Corporate & Securities Law

Is a VC About to Steal Your Startup Grant?

By Ryan

Venture Capital Firms. They won’t grant you a meeting. If you do get a meeting they won’t sign your nda. And you’ll be lucky if your startup gets any funding. Making matters worse, they could be about to commandeer federal grant money earmarked for small businesses like your startup.

Federal agencies earmark 2.5% of their research and development budgets for grants to stimulate innovation among small businesses. To qualify, your company can’t have more than 500 employees and must be independently owned and controlled (51% owned by individuals). Thus, some Venture Capital-backed firms are locked out of the Small Business Innovation Research program (”SBIR”). Using the 2.5% set aside by the federal agencies, the SBIR offers about $2 billion each year in grants to high-tech firms. Currently, these grants are handed out in three phases. The first two phases are reserved for small businesses. In the final phase, applications from entrepreneurs funded by large Venture Capitalists and other corporations are accepted.

But that may all change. The Senate is now considering legislation that would change the definition of “small” business and expand access to set-asides now reserved for independent entrepreneurs. This bill is called the Small Business Investment Expansion Act (”SBIEA”).

In the SBIEA, VCs are trying to end the rule by which the SBA counts all employees of any company affiliated with the applicant - including the Venture Capital firm and other startups in the VCs portfolio - toward the 500-employee limit. This would allow VC-backed firms to compete for grants in all three phases of the SBIR, instead of just the final phase.

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Full post as published by The Startup Lawyer on April 16, 2008 (boomark / email).