Small Business Innovation Research (SBIR) 101: Following Re-Authorization, What Contractors (and Their Investors) Need to Know

On April 13, 2026, President Trump signed into law the Small Business Innovation and Economic Security Act, which reauthorized the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs.  These programs are Small Business Administration-sponsored initiatives intended to encourage small business contractors to conduct early-stage research and development (R&D) and help foster technological innovation related to U.S. government needs across several federal agencies, including the Department of War, Department of Energy, National Aeronautics and Space Administration, and National Institutes of Health.  SBIR/STTR are sometimes referred to as “America’s Seed Fund.”  Consistent with that characterization, SBIR contractors performing in the defense and technology space are often the focus of venture capital and private equity interest and investment.

The SBIR program imposes significant regulatory requirements related to that investment.  While more lenient in certain respects than the baseline SBA affiliation regulations pertaining to broader federal contracting, the program includes complex requirements for ownership and control to maintain SBIR eligibility and for the protection of SBIR contractors’ intellectual property.  Understanding and adhering to these requirements ensures that SBIR contractors are well-positioned for SBIR Phase III sole-source commercialization awards, which are oftentimes the end goal for SBIR contractors (and their potential investors).

Overview of the SBIR/STTR Program phases

The SBIR and STTR programs are made up of three phases:

• Under Phase I, the contractor engages in R&D to determine the technical feasibility and merit of a new concept.  Phase I contracts generally last for six to twelve months and may be awarded for up to $323,090.
• Phase II is the principal R&D effort and builds on the earlier efforts from Phase I to engage in prototyping, product development, and scaling heading towards commercialization.  Phase II awards typically last for 24 months and may be awarded for amounts up to $2,153,927 without seeking SBA approval.
  • • The Small Business Innovation and Economic Security Act introduced a new Phase II “strategic breakthrough” funding vehicle with a $30 million ceiling, increased foreign risk screening, and updates to program administration and oversight.  The establishment of breakthrough awards is another initiative aimed at helping contractors navigate the so-called “valley of death” from the R&D/prototyping phase to SBIR Phase III commercialization.
• Phase III is the commercialization phase, where further development of research from Phase I and II awards is funded by non-SBIR/STTR funding.  As a result, Phase III contracts are not subject to small business eligibility rules.  Significantly, Phase III awards may be sole-source and should be awarded to the SBIR firm (or its successor-in-interest) to the greatest extent practicable.  There is no value or duration limit for Phase III awards.

Eligibility rules for SBIR/STTR awards

SBIR/STTR contractors must meet both size and ownership/control requirements to be eligible for such awards.  A contractor must meet the following requirements at the time of award (as opposed to the time of proposal submission as is the case for non-SBIR small business set-asides) of an SBIR or STTR Phase I or Phase II funding agreement:

• Size eligibility: The contractor must be certified as a small business under the SBIR-specific size standard of 500 employees, including affiliates.  Concerns are affiliates when one controls or has the power to control the other, or a third party (or parties) control or have the power to control both, with such control defined across SBA’s various affiliation tests, set forth in 13 C.F.R. § 121.702 for purposes of the SBIR/STTR programs. 

• Ownership eligibility: In addition to satisfying size eligibility, a SBIR awardee must, among other requirements, be more than 50% directly owned and controlled by any of the following entities:

1. 1. One or more individuals who are citizens or permanent aliens of the United States;
   2. One or more other-than-small business concerns, each of which is more than 50% directly owned and controlled by individuals who are citizens or permanent resident aliens of the United States;
   3. An Indian tribe, Alaskan Native Corporation (ANC), or Native Hawaiian Corporation (NHO), or a wholly owned business entity of thereof.

Notably, there is a subset of SBIR awards/funding, that allow a contractor to satisfy the ownership eligibility requirement if it is majority-owned by multiple venture capital operating companies, hedge funds, and/or private equity firms.  For clarity, this requirement is not satisfied if the company is majority-owned by a single venture capital firm.

