Call the Lawyer: Answers to Entrepreneurs’ Top Questions in a COVID-19 WorldFeatured

I’m a corporate lawyer at Fenwick & West LLP, one of the top tech law firms in Silicon Valley. When sh*t hits the fan (or a global pandemic grinds the economy to a halt), people call their lawyers – to figure out what to tell their employees, how they can cut costs, where they can find funding, whether they’re eligible for government aid, what risks they need to disclose to their investors. I like to think we provide a sense of stability in uncertain times by helping people to make sense of chaos, put structure around problems and analyze their options. One of the things I love about working at a big law firm that specializes in a sector (in our case, tech and life sciences) is that you’ve got a bird’s eye view on what’s happening in the industry. Between addressing real-time issues for clients and talking to colleagues, you can see economic trends and funding strategies play out. Here are some of the top questions we’re fielding from our early-stage start-up clients in the time of COVID-19. What’s the deal with PPP loans? Is there any money left? What’s this I hear about “affiliation rules” for VC-backed businesses? More money just became available. Act fast if you’re eligible. Let’s address this one first, because time is of the essence, ladies. By this point, I hope all business owners have heard about and considered the Paycheck Protection Program loans. The Coronavirus Aid, Relief, and Economic Security (CARES) Act originally authorized $350 billion in aggregate loans to be administered by the Small Business Administration (SBA). Those funds were exhausted by April 17, but on April 24, the President signed another bill authorizing an additional $310 billion in funds for PPP loans. The SBA resumed accepting loan applications on April 27, and eligible businesses (those with fewer than 500 employees) should apply as soon as possible before finite program funds are again depleted. The new money may be gone in a matter of days. For business owners looking to apply, here’s a detailed overview of the program that my colleagues prepared ( eligibility could depend on whether you are “affiliated with” your investors. If you have institutional investors on your cap table and, especially, on your board, you need to be mindful of the SBA’s “affiliation” rules. If you’re “affiliated” with an investor, you have to count the employees of that investor and all of their other affiliate companies to determine if you are under the 500 employee threshold for loan eligibility. Under the rules, your company could be deemed to be “affiliated” with an investor if the investor owns more than 50% of the equity in the company or otherwise exercises “negative control” over the company by having rights under your governing documents to block certain day-to-day actions like declaring dividends, incurring debt, determining employee compensation, or entering into certain contracts or joint ventures. If you’re in this boat, work with your lawyer to analyze your certificate of incorporation, investors’ rights agreement, and any other documents granting governance rights to investors. We’ve seen that some VCs with “negative control” rights have been willing to amend their portfolio companies’ governing documents to remove the problematic provisions in order to make companies eligible to apply for loans. If you use the money for payroll and other covered expenses, the debt will be forgiven. The loans will have a 2-year term and carry a very modest interest rate. If the loan money is used for proper purposes, the entire amount of the loan can be forgiven. Proper purposes include payroll costs, which are limited to cash compensation of $100,000 annualized per employee, covered mortgage interest, covered rent and covered utilities. But the forgiveness rules are complicated (here’s a good overview: and business owners should be careful to structure payments over the coming weeks to fit within the forgiveness framework.It's not just “free money.” Of course all entrepreneurs would prefer to use government grant funding instead of burning through the “expensive” money you raised with dilutive equity. But you need to “need” it. As part of the application, you have to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” For your neighborhood bakery with low cash reserves, that’s an easy statement to make. For venture-backed businesses that tend to raise 12-24 months of runway at a time, the analysis is more complex. You may have some money still in the bank, but you’ve experienced a dramatic hit to your revenue due to COVID-19 and feel very uncertain about your ability to raise more money once you near the end of your runway. As a general rule, we’re advising clients that if you have more than 6 months of runway, have not had your revenues impacted by the pandemic, and have well-known VCs on your cap table, you should think seriously about all of your options before taking money from the program. Companies with prominent investors with deep pockets will probably get viewed negatively in hindsight for taking government funds instead of raising money through traditional venture channels. There’s a huge amount of scrutiny on these loans in the public arena, and there will be government oversight and enforcement action for improper use of funds. How can I conserve cash? What will happen if I don’t pay certain expenses? All businesses – from tech start-ups to mom-and-pop shops – should be focused on conserving cash and bolstering their balance sheets. Find cash where you can get it. Take a hard look at all of your expenses and see what you can cut or renegotiate. Contracts are meant to allocate risk, but this wasn’t a risk that the business community saw coming and prepared for. There’s always a chance that your counterparty could sue over nonpayment on a contract, but businesses generally want to avoid the hassle and expense of litigation and find alternative solutions. You and your contract counterparties are probably equally impacted by the pandemic, and you can share in the pain by finding a plan that keeps you both afloat. Suppliers want to keep their customers and would rather get some cash than cancelled orders. Can you renegotiate