SSM
  • Home
  • News
  • Team
    • Teela Crosthwaite Smith
    • Lindsey S. Mignano
    • Kelly Lawton-Abbott
    • Seth Pardee
    • Jessica Ryland
    • Jennifer Junkin
    • Eric A. Cox II
    • Philip Omorogbe
    • Shinjini Ray
    • Jason Galek
    • Makell Morrill
    • Tyler Collins
    • Dana Short
  • Deck
  • Blog
  • Contact
  • Home
  • News
  • Team
    • Teela Crosthwaite Smith
    • Lindsey S. Mignano
    • Kelly Lawton-Abbott
    • Seth Pardee
    • Jessica Ryland
    • Jennifer Junkin
    • Eric A. Cox II
    • Philip Omorogbe
    • Shinjini Ray
    • Jason Galek
    • Makell Morrill
    • Tyler Collins
    • Dana Short
  • Deck
  • Blog
  • Contact
Search

blog

Startup and Small Business Industry Trends in the Time of Coronavirus

3/27/2020

 
Picture
Startups and small businesses are facing a new host of challenges and opportunities in light of Covid-19 and its the financial repercussions.  We write this blog to inform you, as a startup or small business founder, regarding the latest trends in the industry, and what you can do now to protect your business.

Trend No. 1: Financing Slow Down

Many of our clients were in the process of raising a pre-seed, seed, or Series A round in Q1 2020.  Unfortunately, due to the financial impact of coronavirus on the markets, many angel investors, seed or Series A stage venture capital firms (“VCs”), or corporate strategy departments in BigTech have pumped the brakes on financing early stage companies, despite the availability of capital to deploy.  

Deals are getting done, but at a slower rate and lower volume, and with increasing reliance on virtual technologies.  Moreover, for those companies that are able to successfully raise during the time of coronavirus or shortly thereafter, slower growth will likely negatively affect the company’s valuation in deal documents.  [FN1]  

Second, in a time where financing is dry, startups can also expect investor-friendly terms accompanying the typical convertible note or SAFE note raise (i.e., heavy discounts, lower caps, higher interest rates, and robust side letters with pro rata rights/rights of first refusal, information rights, etc.)  

Finally, there are concerns about whether a startup in the time of coronavirus should even be relying on the typical convertible note or SAFE note when raising less than $2M.  If the economy is slow, sales cycles are longer, and employees are less productive, there may be more disputes between early-stage investors and startups when it comes to meeting various milestones and financial targets, leading investors to decline conversion and insist on repayment.  The startup may not have the funds to repay. For this reason, it might be worth reconsidering priced rounds at this time, which allow less ambiguity about what happens in the future.

Trend No. 2: Taking out a Small Business Loan and/or Tax Filing Relief

As a result of the fact that many of the expected funds from raising a round are no longer in play or are delayed, at best, many startups and small businesses are looking to small business loans to help with expanding their runway.  The Coronavirus Aid, Relief, and Economic Security (CARES) Act includes a Small Business Interruption Loan program. The program would: 

  • Expand the scope of the Small Business Administration’s available 7(a) loan guarantees during a “covered period” beginning on March 1, 2020 and ending on December 31, 2020; 
  • Apply to most businesses that employ 500 or fewer employees; and 
  • Provide for allowable uses of a program loan such as (A) payroll support, including paid sick, medical, or family leave, and costs related to the continuation of group health care benefits during those periods of leave, (B) employee salaries, (C) mortgage payments, (D) rent (including rent under a lease agreement), (E) utilities, and (F) any other debt obligations that were incurred before the covered period.

To qualify, a small business or startup would need to show that: (1) the business was operational on February 15, 2020, and (2) the business had employees for whom it paid salaries and payroll taxes, or paid independent contractors, and (3) the business has been substantially impacted by COVID-19.  [FN2]  Sources indicate that business owners won’t have to provide personal guarantees or use all their available assets as collateral. There are no fees, and interest rates are capped at 4 percent.  [FN3] 

In addition to loans offering liquidity, companies may take advantage of delayed tax payments.  The IRS recently provided guidance in “Notice 2020-18 federal income tax return filing and payment relief” of measures corporate taxpayers can take in response to Coronavirus.  According to Eisner Amper: 

“[A company] ... with a federal income tax return or payment due on April 15, 2020, is eligible for relief under the Notice, including the postponement of the filing and/or payment due date to July 15, 2020 … The payment due is both 2019 federal income tax payments (including payments of tax on self-employment income) and 2020 estimated federal income tax payments (including payments of tax on self-employment income), regardless of the amount owed.  The return in question must be due on April 15, 2020 – the relief does not apply to federal income tax returns and payments due on any other date. A taxpayer does not have to be sick, or quarantined, or have any other impact from COVID-19 to qualify for the relief. One only needs to have a federal income tax return or payment due on April 15, 2020.”  [FN4] 

Regardless of financing options though, startups and small businesses should heed the advice of Sequoia Capital, and look for ways to cut costs,”shop around,” and negotiate invoices from third-party service providers.  [FN5] 

Trend No. 3: Inclusion of a “Corona Clause”

Whether in loan agreements or in covenants in merger or acquisition legal documents, you can expect the use of a “Corona clause,” or a clause that takes into effect the negative ramifications of Coronavirus on a company’s business.  

