The non-dilutive stack: what each kind of money costs you

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Transcript

The non-dilutive stack

Non-dilutive capital doesn't cost you equity. It costs you something else. This lesson is about naming what that something is, so you can compare a grant, a contract, a prize and a state program the way you'd compare term sheets.

Not free money. Differently priced money.

You pay for non-dilutive money with proposal hours, calendar time, a scope of work you have to deliver, reporting, and terms on your data and inventions. Founders who use it well price those costs before they apply. Founders who don't, find out after.

Same outcome, different legal machinery

There are five instruments. Grants and cooperative agreements fund work you proposed. Procurement contracts buy work the government defined. Other transactions fund defense prototypes outside the normal rules. Prizes pay for results. And state and private programs fill the gaps, each with its own conditions.

Sponsor or customer?

The distinction that matters most is grant versus contract. In a grant, the agency sponsors work you proposed. In a contract, the agency is a customer buying something it specified. SBIR uses both. N-S-F makes Phase One awards as grants. The Department of War runs its S-B-I-R topics as contracts. You write differently for each, and you live under different rules after award.

Five costs to write down

Price every opportunity on five costs. Proposal cost, the hours to write it. Calendar cost, the time from submission to cash. Scope cost, what you commit to do. Compliance and reporting cost. And terms: data rights, invention rights, and ownership rules that your cap table has to satisfy.

About 7 months

Calendar cost is the easiest one to underestimate. N-I-H publishes its cycle. An S-B-I-R application due September fifth is reviewed in October or November, goes to council in January, and has an earliest start date in April. That's roughly seven months, if it's funded on the first try.

If the clock exceeds runway, it isn't a bridge

Here's the first decision rule. If the calendar cost is longer than your runway, the award cannot be your bridge. Pair it with something faster. Your financial plan should still work if every pending proposal is declined.

Non-dilutive is not terms-free

Read the terms every time. Under S-B-A's policy directive, properly marked S-B-I-R data is protected for at least twenty years from award. Unmarked data gets unlimited government rights. And S-B-I-R has ownership rules that a priced round can change. These are legal questions, so get a lawyer for anything you'd sign.

Halcyon made the clock visible

Take a fictional company, Halcyon Sensors, with eight months of runway. They compared an N-S-F Phase One against a small equity raise. Once they wrote down the calendar cost, they changed the plan: pursue N-S-F, and raise a smaller bridge so the federal timeline isn't load-bearing. Neither path won. The plan got honest.

Build your company profile

Now build your company profile in OpenGrants, at ops dot opengrants dot io slash signup. Describe your technical problem, your approach, and who pays for the result. Every search and match score in the rest of this course sorts around that profile.

Non-dilutive capital is not free money. It is money you pay for with something other than equity: proposal hours, calendar time, a scope of work you have to deliver, reporting obligations, and terms on the data and inventions you produce. The founders who use it well are the ones who price those costs before they apply, the same way they would price a term sheet.

This lesson gives you the map of instruments and a method for pricing each one. Everything else in the course builds on it.

The five instruments

“Non-dilutive” covers several legally different things. They look similar from a distance because none of them take stock. Up close, they have different customers, different rules, and different obligations.

Instrument	Who you are serving	What you owe	Where it shows up
Grant or cooperative agreement	A public purpose the agency funds; the agency is a sponsor, not a buyer	Do the research you proposed, report on it, spend under the award terms	NSF SBIR/STTR, NIH SBIR/STTR grants, many state programs
Procurement contract	The agency, as a customer buying something it needs	Deliver what the contract specifies, on schedule, under the FAR and agency supplements	DoD (now also styled Department of War) SBIR topics, NASA SBIR, set-aside contracts on SAM.gov
Other transaction (OT) agreement	A defense agency running a prototype project outside the FAR	Deliver the prototype milestones negotiated in the agreement	DoD prototype projects under 10 U.S.C. 4022
Prize or challenge	An agency or sponsor paying for a result, not a proposal	Meet the competition rules; you usually carry all costs until you win	Federal prize competitions under 15 U.S.C. 3719
State and private programs	A state economy, a corporate partner, or a foundation mission	Varies: in-state location, job reporting, sometimes partnership terms	State SBIR matching funds, state innovation grants, corporate programs

The distinction that matters most is grant versus contract. A grant funds work you proposed toward a public purpose. A contract buys work the government defined. The same SBIR program uses both: as of 2026, NSF makes Phase I SBIR/STTR awards as standard grants and Phase II as fixed-amount cooperative agreements, while the Department of War runs its SBIR/STTR topics through broad agency announcements and commercial solutions openings that result in contracts. You will write a different proposal for each, and you will live under different rules after award. Lesson 2 goes deeper.

