Startups ask investors to waive rights, turn to debt to stay afloat

06 May 2020

• Waiving control rights to access PPP
• Convertible notes on the rise
• Non-bank lenders considered



Startups are increasingly asking their venture backers to waive control rights so they can access government loans and are looking at less-than-optimal funding instruments in a bid to stay afloat, said dealmakers.

Many venture capital-backed companies have opted to apply for Paycheck Protection Program (PPP) loans, administered by the Small Business Administration (SBA), but have found it tricky navigating the rules. Created to incentivize employers with 500 employees or less to keep their staff on payroll, it nonetheless prevents companies with an affiliate, such as a larger majority owner or a minority investor with veto rights, to access those funds.

“The rule makes it hard to get money. I’ve heard people are taking a hard look at the consent rights that investors have and looking at waiving them so they can get access to PPP,” said Derek Liu, partner at Baker McKenzie.

Andrea Basham, Counsel, Corporate and M&A at Freshfields, is seeing the same thing, but said investors should take caution before ceding all their rights.


Under the SBA’s affiliation rules, a minority shareholder is deemed to control the business if it has the right to “prevent a quorum or otherwise block action by the board of directors or shareholders.” However, if a minority shareholder “irrevocably” gives up those rights, that shareholder will no longer be considered an affiliate of the business, the SBA states.


The concept of control can be further broken down into ‘positive control’ and ‘negative control,’ and the latter, according to an analysis of case studies by the National Venture Capital Association (NVCA), is more likely to create “affiliation” between a company and a minority investor.


Having a veto right over day-to-day operations is considered negative control under the SBA rules, but veto rights over a change-of-control transaction would not constitute negative control, Basham said.

“VC investors have rights that fall into both buckets,” she said. “Some investors are being rushed to grant blanket waivers but there is room to be more nuanced.”

A VC firm typically does not want to relinquish control, but to get the PPP loan it will often – but not always – agree in the hope the portfolio company survives, said Eric Gonzales, managing director at Montage Capital, a provider of growth capital to startups.