The NVCA is closely monitoring the outbreak of the coronavirus (COVID-19) and is working diligently to address the VC industry’s needs and provide resources that aim to help firms and portfolio companies during this challenging time.
The U.S. Small Business Association (SBA) has revised its affiliation rules for the Paycheck Protection Program, via an FAQ updated on its site, to allow more venture capital-backed companies to be able to participate. The FAQ states that companies will not have to consider the affiliate entities of their minority shareholders, so long as those shareholders do not have, or waive, any negative control rights over the company’s operations.
The National Venture Capital Association (NVCA) has been tracking the affiliation definition closely, and provides a useful discussion in their application guidance, learn more below. Startups may still be eligible for Paycheck Protection Program loans (and other SBA loan products), even if the affiliation rule is applied.
For example, if a seed investor has investments in 10 companies that are either majority-owned or have negative control, but those 10 businesses employ less than 500 people in aggregate, then the affiliated entities are still likely to qualify for a loan. However, in this example, our understanding is that the 10 entities would only be able to access one loan — but could aggregate their payroll and other eligible costs and spending in determining loan and forgiveness amounts.
If you are considering the program for a venture capital-backed company, it’s encouraged that you speak with counsel and/or an experienced SBA lender.
The SBA has more Paycheck Protection Program guidance on their site.
Find more resources on COVID-19 response policies and programs at our resource center.
Affiliation-rule guidance from the NVCA:
In looking at affiliate status, an investor will be deemed an affiliate if:
- The investor holds more than 50% of the voting stock or
- The investor holds any voting stock, but less than 50%, and can “control” (veto) “ordinary” (operational) decisions.
Non-exhaustive list of examples of blocking rights creating affiliation:
- The investor hold sufficient shares to block the vote, based on the voting threshold (example, threshold is 50% of preferred and the investor holds 55% of preferred)
- The specific investor’s affirmative vote is required to approve an action, together with any general percentage approval as may be required
- Item in question requires “both” preferred directors (such that either can block)
- Board consists of only two members, one of which is controlled by the investor, such that the investor’s board member can block.
Non-exhaustive list of examples of “ok” scenarios that do not result in affiliation:
- Threshold to approve item is majority, and no investor has a majority or can block
- Item in question requires “one of the preferred directors” and there are two or more preferred directors designated by different unaffiliated investors in office (such that none can block)
- Board consists of 5 seated members, quorum is majority of seated directors, no investor controls more than two seats.