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Politics

Startups are racing against time for stimulus funds — and Washington’s efforts are falling short

Some VC-backed startups are considering modifying deal terms to get around vague stimulus guidance.

One hundred dollar bills

Many startups aren't clear on whether they qualify for stimulus funds earmarked for small businesses.

Photo: Liu Jie/Xinhua via Getty

Despite a mad dash by dozens of members of Congress and a lobbying frenzy by Silicon Valley, many venture-backed startups still don't have a cut-and-dry answer on whether they qualify for the billions of dollars earmarked for small businesses in the coronavirus stimulus package. So startups are making do with what little information they have.

Late on Monday, the Small Business Administration and Department of the Treasury released new guidance that clarified some of the rules that have tripped up startups and prevented some from applying. Now, investors Protocol spoke with said they're receiving requests from a large number of startups to change their voting and control terms to make them eligible for the grants.

"I think most startups are comfortable moving forward with applications based on last night updated SBA/Treasury guidance, although many startups are still evaluating the true level of their need [and] associated ethics of applying," said Trevor Loy, an investor at FlyWheel VC.

Even so, many banks and lenders are still reluctant to accept applications from VC-backed startups, citing the scattershot guidelines for the $350 billion loans program.

"The guidance from last night still seems to be insufficient, and lenders are still hesitant to make these loans," one Democratic congressional aide told Protocol.

Over 30 members of Congress have written letters, sent emails and set up meetings to encourage the administration to include VC-backed startups as it doles out funds from the SBA program, according to a count by Protocol. Speaker Nancy Pelosi and House Minority Leader Kevin McCarthy have gotten personally involved.

Congressional staffers involved in the process said their efforts have picked up in recent days. The small-business loans program, called the Paycheck Protection Program, officially opened up Friday.

Venture capitalists have seen the program as a way the government can help preserve jobs at companies affected by COVID-19 in a way that their own checkbooks cannot. In the last week, venture firms have scrambled to hold conference calls, send out guidance and host webinars to help educate their startups on how to apply.

There is increasing concern that the small-business funds will be depleted by the time there's more clarity about whether VC-backed firms are eligible for the money. Congress is starting to mobilize to potentially infuse more funds into the program through a standalone appropriations bill, but the path forward is unclear so far.

"The overall sentiment has been that the funds will go quickly … and there's going to be a huge shortage of companies that don't get what they need," Brad Luttrell, the co-founder of a hunting app called GoWild, told Protocol. GoWild, a VC-backed company, applied for the federal loan through Chase Bank on Friday, but has not yet received word on the status of the application.

Luttrel said he has received template communications from Chase but nothing substantial, and the clock is ticking.

"My office has been inundated with calls, emails and letters from small startups who cannot access this critically important economic lifeline," Rep. Anna Eshoo, D-Calif., said in a statement to Protocol. "I hope the SBA takes immediate action because this assistance is needed right now."

Lawmakers, hearing from startups and companies in their districts across the country, have made a number of requests, including that SBA waive its rules for VC-backed startups or that the agency put out specific and helpful guidance clarifying its stance. At issue are the SBA's affiliate rules, which generally indicate that startups with investors who can "control" actions — whether through owning the majority of stock or having voting shares that can block transactions — have to count investors and their other affiliates to the employee headcount, potentially pushing them over the small-business limit (typically 500 employees). Given the extraordinary situation, many have argued that the rules shouldn't apply now.

Despite McCarthy's promise that it was "going to be solved" last week and Silicon Valley's Rep. Ro Khanna's work to press the issue, the treasury department hasn't gone so far as to waive the rules entirely or draw a clear bright line that would make startups unquestionably eligible.

In one relevant addition to the guidance, the SBA confirmed that minority investors may still be considered affiliates if they hold certain control rights. But there are still many outstanding questions about the affiliates issue.

"There's obviously a lot of frustration in the startup community," said Scott Brovsky, the director of the Small Business Development Center at UC Riverside, which helps mentor tech startups in Southern California. Brovsky said most startups he has worked with have avoided applying so far because they aren't sure how to navigate the affiliates question.

