Why startups should be highly wary of taking the SBA PPP loan and why we passed on it

The SBA’s Paycheck Protection Program (PPP) program has been a well intended but deeply confusing and ill-worded rescue package for companies with <500 employees, including the majority of startups in Silicon Valley and beyond.

I run a startup called Zumper in the residential rental industry. Despite having recently raised a large round in Q1, we explored applying for the PPP loan when it was first announced. There were several reasons why we thought we were a good candidate:

1. Our real estate industry was hit very hard by Covid19 and the subsequent shelter-in-place policies.
2. The legislation, as worded, is about saving jobs. The PPP loan would invariably help us do that to ride out the current turbulence. In fact, it would have allowed us to grow the size of our team, helping some people who are currently unemployed find their new home at Zumper. That was an attractive narrative, and something we felt was within the spirit of the legislation.
3. Despite all the ink spilled about VC-backed startups with regard to affiliation rules and voting rights, we seemed to fit the criteria related to investors (no-one with over 20% share) and board governance/voting rules (no one investor could block a major action).
4. Most startups seemed to be applying, agnostic as to their capitalization. We wanted to throw our hat in the ring too.

However, it has become increasingly clear that startups like us should not take these loans, and so we are withdrawing.

We do not want any congratulations. We are well capitalized and so this was an easier decision for us to make than for most.

I’m sharing this in the hope that fellow startup leaders may make the same call for the following reasons:

1. We always struggled with the ethics. The (now) two rounds of PPP loans are capped, and so the use of funds is zero sum. Other companies in the US, almost all not venture-backed, simply need it more.
2. Is this TARP v2? There was an enormous public investigation and backlash in the years following the 2008 crisis. If you’re already on the fence ethically, do you really want to be exposed to that?
3. The SBA’s language has been pretty vague. Until recently. Even just today they published the following guidance (see below) which extends beyond just saving jobs and into how much you really need it to survive in general. TLDR: You’d better be damn sure you qualify by the ‘spirit’ of the legislation or else they’re gonna come at you. In particular, check out the last paragraph which hints at a forgiveness period if you’ve already taken it but, given the clearer guidance, shouldn’t have. Read: We will prosecute you if you didn’t really need it.

SBA Q&A guidance issued on Apr 23rd 2020

I know there are hundreds, probably thousands, of board calls going on each day this week about whether startups should take this or not. Everyone is trying to do the right thing.

If you’re on the brink of going out of business and letting your team go, you should consider taking it.

If you’re not on the brink, you just shouldn’t take it. Let’s join together in this. Let’s lead from the front and look elsewhere for the savings and business model changes you need to get through this. And let’s ensure other companies who need it more receive it.

anthemos