A pair of lawmakers from both sides of the aisle introduced legislation Monday in the House that would ensure that more venture-capital-backed startups are eligible to receive small-business loans under federal stimulus, following a weekslong lobbying blitz from the VC and startup world.
The bill, co-sponsored by seven other lawmakers, would waive "affiliate" rules for startups that have no majority shareholder, fulfilling the wish of tech trade groups including the National Venture Capital Association. Startups for weeks have complained they are being denied the government's small-business loans, or not applying altogether, because the rules require companies to count investors and their other affiliates under the employee headcount, which is capped at 500.
The rules, meant to ensure that larger firms do not exploit Small Business Administration loan programs like the new Paycheck Protection Program, deem a company an affiliate of another when one controls, or has the power to control, the second. That has left many startups, which are frequently backed by VC firms, unable to receive the loans.
"Startups, like all small businesses in our country, are experiencing a trying time. Unfortunately, many have laid off employees while others have shuttered their businesses completely," said Rep. Anna Eshoo, the Silicon Valley Democrat who co-introduced the bill with Republican Rep. Cathy McMorris Rodgers, who represents a part of Washington state that includes Spokane. "My legislation ensures that startups can access the Paycheck Protection Program to keep employees on payroll or rehire those they've recently laid off."
The Caring for Startup Employees Act of 2020 would bar startups from using money they received under the new waiver to pay their investors.
Since the PPP launched in March, the Department of the Treasury and Small Business Administration have issued a stream of sometimes confusing guidelines for who can seek the money; the loan is forgivable if certain criteria is met. Some of the rules deterred startups from applying for loans — and even prompted a wave of startups to retract applications. A number of startups have asked to change investors' voting and control terms to make them eligible for the grants.
In a report last month, the National Venture Capital Association predicted that startups will continue to do mass layoffs, with up to 80% cutting between 10% and 50% percent of employees over the next few months. The group says roughly 300 U.S. startups have laid off more than 30,000 employees.
"Startups and small businesses are the engines of our economy, but right now, they are being hit hard through no fault of their own," McMorris Rodgers said in a statement. "In order to support American ingenuity, we need to ensure these startups can weather this storm so they can continue to grow, innovate, and enrich our communities."
House Speaker Nancy Pelosi, who has continuously called for a startup-friendly fix to the PPP, is expected to unveil the Democrats' proposal for the next COVID-19 economic stimulus package later this week. Pelosi's office did not immediately respond to an inquiry about whether the package will include a fix to the PPP for startups.
