The COVID-19 crisis has triggered a financial downturn that will make 2020 a very challenging year for emerging companies. The Burns & Levinson Emerging Companies & Venture Capital Practice team suggests emerging companies keep the following guidelines in mind.
- Challenging Fund Raising Environment. The financial downturn resulting from the COVID-19 crisis will make fundraising very challenging in 2020. Most venture funds will reduce their volume of making new investments to reserve more capital to support their existing portfolio companies. So emerging companies in the midst of a financing process should stop negotiating for better terms and drive to close without delay. Companies starting the financing process will have to decide whether they can wait or dramatically lower their expectation on the amount they will raise and at what valuation and other terms that such funding will be raised.
- Reductions in Work Force. With fundraising a challenge, emerging companies must focus on preserving cash. For most emerging companies, the largest recurring expense is payroll. Consequently, many emerging companies will look to institute work furloughs or permanent reductions in force (RIF) as a means of lowering their cash burn rate. As employers plan for work furloughs or RIFs, they should engage their legal counsel early in the process to mitigate potential liability and minimize disruptions that may arise form involuntary employment terminations.
- Reviewing Debt Financing Terms. Emerging companies that have secured venture debt prior to the COVID-19 crisis should consider reviewing the terms of their loans. Do the loan terms include financial covenants, and, if so, under what circumstances will the covenants be tripped? Could the economic downturn from COVID-19 lead to a covenant breach? For those borrowers that have not taken down the full amount of their debt facilities, they should consider whether they take down such capital sooner rather than later. Will lenders find a way to renege on previously committed lending? If there is remaining borrowing that is subject to milestones, what are the triggers and are they achievable in light of the COVID-19 pandemic? Can the triggers be renegotiated?
- Address Supply Chain Risks. The COVID-19 crisis is a global crisis affecting every business at the same time. So emerging companies should determine whether they will be exposed to supply chain risks. Are there critical business partners that may be at risk of closing or otherwise unable to fully supply necessary requirements? Are there contracts with partners that should be terminated, not renewed or renegotiated in light of the financial downturn?
- Is the Crisis an Opportunity? Most emerging companies already know how to operate purely online with remote team members. So emerging companies should consider whether they can use their nimbleness to pivot to new business opportunities for what is a crisis for less nimble incumbent businesses that compete in the same market. We have already seen some of our clients developing new business plans to offer services that are in high demand as a result of the current crisis. Some of our other clients are pursuing grants and other governmental aid that will be forthcoming to address the COVID-19 crisis.
As the impact of the COVID-19 crisis continues to develop, Burns & Levinson will continue to keep you updated with the latest “need to know” news and ideas to help improve your business practices in this unprecedented time.
Author: Robert Chow
Robert Chow is a partner in Burns and Levinson’s Venture Capital & Emerging Companies practice group. His practice focuses mainly on general corporate, securities, mergers and acquisitions, strategic alliance, as well as licensing and commercial matters. Robert advises companies at all stages of development, including formation and governance issues, equity and compensation matters, venture capital financing, technology licensing, and other regulatory compliance. He provides actionable legal advice to entrepreneurs, emerging growth companies, and venture investors. He can be reached at firstname.lastname@example.org or 617.345.3599.