Understanding the Purpose of the Paycheck Protection Program

Here’s what venture-backed startups should know about this loan program.

Last Updated: October 7, 2020

Published: April 19, 2020

M13

On April 7, M13 partners hosted virtual office hours to discuss pressing challenges facing startup leaders today. We are former founders and operators, have successfully navigated periods of economic downturn, and have been sharing strategic approaches to finance, talent, data, digital marketing and more.

Our Partner and Head of Finance Brian Carroll explored this week’s hot topic the Paycheck Protection Program.



What should I consider before applying for PPP?

What is it?

The Paycheck Protection Program (PPP) was passed a couple weeks ago as a part of the CARES Act, and just began accepting applications on Friday April 3.

It is $350 billion designed for supporting small/medium businesses so they do not lay off their employees. The intent is for companies with less than 500 employees who are very adversely affected by COVID-19 to not lay off staff.



Who is eligible?

In order to be eligible for PPP, you must have less than 500 employees and must have suffered adverse economic conditions that would cause you to do layoffs.



What do you get?

The program gives you up to 2.5x your monthly payroll, up to $10 million, with a salary cap of $100,000 per employee, as a loan. The loan will be forgiven if you have not laid off staff during this period of time.

It’s is not intended for businesses to take the money and still lay off staff you’ll still owe the loan.



What should I know if I’m a venture-backed startup?

There is a nuance to the PPP for venture-backed startups.

If you have any investors with more than 50% ownership, you are considered an affiliate of that business and all of their employees are counted against your 500 employee limit.

If you have owners with less than 20% ownership but negative covenants (e.g., the ability to vote on the budget, hire or fire executives, and take on debt), they can still be considered an owner in the business, even though they own less than 20%. This means a lot of companies that are venture-backed will find themselves pooled with all the other companies in the venture partner’s portfolio.



What else should I know?

It’s first come first served, and the $350B is going to be exhausted very quickly. so if you think that you qualify, it’s imperative to start reaching out to your bank and lenders to start the process.



Here’s some additional helpful resources on PPP recommended by M13:

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