PPP eligibility turned on control as well as headcount
Investor rights and affiliated businesses could determine whether a startup qualified for emergency payroll support. Its own employee count was only the beginning of the assessment.
A startup could have a modest payroll and still face a difficult eligibility question when the Paycheck Protection Program opened in April 2020. SBA affiliation rules generally required an applicant to consider related businesses alongside itself. For a company with venture investors, the answer could depend on voting arrangements, board rights and other forms of control that were less visible than the number of employees on its own payroll.
The programme provided emergency support for jobs during a severe public health and economic crisis. Its speed did not remove the need to establish eligibility or make the required certifications. Founders and investors had to revisit financing documents negotiated in an earlier funding round to determine whether the company could seek payroll assistance.
Applications began while guidance was still developing
The CARES Act established PPP within SBA's loan framework. The initial rule explained the programme's payroll purpose and the potential forgiveness of qualifying loans. It also allowed lenders to rely on borrower certifications and specified supporting documents. That accelerated delivery while leaving the applicant responsible for representations that could have substantial consequences.
- 27 March 2020
CARES Act enacted
The legislation established the emergency Paycheck Protection Program.
- 2 April 2020
Initial rule issued
SBA issued its initial implementation rule and released the borrower application.
- 6 April 2020
FAQ on minority control published
FAQ 6 explained the effect of irrevocably relinquishing specified blocking rights.
- 15 April 2020
Federal Register publication
The initial and affiliation interim final rules appeared in the formal publication record.
Enactment, initial guidance and formal publication were separate steps. SBA's official FAQ compilation preserves the original publication date of FAQ 6.
SBA's initial and affiliation rules appeared in the Federal Register after the borrower application and initial guidance had already been released. Founders were therefore making decisions before the formal publication record was complete. Applications and guidance developed in quick succession, leaving little time to resolve complicated ownership and control questions.
Whose employees belonged in the calculation?
The familiar threshold was 500 employees, subject to the programme's other eligibility routes and applicable industry standards. The affiliation rule said that, in most cases, a borrower would be considered together with its affiliates. It identified stock ownership, overlapping management and identity of interest as relevant factors. The analysis therefore began with the legal and managerial relationships between businesses, before the applicable size calculation could be completed.
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| Comparison | Question | Relevant evidence |
|---|---|---|
| Size and affiliation | Does the applicant meet an available eligibility route? | Ownership, control rights, management relationships and the applicable size calculation |
| Necessity | Can the borrower certify the necessity of the loan in good faith? | Its economic uncertainty and the support needed for ongoing operations |
| Forgiveness | Does use of the loan satisfy the applicable forgiveness conditions? | Permitted expenditure, payroll records and the programme rules in force |
Under the initial programme rules, passing an affiliation review did not resolve the necessity certification or forgiveness requirements.
For a company with institutional investors, a useful first step was to identify who possessed control rights and which other businesses that person or entity controlled. A fund's presence on the capitalisation table did not by itself establish that every investment belonged in one affiliate group. Equally, a small percentage holding did not make the issue disappear. The governing rights and other affiliation grounds required examination.
A minority investor could have negative control
SBA's affiliation framework included a minority shareholder's ability to prevent a quorum or otherwise block action by the board or shareholders. That is why reviewing only economic ownership could give an incomplete answer. A financing agreement might allocate decision rights very differently from the percentage of shares held. Board procedures and shareholder agreements could become relevant evidence in an application that initially looked like a payroll exercise.
FAQ 6 addressed relinquishing those rights. SBA said an irrevocable waiver or relinquishment of the specified rights would mean the minority shareholder was no longer an affiliate, assuming no other relationship triggered affiliation. Both qualifications mattered. A temporary agreement not to exercise a right was not the irrevocable change described in the answer, and other control relationships still needed examination.
Companies needed to review the actual instruments, since investor consent provisions could have different effects. Changing rights required an assessment of the governance consequences as well as eligibility. An informal understanding offered little certainty about who could take or block the relevant decisions.
Exceptions had defined boundaries
The affiliation rule preserved statutory waivers for businesses with no more than 500 employees assigned a NAICS code beginning with 72 at disbursement, franchises assigned an SBA franchise identifier and businesses receiving financial assistance from a company licensed under the Small Business Investment Act's section 301. Those were particular categories. Private investment generally was not itself an exemption; ordinary venture backing should not be confused with assistance from a licensed Small Business Investment Company.
Two companies with similar payrolls could reach different results because their industry, financing source or control structure differed. Advice circulating between founders therefore needed to be checked against each applicant's circumstances. Another portfolio business's eligibility could identify an issue worth investigating, but the records still had to establish the company's own route through the rules.
Need and forgiveness remained separate
The initial rule required borrowers to certify in good faith that current economic uncertainty made the loan request necessary to support ongoing operations. It also waived the usual requirement to show that credit was unavailable elsewhere. Removing that requirement did not remove the necessity certification. Passing a size test could not answer that second question for the board.
Nor did eligibility make every dollar automatically forgivable. The initial rules tied forgiveness to qualifying expenditure and other conditions. A startup needed payroll and expenditure records in addition to its ownership analysis. Given subsequent changes to the programme, a review of a particular loan must use the rules and guidance applicable to that loan. The programme's initial terms were not its final version.
Governance documents became operating infrastructure
The episode exposed a practical cost of poorly organised company records. A board could need employment information, financing documents and a current account of control relationships on a short deadline. Maintaining those records made it easier to establish facts and involve the right advisers. It did not guarantee access to funding, but it reduced avoidable uncertainty during an already difficult decision.
For venture investors, the enduring implication is that negotiated control rights can affect a portfolio company's interaction with programmes outside the investment agreement. Those effects should be understood when rights are granted and reconsidered when an emergency exposes them. The financing relationship includes that responsibility alongside the provision of capital.
Sources
- Business Loan Program Temporary Changes; Paycheck Protection Program (opens in a new tab)
Small Business Administration, Federal Register
- Business Loan Program Temporary Changes; Paycheck Protection Program (affiliation rules) (opens in a new tab)
Small Business Administration, Federal Register
- Paycheck Protection Program Loans: Frequently Asked Questions, FAQ 6 (opens in a new tab)
Small Business Administration and US Department of the Treasury
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