Avoiding Affiliation Pitfalls from Minority Investor Blocking Rights

While the ownership and affirmative-control requirements in SBA’s affiliation regulations have received the most attention, venture capital investors (and contractors that are the recipients of such investment) operating in the SBIR defense and technology space should ensure they are well versed in the SBA/SBIR negative control restrictions.  Those restrictions, if not properly understood and adhered to, can result in an SBA finding of affiliation between the SBIR contractor and an investor.

Negative control may exist when a minority owner’s participation is required for a quorum, or when that minority owner can prevent a board meeting or vote on “ordinary” or day-to-day business decisions, including budgeting, hiring and firing officers, borrowing money, compensation, and other actions that SBA has deemed “ordinary” in its decisions (and SBA will continue to distinguish actions as ordinary versus extraordinary in subsequent caselaw).  Affiliation resulting from what SBA considers to be impermissible negative control can render SBIR contractors “other than small,” i.e. large, for the SBIR program and result in ineligibility for the SBIR program, loss of SBIR awards, or even exposure under the False Claims Act.  The scenario in which a contractor is most typically found “other than small” is through a size protest where, typically just prior to award, the   contractor’s size status is challenged by the awarding agency, a competitor, or SBA.  If the contractor is found “other than small” by SBA in relation to that award, they are rendered ineligible and lose the award, although the contractor could fix the eligibility issue(s) to become eligible for future awards.

In January 2025, the SBA revised its regulations to set forth six actions over which minority investors may have blocking rights.  The policy rationale for this is that these are “extraordinary actions” over which blocking rights are necessary for a minority investor to reasonably protect its investment. The updated regulations permit a minority investor to block action by the board of directors or shareholders, without triggering affiliation, that would (i) add a new equity stakeholder; (ii) dissolve a company; (iii) sell the company or all assets of the company; (iv) cause a merger of the company; (v) declare bankruptcy; or (vi) amend the company’s corporate governance documents to remove the shareholders’ authority to block any of (i) through (v).  Additionally, SBA included a seventh catch-all for extraordinary actions not otherwise identified within the first six.  This catch-all is intended to encompass historic and future SBA caselaw regarding additional “extraordinary actions” over which blocking rights are permissible such as confessing of a judgment and committing any act that would make it impossible to carry on ordinary business.

Understanding the Benefits and Hazards of SBIR-Developed Technical Data or Computer Software

A major incentive of the SBIR program is that it incentivizes R&D using government funding while significantly dialing back the extent of the government’s license in such SBIR-developed technical data and computer software as those terms are defined in the Federal Acquisition Regulation (FAR) and Defense Federal Acquisition Regulation Supplement (DFARS).  While the typical federal contracting baseline is that the contractor retains ownership in technical data and computer software developed under government contracts, under most government contracts the government receives a perpetual license in such technical data and computer software that can be quite expansive. 

Under the SBIR/STTR program, however, the government’s license is normally more limited.  Under the current regime and standard clauses, the government receives limited rights for a period of 20 years,^[1]beginning on the date of the contract award under which the SBIR/STTR technical data and software are developed or generated, with no renewal.  Upon expiration of the current SBIR/STTR 20-year protection period, the government receives substantially broader rights.  Under an earlier regime, which may still apply to some contracts awarded pursuant to the prior versions of the SBIR/STTR FAR/DFARS clauses, the protection period concluded either four years from acceptance of all contract deliverables or five years from the end of the SBIR/STTR contract, but it could be extended via subsequent SBIR awards that derive from, extend, or complete the preceding SBIRs.

Under the SBIR program, and in federal contracting in general, the FAR/DFARS data rights regime contains various requirements that contractors must meet in order to protect their SBIR-developed (or privately developed) technical data and software to the maximum possible extent.  It is crucial for SBIR/STTR contractors (and their investors) to ensure these requirements are understood to prevent inadvertently ceding to the government greater rights in technical data and computer software than required and undermining the protections and advantages of the SBIR program.