Rules on how to deal with affiliates/affiliations related to the 500 person threshold for the PPP loan program remain hazy and there's indication that further guidance is coming. Current determination as to affiliation by the SBA would presumably be made under existing statutes -- specifically 13 CFR 121.103. One of the major issues with venture-backed deal here relates to CONTROL. You must assume that all contingent equity rights (options, warrants, convertible notes, etc.) have been fully converted and then what entities have blocking rights (or other affirmative or negative control) in various situations. If an investor can block an action of the board or shareholders then they have control that would trigger an "affiliation" under SBA rules (same in an LLC for any operating agreement where an investor has a blocking right on the manager(s)).
We are also aware that one major bank is requiring applications to me the following representations and warranties:
1. No business which, when combined with the Applicant, would have more than 500 employees (or any higher number provided in SBA standards for the relevant industry): (a) owns or controls more than 50% of the Applicant’s equity, or (b) has, pursuant to the Applicant's charter, bylaws or shareholder agreements, the ability to prevent a quorum or otherwise block action by the Applicant board of directors or shareholders, or (c) has the ability to control day-to-day activities of the Applicant through its Board or Shareholders (including for example, setting employee compensation, hiring and firing of executives, and purchasing or selling equipment);
2. The Applicant is not one of the types of businesses ineligible for SBA business loans (see 13 CFR 120.110), nor is any owner of 20% or more of the business;
3. The Applicant has considered the SBA’s affiliation rules and included the employees of its affiliates (at any level) when determining its eligibility for this program; and
4. The Applicant has considered existing options, convertible securities, and agreements to merge when determining its eligibility for this program.
NOT LEGAL ADVICE
Please be advised that we have provided the information contained here as a courtesy and while we have sought to be as current and accurate as possible we do not represent the accuracy of anything contained here. Nothing contained here should be considered legal advice.