Note: SBIR and STTR are not a separate instrument. They are programs that run through grants and contracts. When someone says “we got an SBIR,” your next question should be “from which agency, and was it a grant or a contract?”

What non-dilutive money actually costs

Price each opportunity on five costs. Write numbers down, even rough ones. The point is to compare opportunities to each other and to the equity alternative.

1. Proposal cost

The hours to write, review and submit, multiplied by what those hours are worth to you. Include the founder hours that do not go into product, sales or fundraising while you write. A federal proposal also needs registrations completed first (Lesson 3), which add lead time but little cost.

2. Calendar cost

The time between submission and cash in the bank. This is the cost that is easiest to underestimate.

NIH publishes its cycle. For SBIR/STTR applications due on the September 5 standard date, scientific merit review happens in October–November, the advisory council round is in January, and the earliest project start date is April. That is roughly seven months from submission to the earliest possible start, before any resubmission. NSF says a Project Pitch alone typically takes one to two months to get a response, and the full proposal comes after that.

If your runway is nine months, a program with a seven-month clock is a bridge you might not reach. Plan it, don’t hope for it.

3. Scope cost

What you commit to do, and what that stops you from doing. SBIR awards carry structural rules. On NIH’s published comparison, for example, an SBIR small business may outsource up to 33% of Phase I research and 50% of Phase II research, and the principal investigator’s primary employment (more than 50%) should be with the small business. NSF’s current solicitation requires the PI to be primarily employed by the company, at least 51% of their time. If your technical lead is a 20%-time professor, that is a constraint to solve before you apply, not after.

Contracts carry a different scope cost: you are delivering what the government specified. If that specification drifts from your product roadmap, the contract funds a detour.

4. Compliance and reporting cost

Grants come with progress reports, financial reports and spending rules. Contracts come with deliverables, invoicing, and, for defense work, clauses such as cybersecurity requirements. After the 2026 reauthorization, SBIR/STTR applicants also face expanded foreign-risk due diligence (Lesson 2). Estimate the monthly hours and whether you need accounting help.

Note: Indirect cost rates, allowable costs and accounting systems are tax and accounting territory. This course is not accounting or legal advice. If a solicitation asks for an indirect rate or an accounting system you don’t have, talk to an accountant who works with federal awardees before you submit.

5. Terms cost: data, inventions, and ownership

Non-dilutive does not mean terms-free. Three things to check every time:

Data rights. Under the SBA’s SBIR/STTR Policy Directive, properly marked SBIR/STTR data is protected from disclosure for a period of not less than 20 years from the award. After that, the government has a royalty-free license to use it for government purposes. Unmarked SBIR/STTR data gets unlimited rights, so marking is not optional housekeeping.
Inventions. Federally funded inventions come with government license rights. Read the patent rights clause in the award.
Ownership eligibility. SBIR/STTR has its own ownership rules. In general an awardee must be more than 50% owned and controlled by U.S. citizens or permanent residents (or certain qualifying entities), and a separate path exists for companies majority-owned by multiple venture capital operating companies, hedge funds or private equity firms, but not by a single one. A priced round can change your answer. Check the current rules against your cap table before each application.

Note: Data rights, patent rights and ownership eligibility are legal questions. What is here is orientation, not legal advice. Before signing an award or a term sheet that touches these, talk to a lawyer who works on federal R&D awards.

The comparison to make: non-dilutive versus equity

Put the two side by side with your own numbers. Here is the method with a fictional company.

Worked example: Halcyon Sensors, Inc. (fictional) builds low-power acoustic sensors for pipeline leak detection. Three founders, pre-seed, eight months of runway. They are weighing an NSF SBIR Phase I proposal against raising $300,000 more on their current SAFE terms.

Equity path. At an assumed $6M post-money cap, $300,000 is 5% of the company. If Halcyon later exits at $60M, that 5% is $3M. Fundraising time: they estimate six weeks of founder time.

NSF path. As of the May 2026 solicitation (NSF 26-510), NSF Phase I awards are up to $305,000 for 6–18 months. Halcyon estimates: 2 weeks to write and submit the Project Pitch, 1–2 months waiting for NSF’s response (NSF’s published estimate), 4 weeks to write the full proposal, then review and award time on top. They have not yet registered in SAM.gov, which NSF requires before they can register the company in Research.gov.

