The Paycheck Protection Program (PPP) designed to loan money to small businesses affected by the pandemic-induced economic downtown kicked off less than three weeks ago—on Friday, April 3—and the $349 billion stimulus effort has already run out of money. (Though Congress is reportedly close to a deal to reload the program with fresh billions.) Here’s how some Triangle entrepreneurs and the venture capitalists who advise them decided whether to apply for the PPP loans or not.
Before many venture-backed startups could apply for the loan program, they had to be sure they qualified as small businesses, said Jesse Lipson, Founder and CEO of Raleigh-based Levitate. According to the Small Business Administration (SBA), a small business has less than 500 employees and meets other specific criteria. But sometimes minority investors (think a private equity or venture capital firm) can be legally viewed as part of the company, depending on the agreements they have, thus making a startup technically part of a larger business and therefore ineligible.
Because of this legal murkiness, Lipson and his team focused a lot of their time talking with their lawyers and looking at their documents when the PPP came out. They wanted to make sure they were legally eligible as a small business. When they realized they qualified for the program, they applied as soon as they could.
But once Lipson started talking to his investors and board members, he decided not to go forward with the loan.
“The thinking of startups has been evolving pretty rapidly,” Lipson said, “just from the day PPP was announced—where I think most startups thought they would apply, and over time, as everybody’s had more time to absorb it and talk about it internally and with their investors, there’s been a lot more nuance.”
Lipson decided the loan was not necessary to his business because, while the stimulus would help Levitate during this precarious time, he had no plans to make layoffs. He and his team have officially let their bank know that they will not go forward with the loan.
This tough decision was not uncommon for many startups. Jason Caplain, Co-Founder and General Partner at Durham-based Bull City Venture Partners, said he encouraged his portfolio companies to carefully consider whether they needed the loan before going through with it.
“This program was designed to help companies that are distressed with things like payroll and rent,” Caplain said. “I think the important thing here is that as a founder and CEO, you’ve got to represent in the agreement that you took these dollars because of that. Because of this downturn. Because your business has been negatively impacted. There’s no such thing as a free lunch or free money.”
The legal wording in the PPP puts a lot of businesses in a gray area, said Derek Colla, a lawyer at Cooley LLP, an international law firm based in Palo Alto, Calif., that specializes in technology and life sciences companies. There are some businesses that absolutely need the loan, there are businesses that absolutely do not—and then there are those businesses for which the answer is ambiguous. Many local startups fall into that last camp.
What is the “price” for taking a loan you may not necessarily need? It’s still hard to tell, Colla said. However, it is a simple fact that knowingly being fraudulent could send you to jail. There is a chance that companies that take the loan get audited, or the program could be changed retroactively like the TARP loans from 2008, made during the peak of the Great Recession. And even if there are no legal ramifications to taking a loan you don’t need, there is a PR risk should any pesky reporters (like the ones at GrepBeat) find out.
“I would hate to be the business that is profitable and growing still [but takes the loan],” Caplain said, “while the local pizza shop around the block closes up.”
Michael Doernberg, CEO and Co-Founder of Morrisville-based eMinor—which has built three software platforms in different industries including ReverbNation and Adwerx; we ran a Q&A with Doernberg here—considered all of these aspects and more when he decided not to take the loan. In a time of tremendous uncertainty, he wanted to do what was best to protect his business and his members.
Doernberg’s company is faring the storm well right now, but he tried to imagine a future where the economy further plummets and deeply damages all of his businesses regardless of industry. In this scenario, Doernberg considered what would happen if his company took the loan as a form of insurance.
“What would happen if you took a bunch of money as a loan,” Doernberg said, “you used it to pay payroll, but you didn’t see a marked decrease in the revenue side of your business? Then you apply for loan forgiveness, and all of a sudden your net income on your business for those months went sky-high because you just got free money. Could you legitimately make a claim for forgiveness?”
If you couldn’t, Doernberg said, you could hold onto the money or you could pay the government back, but then there was no purpose in taking the loan and taking the money from other businesses that desperately need it right now.
Because make no mistake: there are many, many small businesses in obviously dire straits—think bars, restaurants, gyms, brick-and-mortar retail stores, etc. That’s who the PPP is designed to help first and foremost.
“If you truly need the money, you should absolutely take it,” said Doernberg. “I think it’s the right thing for companies, I think it’s the right thing for the economy, and I think it’s the right thing for the employees.”