As small businesses race to apply for Paycheck Protection Program loans from the Small Business Administration, many venture capital firms and startups are figuring out how they can participate, if at all. 

“We have companies that would fall into the category of benefiting from the [SBA] program,” said Karim Gillani, general partner at the Luge Capital. “The issue really stems from the fluidity of the situation and the confusion that companies have in navigating how this whole program works.” 

At issue is whether startups, many of which have investors on their boards, qualify for funding under the current SBA loan program. Because investors on startup boards are often affiliated with other companies that have more than 500 employees, the cutoff for PPP loans, some small startups are barred from applying for loans. The so-called “Affiliate Rule” is meant to stop startups with healthy finances and deep-pocketed investors from getting a government grant, but many venture capitalists feel startups suffering from the pandemic shouldn’t be punished just because they are venture-backed.

Gillani said it is relatively easy for a small startup to cross the 500-person threshold if its investors sit on the board and have a large swath of other portfolio companies, an unfair categorization for a startup that might only have a handful of employees.

“Each member of the portfolio is an individual entity,” he said. “Having shared investors alone doesn’t roll them up in the same entity.”

The language of the legislation should change to include venture-backed startups that are facing layoffs due to the pandemic, Gillani said.  

Propel Venture Partners’ portfolio companies, meanwhile, can apply for PPP loans because Propel is a Small Business Investment Company (SBIC), which is an investment company already regulated by the SBA. Ryan Gilbert, a partner at Propel, said the firm is communicating with portfolio companies to engage with their council and banks to apply for PPP loans, if necessary. He agrees that, in general, startups should not be excluded from the SBA loan program just because they have investors from large firms. Many companies that can apply for the loans, like restaurants, have large investors as well, Gilbert said.  

See also: Investors: Coronavirus could shrink startup valuations   

Some investors have taken to Twitter to discuss the legislation. Mark Suster, a partner at LA-based Upfront Ventures, said on Twitter there are rumors the SBA will amend the program this week.

“Until fixed, it’s nearly impossible for most VC-backed startups to apply because it would require huge legal lift to amend all of the charters of these companies to change control provisions,” he wrote. He added that early-stage startups shouldn’t take PPP loans unless they are actually affected by the pandemic. “Just taking a handout of ‘public money’ intended for people who need it is wrong,” he wrote. 

Gilbert said banks must step up to the task of helping small businesses apply for SBA loans. He said banks like the Independence, MO.-based Blue Ridge Bank and the Minneapolis-based Sunrise Banks are taking on new clients to help them apply, while the Santa Clara, Calif.-based Silicon Valley Bank is working with business customers that cannot repay loans in the next six months. Many banks, however, are not participating in the SBA loan program, said Gilbert, so that leaves small businesses scrambling for other options. 

“I hope there is going to be a lot of review by regulators and elected representatives,” Gilbert said. “They should bring the banks in front of them and ask, ‘Why didn’t you lend during this crisis?’”