  • Follow their due diligence guidelines and try to provide exactly what they want fast
  • Delays are your worst enemy

A Wrinkle, Always a Wrinkle; The Affiliation Rule

  • This is the most relevant provision of the Act that at first sight disadvantages venture backed companies. The SBA “affiliation” rules are subject to interpretation and are supposed to be applied “case by case”, but in general they presume that any investors with some degree of influencing decisions on the business is an “affiliate" of the company. Being an affiliate means that the employees of an affiliate are also added to the company’s employee count (max of 500 in the aggregate). In the most extreme interpretation, the employees of other portfolio companies of the company’s affiliated investors are also considered in the employee count. It is important to mention that for the “employee count” all employees worldwide (not just the US based employees) are considered. There are significant efforts of consultation by lobby groups, the banks and the NVCA (National Venture Capital Association) being presented to Capitol Hill, the SBA and the administration to obtain clarity on how the affiliation rule applies in this instance (PPP). In the meantime each SBA Bank will take a stance and screen based on their own interpretation.

Conclusion

  • Contact your bank immediately, move fast and provide all the information they require. The faster you do this the earlier you will get an answer from your bank. In the end, certain key aspects of the application like your bank’s interpretation of the Affiliation Rule are out of your control. File the application and find out. If your bank’s interpretation of the rule favors your case, you strike gold, if not, it was not meant to be. You have one silver bullet, use it now.