A startup may have as few as 20 employees but still not qualify for stimulus relief by way of SBA loans.

The devil is surely in the details, as VC-backed startups with less than 500 employees will tell you. They may not qualify for SBA relief loans because their employees may be classified as “affiliates” of the VC firm that financed them. (CNBC)

A start-up, but not eligible

The SBA treats companies in a private equity investor’s portfolio as “affiliates” rather than individual companies. Let’s assume all the employees across the investor’s portfolio aggregate more than 500. Then a portfolio startup with say, just 20 employees may be denied the loan relief. The relief announced in the stimulus package, which President Trump signed off on Friday, is $349 billion. The Small Business Administration (SBA) would administer the loan program as a Paycheck Protection Program.

The SBA may also disqualify a startup in which a VC or PE owns a majority of shares.

These hairsplitting distinctions could harm employment in the country, according to Justin Field, head of government affairs at the National Venture Capital Association. About 2.2 million Americans work at VC-backed startups, Field disclosed.

If the authorities do not fix the lacuna, it would be a “lost opportunity to keep people employed” according to Field. He called for guidance from the Treasury or the SBA to ease the “affiliation” rule.

Washington worried about the “optics”

The powers-that-be in Washington are more worried about their image opposite the electorate by appearing to be soft towards private equity players.

“There are conversations around private equity firms sitting on a lot of cash, said Reena Aggarwal, vice provost and finance professor at Georgetown’s McDonough School of Business. “People in Washington are concerned about the optics — it might look bad bailing out PE-owned firms, even though they deserve it as much as anyone else.”

These firms were sitting on a humongous cash pile of $1.5 trillion at the end of 2019.

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