Non-dilutive funding: grants, SBIR and state programs

• SBIR and STTR are funded through 11 federal agencies, each with its own topics and timelines.
• SBIR.gov lists Phase I and Phase II limits agencies can award without SBA approval; many agencies set lower caps.
• Qualified small businesses can apply part of the research credit against payroll tax, up to $500,000 per year per the IRS.
• Most states offer grants, SBIR matching, loans or state-backed funds through economic development agencies.
• Grants work best alongside an equity raise, not instead of one.

What counts as non-dilutive funding

Non-dilutive funding is money you don't pay for with equity. For a pre-seed or seed startup it usually comes in five forms: federal research grants and contracts, state and local programs, tax credits, prize and competition money, and customer-funded development. Some debt is also non-dilutive, though it has to be repaid.

For founders outside the big startup hubs, non-dilutive money does two jobs. It extends runway without selling more of the company, and it adds outside validation, such as a federal agency's technical review or a state program's due diligence, that makes later equity investors more comfortable. It is slower and paperwork-heavy, so it works best alongside an equity raise, not as a substitute for one.

SBIR and STTR: America's Seed Fund

The Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs are the largest source of early-stage non-dilutive capital for US technology companies. According to SBIR.gov, the programs are coordinated by the Small Business Administration and funded through 11 participating federal agencies, each of which runs its own program within guidelines set by Congress.

How it works in practice:

• Phase I funds a feasibility project, typically for months rather than years. SBIR.gov states that, as of October 16, 2026, agencies may issue a Phase I award up to $335,937 without seeking SBA approval; many agencies set their own lower caps.
• Phase II funds full research and development for companies that succeeded in Phase I. The same SBIR.gov notice gives a Phase II limit of $2,239,578 without SBA approval.
• Phase III is commercialization, funded by private capital or non-SBIR government contracts.

Each agency has different topics, timing and rules. The National Science Foundation's program, for example, says it invests up to $2 million in seed funding, takes zero equity, and starts with a short Project Pitch before a full proposal. Defense agencies often publish specific problem topics; health agencies fund research tied to their missions.

STTR is similar but requires formal collaboration with a research institution such as a university. If your technology came out of a lab, STTR may fit better.

Eligibility basics to check before you apply

Read the current solicitation for the agency you're targeting; rules change and differ by agency. Founders commonly need to check:

• That the company is a for-profit US small business and meets ownership and size rules in the SBA's policy directive, including rules about venture-backed ownership.
• Where the principal investigator is employed during the award.
• Registration in SAM.gov and on SBIR.gov, which can take weeks; start early.
• Whether your technology fits a published topic, or an open topic if the agency offers one.

State and local programs

Most states run some mix of grants, matching funds, loans and investment programs through an economic development agency, a technology-based economic development organization or a state-backed fund. Common types:

To find yours, search your state's economic development agency and its technology or innovation office, then ask your local small business development center and university entrepreneurship center which programs local startups actually won. State-backed funds also appear in investor lists; browse your state, such as Ohio, Michigan or Pennsylvania.

The R&D tax credit and the payroll offset

The federal research credit (Internal Revenue Code section 41) rewards qualified research spending. Startups with little or no income tax often assume it's useless to them. It isn't: the IRS describes an election that lets a qualified small business apply part of the research credit against payroll taxes. The IRS states that the Inflation Reduction Act raised the maximum amount a qualified small business can elect to apply against payroll tax from $250,000 to $500,000 for tax years beginning after December 31, 2022. The election is made on Form 6765 with a timely filed return and claimed on Form 8974. Ask your accountant whether you qualify; the definitions of a qualified small business and qualified research matter.

Other non-dilutive sources

• Accelerator and competition prizes. Some programs, including several described in accelerators outside YC, take zero equity.
• Foundation and corporate grants for climate, health, education and community impact.
• Customer-funded development. A paid pilot or a design partner who pays for a custom build is non-dilutive and doubles as traction.
• Revenue-based financing and venture debt, which don't take equity but must be repaid; usually a fit after you have revenue.

How to combine grants with an equity raise

Investors generally see non-dilutive money as a plus, provided it doesn't distract from the commercial plan. A few rules of thumb:

1. Show it in the round. "We're raising $750,000 alongside a $300,000 Phase I award" reads as leverage. Hypothetical example.
2. Keep grant work aligned with the product. Investors worry when research projects pull the team away from customers.
3. Budget the time. Proposals, reporting and audits take real hours. Assign an owner.
4. Mind the timeline. Awards can take many months from submission to money. Don't plan payroll around a grant you haven't received.
5. Check ownership rules before taking venture money if you plan to keep applying for SBIR, since agency eligibility depends on who owns the company.

Investors in deep tech, biotech and climate are especially used to grant-funded companies.

Non-dilutive checklist

• Register in SAM.gov and on SBIR.gov now, even if you apply later.
• List two federal agencies whose missions match your technology and read their current solicitations.
• Find your state's innovation office and one local prize competition.
• Ask your accountant about the research credit payroll election.
• Add any award or application to your use of funds and investor updates.