payment terms? If they’re unwilling to budge, I expect there are many eager competitors offering great deals to pick up new business right now. Your landlord probably doesn’t want to deal with the hassle of finding a new tenant or having a property potentially sit empty for months in a down market. Can you defer or lower rent payments in exchange for extending the lease? No one wants to lose a long-term source of income so vendors and landlords may be flexible about deferring or accepting reduced payments. It’s worth a conversation. Those who don’t ask, don’t get.What’s going on with start-up financings? What are my chances of raising money right now? Investors have been distracted, but deal activity is picking back up. New deal activity stalled for a while. Many VCs went into triage mode with their existing portfolio companies, trying to help them figure out how to cope with revenue streams suddenly drying up or, in the case of many life science companies, capitalize on coronavirus-related opportunities. A lot of VCs are still in that mode, but I think people are trying to get back to some semblance of “business as usual.” People are doing pitches over Zoom now. We are seeing new term sheets come in. It may be easier for early-stage companies to find funding in this environment. Series B and beyond companies are, for the most part, expected to have revenue. And once you have revenue, your valuation is tied to some multiple of that revenue (depending on your business model and industry) and to the general market landscape. When your revenue and the economy take a hit, so does your valuation, and with so much uncertainty right now about how long the country will be under shelter-in-place directives and what the economy will look like when we finally emerge, it seems people are wary of pricing big deals right now. They want to wait to see where the bottom is first before they assign a value to a company. But those factors are less at play for early stage, pre-revenue companies. They’re raising money on the potential of nascent technology they’ve yet to develop, and their value isn’t as impacted by macroeconomic headwinds. By the time they build out their products and find product-market fit, we could be in another bull market (here’s hoping!). VCs want to stay active and put money to work, and many of them are finding opportunities to do that with early-stage companies. It’s an investor’s market. Before the pandemic, the tech industry was awash with record amounts of capital from venture investors and other crossover private equity and hedge funds. For several years, entrepreneurs held the cards in financing negotiations and were raising money at eye-popping valuations with strong founder-friendly terms. With founders now desperate to shore up cash while they can get it, the tables have turned. Investors are seeking stronger terms and are more focused on downside protection. They recognize that if they are putting in money now, particularly into a later stage company, the company may need to raise money again later at a lower valuation. And investors want to hedge their risk if that happens. We’re seeing VCs asking for investor-friendly terms, like liquidation preferences and full-ratchet antidilution protections, that were common after the 2008 financial crisis but had gone by the wayside in years since. Investors are looking for the companies that will be made stronger and more resilient by this “baptism of fire.” Many great companies may be born out of this down cycle, and investors are looking for them. History suggests that an economic downtown can actually be a great time to start a new business (Cisco, Google, Airbnb and Stripe, to name just a few, were all founded during downturns). In boom times, marginal ventures get funded, companies can spend a ton on customer acquisition costs and take a long time to get to cash flow positive. In down times, founders have to be scrappier, more creative and more disciplined. They have to focus on business fundamentals sooner. Teams bond and gel through crisis. And new ventures have far greater access to talent because of layoffs, furloughs and hiring freezes at the bigger companies with whom they’d usually be competing for potential employees. A financial downturn can be a fertile ground for innovation and team building – and a crisis is a terrible thing to waste.
Thanks for sharing this Caroline! I see you’re back with a vengeance. Hope the baby is doing well 😚
Thanks, Quinn! And congrats to you for getting Quadrant Eye off the ground! Will look forward to following your progress
Thank you!!> As a general rule, we’re advising clients that if you have more than 6 months of runway, have not had your revenues impacted by the pandemic, and have well-known VCs on your cap table, you should think seriously about all of your options before taking money from the program. Companies with prominent investors with deep pockets will probably get viewed negatively in hindsight for taking government funds instead of raising money through traditional venture channels. I especially appreciate you calling out the ethics of venture backed companies with considerable runway applying for PPP.
@teresaman glad you found this helpful! Yes, it's definitely an issue that we expect to get even more press coverage in the coming weeks. The SBA put out new guidance regarding companies with "adequate sources of liquidity" last Thursday. For those that would like more information, my colleagues published an update for the start-up/venture community yesterday:,-Provides-Brief-Window-of-Amnesty-for-Return-of-Funds.aspx
This is a very insightful post. Thanks for sharing, Caroline!
Hi Caroline, I have set up community version of my legal-tech for lawyers to contribute this stuff into a wider legal founder KM base. Feel free to join at
Thanks, Rachel. I'd like to check that out - but the link isn't working?
Oops! Trigger happy. That was our Covid Senate this is makelawbetter. - re your comment on term sheets I just got asked by a prospective investor for the right to force the sale of the company in four years time plus anti-dilution. And this is for a convertible note when he will earn 8% and will only hold 10% of the company. Too rich. Need to pivot and re-think.