By: James A. Wolff, Esq. and David Egozi*, Summer Associate (*Not an Attorney)
In light of the reauthorization, startups should approach SBIR/STTR participation with a structured legal strategy rather than an ad hoc grant-seeking mindset.
Do:
- Conduct early eligibility and ownership analyses, particularly where foreign capital is involved.
- Formalize IP ownership through clear assignment agreements and implement disciplined data-marking practices.
- Develop commercialization strategies that align with Phase III opportunities and agency priorities.
- Establish internal compliance processes covering certifications, reporting, and regulatory requirements.
Don’t:
- Assume that minority foreign investment is risk-free without analyzing control and influence implications.
- Overlook contractual terms that may inadvertently grant broad IP rights or restrict future commercialization.
- Treat SBIR/STTR awards as isolated funding events divorced from broader corporate strategy.
- Delay compliance infrastructure development until after funding is secured.
STTR and SBIR Accounting Implications
Contract or Grant
The threshold accounting determination for any SBIR or STTR recipient is whether the award is a contract or a grant. In 2020, the combined SBIR and STTR budget across all eleven participating Agencies exceeded $4 billion. Of that, a little over half was provided to small businesses as contracts, while the other half was provided as grants. Beyond clarifying the intended use of funds, this classification also determines how organizations recognize income, apply cost principles, assess audit requirements, and present financial results.
Contracts are used when the agency seeks to procure a specific good or service for its own direct benefit. These awards are mission-driven, with clearly defined requirements, deliverables, and timelines. Five Agencies participate in the SBIR or STTR programs using contracts, with the largest being the Department of Defense. Such awards are typically accounted for under ASC 606, which provides for revenue to be recognized as performance obligations are satisfied, often based on progress toward completing deliverables. Because SBIR contracts typically involve the delivery of research results and milestone reports, recognition occurs over time as performance obligations are satisfied.
In contrast, grant-based awards generally fall outside the scope of ASC 606. In these arrangements, the federal agency is not acting as a customer purchasing research, but rather as a resource provider supporting research aligned with a broader public mission. As such, the substance of the transaction is funding support rather than the procurement of goods or services. Additionally, grants offer significant flexibility and are generally driven by small businesses rather than government agencies. Companies propose research ideas that align with an agency’s strategic objectives, and funding is awarded based on the merit and relevance of those proposals. Against this backdrop, the recent reauthorization efforts have introduced new funding pathways, including Strategic Breakthrough Awards, which are designed to accelerate commercialization in priority technology areas.
Strategic Breakthrough Awards
The introduction of Strategic Breakthrough Awards adds a new layer of complexity from an accounting perspective, as these awards may not fit neatly within the traditional contract-versus-grant framework. At their core, these awards are designed to accelerate commercialization and avoid what is commonly referred to as the “Valley of Death”—the high-risk gap between Phase II and Phase III during which many promising technologies fail to secure follow-on funding or contracts.
By targeting this critical stage, Strategic Breakthrough Awards emphasize later-stage development and deployment, often incorporating milestone-based funding and commercialization objectives. While these features are commonly associated with contract arrangements, they are not determinative. Instead, they introduce additional complexity by increasing the likelihood that such awards may exhibit characteristics of both exchange and non-exchange transactions. This shift toward outcome-oriented funding further complicates the accounting analysis, requiring a more careful evaluation of whether the arrangement falls within the scope of ASC 606 or is more appropriately accounted for as a grant or contribution.
Conclusion
The 2026 reauthorization of the SBIR/STTR programs reflects a broader shift in how the federal government views early-stage innovation funding, not merely as a research subsidy, but as a strategic tool tied to national security, economic competitiveness, and commercialization outcomes. For startups, this evolution introduces both opportunity and complexity.
Success under the modern SBIR/STTR framework requires more than technical merit. Companies must align their ownership structures, IP strategies, and commercial partnerships with an increasingly sophisticated regulatory environment. Those that address eligibility, compliance, and transactional considerations will be better positioned to use these programs as a scalable, repeatable part of their growth strategy, rather than a one-off source of non-dilutive capital.
As agencies continue to refine implementation guidance and expand oversight mechanisms, startups should expect a more integrated and compliance-driven funding ecosystem, one that rewards not only innovation but also organizational readiness and legal discipline.
This is the final edition of a three-part blog series, in which partner James Anthony Wolff and summer associate David Egozi examine the legal and structural implications of the 2026 SBIR/STTR reauthorization.