A Bi-National Look at Covid-19 Financial Relief

Multiple sources of financial relief are available for cross-border tech startups in the United States and Israel

Written by Yael Hauser and Ayalah Teitelbaum.

In light of the recent coronavirus outbreak, governments around the world have been creating financial relief programs for various businesses in general, and startup companies in particular. The US government and the Israeli government have taken very different approaches to such relief, with companies who have a presence in each country potentially able to take advantage of both approaches.

One particular program, the Paycheck Protection Program (PPP), created by the American federal government and carried out by the Small Business Administration (SBA) is an example that has gotten a lot of attention. The program is intended for any small business adversely affected by the COVID-19 outbreak, and is not limited to specific domains such as a hi-tech startup. A business can apply for a loan under the PPP if it has 500 employees or less, and will continue to employ workers through the crisis.

The SBA will supply forgivable loans to these companies in order to cover expenses such as payroll, rent or mortgage, employee benefits, interest payments, utilities and more for their US-based operations. The program also includes multiple tax benefits. In order to apply for these loans, a company must declare that it requires the loan in order to maintain the ongoing activities of the company, that the money is intended for the aforementioned purposes, such as rent or payroll, and isn’t receiving any additional SBA loans for the same purpose or receiving any PPP funding between February 15th, 2020 and December 31st, 2020. However, some VC-funded tech companies have had trouble in some cases obtaining funding under the PPP program due to affiliation rules which may in some cases aggregate the venture capital firm’s employees and employees of the VC’s portfolio companies with the employees of the tech company for purposes of qualifying as a small business.

The US government allocated $349 billion dollars for the PPP. After an initial run, funding for this program ran out, with many businesses rushing to apply for immediate monetary relief. The US Congress has since passed another stimulus package, increasing the funding for the PPP by an additional $310 billion dollars, and the SBA is reviving the lending under the PPP. However, since the initial rush, a number of companies have begun returning some of the funding, some due to public perception of the receipt of funds, and some due to a retroactive change to the certification criteria. Last Friday, the SBA issued a clarification and the US Treasury followed with publication of new guidance regarding the interpretation of the certification of “need”, and applied this standard retroactively, so that if a company has other sources of funding, such as venture backing, the company would not necessarily qualify for a PPP loan. This means that borrowers who have taken money, but don’t meet the new interpretation of need, are required to repay the SBA loan in full before May 7th, in order to avoid liability with respect to that certification.

In Israel, the Innovation Authority (IIA) recently released details of a new grant program for tech companies in light of the coronavirus outbreak. The program is aimed specifically at tech companies with a high chance of long-term success, but with immediate monetary cash flow problems, a.k.a. a short runway. It is meant for companies with significant IP assets or significant monetary worth, and provided based on ongoing R&D within the company. This means that if a company has multiple products in development, it may be able to receive multiple grants.

The total amount of R&D funds available per company is NIS 15 million, and in order to qualify for the grant the company must meet a few criteria. The company must have limited financial capability for no longer than 12 months following their application date, calculated as the company’s remaining cash (minus current liabilities), combined with projected receipts from income and investments, divided by the burn-rate. If the company is eligible, the IIA may provide funding for 20%-50% of the approved R&D expenses. In addition, the IIA will provide an advance of up to 50% of the grant for companies that have presented the full complementary funding for the approved grant. Companies that have requested R&D grants for the first quarter of 2020 (January 1st, 2020 — March 31st, 2020) or for the year 2020 under certain programs, along with companies that lack cash flow and balance sheet information (including salary payments at least 3 months prior to the application date), are ineligible for the IIA’s grant program.

Tech companies can apply for such a grant from the Innovation Authority until September 15th, 2020. The IIA will grant money based on the level of technological innovation of the products, the financial challenges and likelihood of the company pulling through the crisis, and the level of technological and employment contribution of the company to the Israeli economy (particularly the extent of the company’s activity and production in Israel). An additional percentage of funds will be allocated to companies in certain development areas (10%) and areas surrounding Gaza (25%). The main benefit of this program is that the IIA will fast track the application and provide an answer within 4 weeks; however, the usual restrictions normally attached to IIA grants would still apply, such as royalty repayment, IP transfer restrictions, etc.

Both programs may benefit tech companies, but offer different kinds of financial relief during these troubled times. The IIA program has only just been opened for application, whereas the American alternative has been around for several weeks with a new round of funding already in effect. The criteria for applying for the programs is different, since in Israel, the program is geared towards tech companies with very specific financial and business prerequisites while the PPP is not limited to specific business types but demands that, other than with regard to certain industries, the company be smaller than 500 employees (including its affiliates). The PPP certainly doesn’t require the same IP criteria as the IIA program, and also has a much larger budget for allocating funds, without the requirement for matching the grant and with the possibility of complete loan forgiveness.

With both Israeli and American governments working towards helping small businesses, a typical hi-tech company with R&D activity in Israel and additional activity in the United States that might not meet the standards of one program may be able to apply for the other, or both. If eligible, it is possible to apply for both programs, provided a company meets the standards for each one. If you are a startup company with strong IP and R&D but require some financial assistance due to lack of reserves, you should consider applying for the Innovation Authority grant program as well as checking your eligibility for the PPP loans, as available. In both cases, time is of the essence both due to the needs of the business and due to availability of funds under the applicable programs.