Amid concerns that startups could be left out of COVID-19 bailout, investors step up lobbying

The massive bailout package that the U.S. government passed last week to stave off an economic collapse from measures put in place to mitigate the spread of the COVID-19 epidemic is giving out billions to American small businesses. But startups that received venture capital money could be left out.

So the nation's investment organizations and lobbying firms are stepping up their efforts to get clarification around the specifics of the loan programs established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Their efforts could mean the difference between some of those billions in loans for small businesses going to startup companies or a whole swath of companies left falling through the cracks.

There appear to be two issues for startup entrepreneurs with the different types of loans that companies can receive.

The first is the "Affiliation Rules" that the Small Business Administration (SBA) uses to determine who is eligible for loans. Under the rules, companies could be required to count all of the employees at every company their investors have backed as part of their employee count - pushing the individual companies above the employee size threshold.

"Regardless of the purpose of these rules for traditional 7(a) loans, allowing the rules to exclude some of our country's most innovative startups in this new loan program is manifestly contrary to the intent of the legislation: to help small businesses keep their lights on and their employees working despite the double financial squeeze created by the economic and financial market downturns," according to a letter sent to Treasury Secretary Steve Mnuchin and SBA Administrator Jovita Carranza by the NVCA and other startup investment organizations. "Without clear guidance enabling startups and small businesses supported by equity investment to access the loan facility, many of these startups may be rendered ineligible."

These issues around affiliation and 7(a) loans aren't the only ones with which startups may contend. Startups could also be eligible for Economic Injury Disaster Loans (EIDL). These loans are part of a $10 billion program within the CARES Act that is also overseen by the SBA. However, these loans have to come with a personal guarantee if they're over $200,000. And that requirement may be too onerous for startups.

EIDLs less than $200,000 don't require a personal guarantee, nor do they require real estate as collateral, and will take a general security interest in business property, according to an article in Forbes. Borrowers for EIDLs can take an emergency cash grant of $10,000 that can be forgiven if spent on things like paid leave, maintaining payroll, increased costs due to supply chain disruptions, mortgage or lease payments or repaying obligations that cannot be met due to revenue loss, according to Forbes.

These loans apply to sole proprietors and independent contractors and employee stock ownership plans with fewer than 500 employees, Forbes wrote. The emergency loans are available to companies that don't qualify for additional funds - and are based on self-certification and a basic credit score, Alex Contreras, director of Preparedness, Communication, & Coordination at the Office of Disaster Assistance for the SBA told Forbes.

While the EIDLs may be interesting, the biggest issue is the lack of clarity around affiliation rules, Justin Field, NVCA's senior vice president of government affairs, tells me.

"These rules will make it more difficult for small businesses with equity investors to even understand if they can access the program," he says. "It's a tough situation" If you have these non-bright-lined rules it's going to be tough for anybody that has a company that has minority investors."

There could be significant implications for the U.S. economy if these startups are ineligible for loans, the NVCA wrote. Companies backed by venture investors are involved in the development of technologies of strategic interest to the U.S. in the long term and are currently working on tools to diagnose, track, monitor and mitigate the spread of COVID-19 in the short term.

"Bottom line: not providing this critical support to startups now will cause both short-term pain and long-term consequences that linger for years," the organizations wrote. "In 2019 alone, 2.27 million jobs were created in the U.S. by startups across our nation. According to the job site Indeed, 98 percent of firms have fewer than 100 employees and between small and medium sized companies, they jointly employ 55 percent of employees. When implementing the CARES Act, we urge the SBA to issue guidance that makes clear affiliation rules do not arbitrarily exclude our most innovative startups."