For example, specifically in negotiating loan agreements, this clause might have the effect of allowing companies to add back in lost profits or anticipated revenues that were not forthcoming due to “an extraordinary, unusual, infrequently occurring or non-occurring loss, charge, or expense” (i.e., Coronavirus).  

In the context of an acquisition, a selling company’s representations or covenants might include a “Corona clause” that allows for sudden and/or unanticipated Corona-related changes that could materially and adversely affect the company’s business, financial condition and operations.  There may be risk-shifting provisions from buyer to seller in acquisition documentation to account for unexpected ramifications of Coronavirus. Finally, companies should consult with counsel regarding whether to sell in part or in whole, based on the current climate and the foreseeable effects on business.

Trend No. 4: New “Hot” Verticals

In the time of coronavirus, certain verticals with disruptive technologies may be spared the otherwise uphill climb of financing.  If you are looking to either start a company or pivot, it might be worth investigating these predictably “hot” verticals, including:

  • Deep life sciences technologies, tele-health, or (mental) health tech;  [FN6] 
  • Digital technologies which allow people to communicate/work remotely/virtually;
  • Online commerce and goods delivery services; and
  • E-sports or e-gaming companies.

***

Footnotes:


  1. See https://www.cnbc.com/2020/03/19/silicon-valley-deals-on-pause-until-coronavirus-uncertainty-clears.html
  2. See https://dailyreporter.com/2020/03/25/stimulus-bill-proposes-299b-for-small-business-interruption-loans/
  3. See https://www.natlawreview.com/article/small-business-relief-cares-act; see also https://www.nytimes.com/2020/03/26/business/coronavirus-stimulus-small-business.html
  4. See https://www.eisneramper.com/irs-faqs-covid-19-extension-0320/?C=EM&utm_campaign=Covid-19&utm_source=hs_email&utm_medium=email&utm_content=85240667&_hsenc=p2ANqtz-9SVLz8EM7YyG_fh9e0btzvTiN18PuKY4ktNewddoaZeas2aS3L9GzIdK-VcBZUqmkZYj8Jd3IEIHW8XP0ZZUQfSlluP9WwpszVRMHnuVbkC70oMQE&_hsmi=85240667
  5. See https://medium.com/sequoia-capital/coronavirus-the-black-swan-of-2020-7c72bdeb9753
  6. See https://pitchbook.com/news/reports/q1-2020-pitchbook-analyst-note-covid-19-the-sell-everything-trade-and-the-impact-on-private-markets
Smith Shapourian Mignano PC is available to answer any questions or concerns you may have regarding Coronavirus’ effect on your startup or small business.

This blog does not constitute solicitation or provision of legal advice, and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a suitably qualified attorney regarding any specific legal problem or matter in a timely manner, as statutes of limitations may bar your claim.

​

Comments are closed.

    Archives

    February 2023
    October 2022
    September 2022
    September 2021
    June 2021
    May 2021
    March 2021
    January 2021
    December 2020
    October 2020
    September 2020
    August 2020
    June 2020
    May 2020
    April 2020
    March 2020
    January 2020
    June 2019
    April 2019
    March 2019
    February 2019
    November 2018
    October 2018
    September 2018
    May 2018
    April 2018
    March 2018
    February 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    April 2017
    March 2017
    January 2017
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016

    Categories

    All
    83(b) Elections
    Arbitration
    Benefit Corporation
    Bootstrapping
    Business Name
    Buy-Sell Agreement
    Cannabis
    CBD
    Cloud
    Commercial Lease
    Contracts
    Conversion
    Coronavirus
    Crowdfunding
    Delaware Flip
    Dissolution
    Early Hires
    Employers
    Employment Law
    Entrepreneurs
    Entrepreneur Spotlight
    Financials
    Funding/Financing
    GDPR
    Guest Blogger
    Health Care
    HR
    Industrial Hemp
    Insurance
    IT Solutions
    Joint Ventures
    Litigation
    LLC
    LOEN
    Logo
    Marketing
    Non Profits
    Non-Profits
    Partnerships
    Patent
    Pitch Deck
    Privacy Policy
    Professional Corporation
    Raising Money
    S Corp
    Securities
    Settlement
    Small Business
    Sole Proprietorship
    Startups
    Stock Options
    Tax
    Trademarks
    Website

    RSS Feed


​© 2024 SSM Law PC.  All Rights Reserved.
Privacy Policy 
Terms of Use
Accessibility Statement

Attorney Advertising 
​Client Reviews & Testimonials

​

  • Home
  • News
  • Team
    • Teela Crosthwaite Smith
    • Lindsey S. Mignano
    • Kelly Lawton-Abbott
    • Seth Pardee
    • Jessica Ryland
    • Jennifer Junkin
    • Eric A. Cox II
    • Philip Omorogbe
    • Shinjini Ray
    • Jason Galek
    • Makell Morrill
    • Tyler Collins
    • Dana Short
  • Deck
  • Blog
  • Contact