What should startups know about PPP?
How long is the loan application process for the Paycheck Protection Program? What do founders need to provide? What should VC-backed companies do? Orrick partner Albert Vanderlaan has answers
The CARES Act rolled out, and everyone has questions. What should startups know about the US Small Business Administration (SBA) Small Business Loans and Paycheck Protection Program (PPP)? The Data Future Lab brought in our partner Orrick, which offers NYU Tandon Future Labs startups free legal counsel, to find out how entrepreneurs can tap into the $349 billion designated to PPP under the $2 trillion CARES Act. Albert Vanderlaan, a partner in Orrick’s Technology Companies Group, joined our founders last week on a Zoom call to give us an overview and go through questions.
**All information is as of the date of the Q&A session (April 6, 2020). Loans under the PPP are unprecedented and are being made under law that is uncertain. Any advice with respect to PPP matters should be considered preliminary and should not be relied upon until such advice is confirmed following review of additional rulemaking and guidance from applicable authorities.**
The basics
April 3, 2020 was the first day companies were able to apply. The program is on a first-come, first-served basis, so apply as soon as possible.
The PPP aims to have employers with less than 500 employees retain headcount during the COVID-19 pandemic, thereby reducing unemployment. PPP retroactively applies from February 15, 2020 through June 30, 2020, with a max individual loan amount of $10 million.
The SBA funds are used to cover payroll costs, and most mortgage interest, rent, and utility costs, and must be used over the 8-week period after the loan is made. A rule of thumb to know what’s not forgivable: When you reduce headcount, employees, salaries, etc., you reduce the forgiveness portion of the loan.
Interest on mortgage obligations, utilities, and rent payment are included, but not more than 25% of the forgiven loan amount can be used for non-payroll costs.
The lenders will be looking for payroll documentation proving that wages and salaries (up to $100,000) are not reduced below 25%.
Q&A with Albert Vanderlaan, Partner, Orrick Technologies Company Group
How long is the loan approval process?
SBA says 2–3 days, but that sounds a little too fast. Lenders might take approximately 2–3 days to submit the application to the SBA, so it’s closer to 7–10 days for an application to go through the process, at a minimum.
Which forms are being requested by SBA lenders? What do companies need to have ready?
Apart from the application form, you’ll need formation documents, governance documents, investment documents, payroll receipts and taxes, revenue, and any insight into your current balance sheet. My recommendation is to start with an existing banking relationship, if you have one with an SBA-associated lender or organization.
Do the lenders require photos of major shareholders and/or driver’s licenses or social security numbers?
The standard application is, of course, required, but I have heard of lenders asking for additional items. I’ve heard of some asking for driver’s licenses or other individual ways to conduct background checks. There’s no hard-and-fast-rule.
What do you know about non-bank SBA lenders? Are they reputable?
The usual Google search and checking in with your peers is the best course of action in terms of lenders. All SBA-approved lenders are federally-backed and SBA-backed. Heed the usual warnings, though — a brand name is usually going to be a bit safer.
What should VC-backed startups do?
A startup with an investor on the board of directors may be affiliated with the VC’s other startups and their employees — potentially bringing up employee headcount to over 500, rendering the startup ineligible for PPP. One option is to include the VC’s portfolio to show that there aren’t 500 employees there — but your investor might not want this information to be in the public domain. You should speak to your legal counsel and draw up new contracts clarifying the relationship between your investor and startup, and apply for the loan after these agreements are signed.
What will founders need to ensure that the loan is forgiven?
Employee and salary spending need to be maintained, or as much as reasonably practicable for the business. Document everything. Save all digital files, save all hard copies. There is a criminal liability attached to this loan for claims and certifications that are not true. Assume that there will be a lot of government oversight and watchdogs on this program, so keep all your paperwork.
Are founders included under PPP?
Founders who are on the payroll as paid employees are included. If they’re not on payroll, this would be a discussion with the lender.
Are employees who make over $100,000 included?
Amounts up to $100,000 are covered. The salary amount over that will be excluded.
Does PPP cover international founders or non-residents based in the United States?
Anyone who is not a US citizen is excluded from the number of employees covered, and is not counted for the forgiveness portion of the bill. PPP is a US-centric bill and loan.
Is credit history required to apply? For companies with international founders and American employees, these founders might not have credit history.
You do not need a credit score to apply for these loans. It is not a requirement, though certain lenders may require something else in that regard.
Are contractors or consultants covered under PPP?
Payments to contractors/consultants are not used to make certain calculations under PPP. If you’re working with US-based contractors, advise them to apply for their own loans, if applicable. The idea is that each company applies for its own employees, and independent contractors should be applying on their own as self-employed individuals.
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Compiled by Michael Frank (michael.frank@nyu.edu)
