The novel coronavirus pandemic is punishing some venture-backed startups, as lockdown orders jeopardize business plans years in the making. Revenue streams have evaporated overnight, leaving young companies desperate to cut expenses and attract more funding as investors tighten their wallets.
The federal government’s $350 billion small-business loan program could be a lifeline, offering low-interest loans that may be forgiven in some cases to pay employees and other expenses. After all, most startups meet the program’s best-known criterion—they have fewer than 500 employees.
But tapping these loans turns out to be complicated. Lawyers spent weeks puzzling over whether venture-backed companies could apply. To qualify, some startups have changed their bylaws or asked investors to accept diminished control over the company’s actions.
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On top of the rules, an unusual debate has broken out in Silicon Valley over the ethics of applying for help from a program designed to help Main Street businesses like restaurants, retail shops, and salons. Some venture capitalists have tried to dissuade startups in which they’ve invested from applying. Others see the program as a way to help their investments without putting more of their capital on the line during a global economic crisis.
“We’d heard from a number of people that it was, in their words, ‘free money.’ And it is most certainly not,” says Seth Levine, founding partner of the Foundry Group, a Colorado-based venture firm that has invested in Rover, Molekule, and other early-stage tech startups.
After a tense April 2 call about the relief program with more than 70 Foundry Group CEOs and CFOs, the firm urged founders to think twice before applying for the loans, writing in an email:
As you reflect, we think it is important to start by asking yourself “Was this relief package created for my company?” We’ve heard many of you tal