Ed Zimmerman, a lawyer who specializes in venture capital and startups at Lowenstein Sandler LLP, said his firm has been working overtime to convince banks to accept applications from VC-backed startups. He said he has been in communication over email and over the phone with three separate banks who were reluctant to offer the loans, but have chosen to open up the process, particularly in light of the guidance released this week.

"Guidance is coming out in an unsteady way," Zimmerman said, noting that far more startups are likely eligible for loans than previously understood, but the chaos and confusion has led even potentially eligible firms to "take a step to the back of the line."

To get around it, some startups are now asking venture capitalists to amend their deal terms to relinquish specific control in order to meet the eligibility requirements. In a blog post, Upfront Ventures partner Mark Suster said getting investors to agree to the amended terms may be easier for companies that have a larger number of investors who all own around the same size of the company. But earlier-stage startups that may have one lead investor who does have more control may be less willing to agree to a change, he warned.

"If your company is in dire straits (let's say you're a transportation company or a hospitality company), then you're likely to find an amenable investor," he wrote. "If you're in a company where the investor views your application as more of a 'gray area,' then you may not easily receive consent for changes."

Zimmerman said he has heard from a slew of startups hoping to amend their deal terms at this point. "We are spending plenty of time reading venture deal documents to see if there are offending provisions and to ensure those provisions are irrevocably waived or amended out of those deals," he said.

Many startups are opting to try their luck and apply, instead of waiting for new guidance, due to escalating concerns that the money won't be there within days.

Wells Fargo had already stopped taking applications as of Monday morning, announcing that it reached the $10 billion cap it had set for loans. The administration on Monday said it had approved 130,000 loans worth $38 billion, amounting to about 10% of the program.

There's already been talk of expanding the loans program. Sen. Marco Rubio, R-Fla., who authored the PPP, said in a tweet that his office is working with the treasury department to "make a formal request for additional funds ASAP & with Senate leadership to get fast track vote ASAP."

And several lawmakers said they will likely try to ensure that the next economic stimulus package includes a fix to clarify the role of startups.

"We have been in contact with the Small Business Administration about these concerns, and we hope to get them addressed through fixes to phase 3 or possibly in phase 4," Rep. John Carter, R-Ga., said in a statement to Protocol. "It is my hope that the Treasury will rectify a number of these eligibility issues in their guidance."

Despite the rush by many VC-backed startups to try to get funding, there's a growing worry that some startups are applying for the loans without actually needing them, and investors are starting to push back against the frenzy. "This misconception that it's a free two months of payroll is bizarre to me," said one startup CEO, who decided not to go ahead with the application and spoke to Protocol on the condition of anonymity to discuss their company's finances. Some peers the CEO has spoken with applied to the program to stave off layoffs, but there are also companies who aren't in as dire of need who have also applied. "I think it's incredibly reckless of founders," the CEO said.

Protocol | Workplace

In Silicon Valley, it’s February 2020 all over again

"We'll reopen when it's right, but right now the world is changing too much."

Tech companies are handling the delta variant in differing ways.

Photo: alvarez/Getty Images

It's still 2021, right? Because frankly, it's starting to feel like March 2020 all over again.

Google, Apple, Uber and Lyft have now all told employees they won't have to come back to the office before October as COVID-19 case counts continue to tick back up. Facebook, Google and Uber are now requiring workers to get vaccinated before coming to the office, and Twitter — also requiring vaccines — went so far as to shut down its reopened offices on Wednesday, and put future office reopenings on hold.

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Allison Levitsky
Allison Levitsky is a reporter at Protocol covering workplace issues in tech. She previously covered big tech companies and the tech workforce for the Silicon Valley Business Journal. Allison grew up in the Bay Area and graduated from UC Berkeley.

After a year and a half of living and working through a pandemic, it's no surprise that employees are sending out stress signals at record rates. According to a 2021 study by Indeed, 52% of employees today say they feel burnt out. Over half of employees report working longer hours, and a quarter say they're unable to unplug from work.

The continued swell of reported burnout is a concerning trend for employers everywhere. Not only does it harm mental health and well-being, but it can also impact absenteeism, employee retention and — between the drain on morale and high turnover — your company culture.

