IN-DEPTH: Are venture-backed businesses eligible for loans to stay afloat?


AUSTIN (KXAN) — Business owners are trying to get their hands on a Paycheck Protection Program loan to help keep their businesses afloat. The program just rolled out a week ago.

“These new rules are really complicated,” Joshua Baer, founder and CEO of Capital Factory. “So the challenge is nobody really knows and they’re even changing it as they go.”

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KXAN has gotten reports that a specific group of business owners worry they’re ineligible, those that are venture-capital-backed startups. Baer said it’s important to pay close attention when applying.

“Some of the language in there makes it look like venture-backed companies that have investors in a lot of companies can have trouble qualifying under the standard way that things have been set up in the past,” Baer said.

Baer, along with others, said that’s not the case. Venture-backed companies are eligible, business owners just have to do their research.

“There’s been mass confusion in the market, that mass confusion was really avoidable, and a lot of people frankly misread the rules,” Ed Zimmerman, a venture lawyer and chair of The Tech Group at Lowenstein Sandler said. “Many, many venture-backing startups are eligible.”

Zimmerman and his team have dug deep into the rules of the program. He said a lot of the confusion arose from the affiliation rules the program lays out.

“Initially, people thought that a startup that had investors who each owned 12% or 15% of the equity might be excluded and that is not the case,” he explained.

He said there are three things help venture-backed businesses determine eligibility.

  1. Does your venture fund hold 50% or more of your company’s equity?
  2. Does your venture fund control half or more of your board?
  3. Does it have the right to block your business’s day-to-day actions, for example, could they hire or fire someone?

Zimmerman said if you answer ‘yes’ to any of those questions you just heard, it’s best to find counsel to help guide you through the loan application process.

“The biggest thing that I would remind small businesses is that this is a major accelerated of all things and so it’s going to accelerate a bunch of bad things but there will be good things and there will be lemonade to make from the lemons,” Baer said.

Both Baer and Zimmerman said it’s important to make sure everything you submit is accurate because the PPP loan requires a “good faith” certification.

Kathleen McGee, technology and regulatory lawyer at Lowenstein Sandler and former prosecutor with more than 17 years’ experience in the public sector said making sure everything is accurate can avoid businesses facing issues in the future like fraud charges.

Texas restaurant concerns

The Texas Restaurant Association also has concerns with the Paycheck Protection Program.

Emily Williams Knight, the president and CEO of the organization, wrote a strongly worded letter to Senator John Cornyn, Senator Ted Cruz and other congressional leaders. Following her lead, the associaton reports 608 people have sent 2,246 emails to their specific representatives.

FULL LETTER: Texas Restaurant Association sends letter to government leaders requesting changes to Paycheck Protection Program

In the letter, Williams Knight identifies several corrections she wants made to better protect restaurants. She said this industry, made up of 500,000 restaurants, accounting for $70 billion in revenue, should not be short-changed.

“We need to do that now, because if we don’t, the restaurant industry in our state will never look the same, and that means the economy in our state will never look the same,” Williams Knight said.

Other small businesses have seem similar flaws in the system.

Brian Smith, the owner of Monster Mini Golf and Laser Tag said his 20 furloughed employees are important to him and he wants to take care of them. But while the Paycheck Protection Program will cover their needs, he still needs more financial backing to pay the rent for his large warehouse facility and its overhead costs. He also said he’s received no communication about when he will receive his loan.

“We still have rent. We still have people to pay. We still have utilities to pay,” Smith said. “We are waiting for the slow gears of government to do what its gotta do to fund those loans.”

The City of Austin says it plans to help small businesses by providing loans. It has $6 million from the U.S. Department of Housing and Urban Development.

Once the infrastructure is in place, business owners can apply online and the city will provide up to $35,000 dollars of working capital.

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