The Purpose of Paycheck Protection Program and Other Finance Questions
On Tuesday, April 7th, 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.
First, our Partner and Head of Finance Brian Carroll explored this week’s hot topic — the Paycheck Protection Program — as well as other financial considerations. Watch Brian’s office hours with M13 Partner Gautam Gupta below.
How do you plan for 2020 given how much has changed and given how much uncertainty there is in the rest of the year?
- Cash and runway are king.
- Try to position your business so that you have at least 24 months of runway.
- Target cash runway through Christmas 2021, and find a plan that gets you there.
- Brainstorm and prioritize cash burn improvement tactics.
- What is your monthly burn now, and what target number would extend your runway to 24 months?
- Make pessimistic assumptions about revenue (e.g., 20% / 50% / 80% miss on topline), with downsides to gross margin.
- Make pessimistic assumptions about working capital (e.g., customer defaults, payment delays, tighter credit, supply chain disruptions)
- Generate a long list of potential expense reduction and working capital improvements between now and 2022 — you may not have to actually make those cuts, but have the list and get ready to prioritize.
- Communicate with your stakeholders to prioritize levers
- Group your financial levers into buckets like revenue, expense, working capital, and equity / debt.
- Communicate often and openly to make sure you’re in agreement with the stakeholders on your board and executive team.
- Use a simple table like the below to drive conversation around prioritization.
What are opportunities and challenges of raising capital over the next three months?
- Universally everyone wants to take a breath, take stock of where things are, and exercise caution.
- Venture firms are hyper-focused on working with their existing portfolio right now.
- This doesn’t mean deals won’t happen, but the bar will be raised across the board.
What should I consider before applying for PPP?
- 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 $350B designed for small/medium businesses to 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.
- 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.
- The program gives you up to 2.5x your monthly payroll, up to $10M, with a salary cap of $100k per employee, as a loan. The loan will be forgiven if you have not laid off staff during this period of time.
- It is not intended for businesses to take the money and still layoff staff — you’ll still owe the loan.
- 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.
- It’s first come first served, and the $350B is going to be exhausted very quickly, so if you think that you qualify, it is 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:
- PPP Loan Program: Application and Affiliation Guidance
- SBA Programs Under the CARES Act: Are You Eligible for Federal Assistance?
- SBA Section 7(a) Loans for Venture Capital Backed Growth Companies/Startups Under the CARES Act