What they write on the decision worksheet:

Proposal cost: about 6 founder-weeks across both stages
Calendar cost: submission-to-cash likely beyond their current runway, so this only works alongside a smaller bridge
Scope cost: PI must be primarily employed by Halcyon; their CTO is full-time, so this is satisfied on paper
Terms: SBIR data rights with 20-year protection if they mark their data; no equity
Decision: pursue NSF, and raise a smaller bridge so the NSF timeline is not load-bearing

The point is not that one path wins. The point is that they made the calendar cost visible and changed the plan because of it.

Notice what Halcyon did not write: “we qualify” or “we’ll win.” Nobody can know that before review, including them. What they can know is the cost, the timeline, and whether the published rules fit their company.

Decision rules

Use these until you have your own:

If the calendar cost exceeds your runway, the award cannot be the bridge. Pair it with something faster, or don’t count on it.
If the scope requires work you would not do anyway, price the detour. A contract that funds a feature your customers don’t want is a cost, not revenue.
If you can’t answer the ownership question from your cap table in ten minutes, fix that first. It affects every SBIR/STTR proposal you will write.
Contracts and grants are not substitutes, they are complements. A grant funds your research agenda. A contract proves a government customer will pay. Many companies need both, in sequence.
Write the cost down before you read the dollar figure twice. The award ceiling is the most visible number and the least informative one.

Common mistakes

Common mistake: Treating the maximum award as the expected award. A solicitation’s ceiling is a limit, not a quote. Budget what the work requires and what the solicitation allows.

Common mistake: Counting non-dilutive money as runway before it is awarded. Pending proposals are not cash. Your financial plan should work if every pending proposal is declined.

Common mistake: Ignoring the contract side entirely because someone said “go get grants.” Procurement is a large part of non-dilutive money. Lesson 4 covers it.

Common mistake: Assuming SBIR is one program with one set of rules. It is one statute implemented by eleven agencies with different award sizes, instruments, deadlines and proposal limits.

Your decision worksheet

This course ships a one-page worksheet, Is this program worth pursuing?, that turns the five costs into a go / no-go / later decision. You will use it in every lesson from here on and in the capstone. Download it from the templates for this course: /learn/non-dilutive/templates/program-decision-worksheet.

Do this now in OpenGrants

Build your company profile so every search and match score in the rest of the course is grounded in your actual company.

Sign in or start your account at ops.opengrants.io/signup. An account is required to search; every new account starts with a 7-day trial, then $9/month.
Fill in your profile: what you build, your technology area, your stage, your state, and, if you know them, your NAICS codes (Lesson 4 helps if you don’t).
Write your company description the way a program officer would need to read it: the technical problem, the approach, and who pays for the result. One paragraph.
Run one search for your core technology term and skim the mix of grants and contracts that comes back. Don’t save anything yet. You are calibrating.

OpenGrants indexes 43,000+ open opportunities across grants and contracts, federal through local, refreshed daily. The profile is what lets that index sort itself around you.

Build your company profile (opens in a new tab)

Check yourself

Name one program that funds SBIR work through grants and one that funds it through contracts. What changes for you after award in each case?
Your runway is eight months. A program’s earliest start date is seven months after submission, if you are funded on the first try. What does decision rule 1 tell you to do?
Which two SBIR structural rules from this lesson would you check against your team and cap table before writing a word?
What happens to SBIR/STTR data you deliver without the required marking?
Why is “the maximum award is $305,000” the least useful number on the page?

Sources

NSF 26-510 SBIR/STTR solicitation — NSF — Phase I up to $305,000 for 6–18 months; standard grant and cooperative agreement instruments; PI employment requirement
Project Pitch — NSF SBIR — 1–2 month typical response time
Standard Due Dates — NIH — SBIR/STTR cycle: September 5 due date, review, council, earliest April start
Understanding SBIR and STTR — NIH SEED — outsourcing limits and PI employment
DoW SBIR/STTR Program — Defense SBIR/STTR — BAA/CSO structure and DSIP submission
SBIR/STTR Data Rights FAQ — SBIR.gov — protection period of not less than 20 years
SBIR/STTR Policy Directive (May 2023) — SBA — data rights definitions; unmarked data receives unlimited rights
SBIR 101 Following Re-Authorization — Crowell & Moring — ownership and control eligibility, multiple-VC ownership path
[10 U.S.C. 4022 — U.S. Code](https://uscode.house.gov/view.xhtml?req=(title:10%20section:4022%20edition:prelim) — DoD prototype other transactions
15 U.S.C. 3719 — U.S. Code — federal prize competition authority