Crisis management is one thing, but how do you permanently lower the temperature so your teams can recover sustainably? Companies around the world are now taking larger steps to curb burnout, with industry leaders like LinkedIn, Hootsuite and Bumble shutting down their offices for a full week to allow all employees extra time off. The CEO of Okta, worried about burnout, asked all employees to email him their vacation plans in 2021.

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Stella Garber
Stella Garber is Trello's Head of Marketing. Stella has led Marketing at Trello for the last seven years from early stage startup all the way through its acquisition by Atlassian in 2017 and beyond. Stella was an early champion of remote work, having led remote teams for the last decade plus.
Protocol | China

Livestreaming ecommerce next battleground for China’s nationalists

Vendors for Nike and even Chinese brands were harassed for not donating enough to Henan.

Nationalists were trolling in the comment sections of livestream sessions selling products by Li-Ning, Adidas and other brands.

Collage: Weibo, Bilibili

The No. 1 rule of sales: Don't praise your competitor's product. Rule No. 2: When you are put to a loyalty test by nationalist trolls, forget the first rule.

While China continues to respond to the catastrophic flooding that has killed 99 and displaced 1.4 million people in the central province of Henan, a large group of trolls was busy doing something else: harassing ordinary sportswear sellers on China's livestream ecommerce platforms. Why? Because they determined that the brands being sold had donated too little, or too late, to the people impacted by floods.

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Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.
Power

The video game industry is bracing for its Netflix and Spotify moment

Subscription gaming promises to upend gaming. The jury's out on whether that's a good thing.

It's not clear what might fall through the cracks if most of the biggest game studios transition away from selling individual games and instead embrace a mix of free-to-play and subscription bundling.

Image: Christopher T. Fong/Protocol

Subscription services are coming for the game industry, and the shift could shake up the largest and most lucrative entertainment sector in the world. These services started as small, closed offerings typically available on only a handful of hardware platforms. Now, they're expanding to mobile phones and smart TVs, and promising to radically change the economics of how games are funded, developed and distributed.

Of the biggest companies in gaming today, Amazon, Apple, Electronic Arts, Google, Microsoft, Nintendo, Nvidia, Sony and Ubisoft all operate some form of game subscription. Far and away the most ambitious of them is Microsoft's Xbox Game Pass, featuring more than 100 games for $9.99 a month and including even brand-new titles the day they release. As of January, Game Pass had more than 18 million subscribers, and Microsoft's aggressive investment in a subscription future has become a catalyst for an industrywide reckoning on the likelihood and viability of such a model becoming standard.

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Nick Statt
Nick Statt is Protocol's video game reporter. Prior to joining Protocol, he was news editor at The Verge covering the gaming industry, mobile apps and antitrust out of San Francisco, in addition to managing coverage of Silicon Valley tech giants and startups. He now resides in Rochester, New York, home of the garbage plate and, completely coincidentally, the World Video Game Hall of Fame. He can be reached at nstatt@protocol.com.
Protocol | Policy

Lina Khan wants to hear from you

The new FTC chair is trying to get herself, and the sometimes timid tech-regulating agency she oversees, up to speed while she still can.

Lina Khan is trying to push the FTC to corral tech companies

Photo: Graeme Jennings/AFP via Getty Images

"When you're in D.C., it's very easy to lose connection with the very real issues that people are facing," said Lina Khan, the FTC's new chair.

Khan made her debut as chair before the press on Wednesday, showing up to a media event carrying an old maroon book from the agency's library and calling herself a "huge nerd" on FTC history. She launched into explaining how much she enjoys the open commission meetings she's pioneered since taking over in June. That's especially true of the marathon public comment sessions that have wrapped up each of the two meetings so far.

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Ben Brody

Ben Brody (@ BenBrodyDC) is a senior reporter at Protocol focusing on how Congress, courts and agencies affect the online world we live in. He formerly covered tech policy and lobbying (including antitrust, Section 230 and privacy) at Bloomberg News, where he previously reported on the influence industry, government ethics and the 2016 presidential election. Before that, Ben covered business news at CNNMoney and AdAge, and all manner of stories in and around New York. He still loves appearing on the New York news radio he grew up with.

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