The $2 trillion economic stimulus package signed by U.S. President Donald Trump expanded the existing lending program of the Small Business Administration (SBA) to help small businesses survive the COVID-19 pandemic. But the program comes with the so-called affiliation rules which require businesses that are majority-owned by venture capital (VC) or private equity firms to include the employees of other companies in their investors’ portfolio in their total employee counts. The stimulus package is open only to businesses with less than 500 employees.
As an example, if a VC firm funded or invested in two startups each with 300 employees then both companies will not be qualified to apply for the financial relief package. Startups funded by multiple VC firms that are “larger compared to other stock holdings” are not eligible for the stimulus program. Small companies in the cannabis industry are excluded from the program. The affiliation rules also present a serious problem for tech startups past a certain growth stage. Most tech firms are VC-backed.
According to digital startup incubator 1871’s CEO Betsy Ziegler, the exclusion of startups from the stimulus package could be potentially devastating to the broader economy. She explained that if the startup engine is broken then the job creation engine is also broken. VC-backed startups employ around 2.7 million people.
MATH Venture Partners’ managing director Troy Henikoff added that unlike corporate subsidiaries, which were the original target of the affiliation rules, VC-backed startups cannot simply ask their investors for more funding. VC firms do not usually have available money to do that.
The National Venture Capital Association (NVCA) is already coordinating with the SBA and the Treasury Department to clarify or relax the affiliation rules to make VC-backed startups eligible for the stimulus package. In its open letter to the SBA, the NVCA said that the rules create confusion about eligibility and can cause a delay in the loan application process which in turn could exacerbate layoffs.