Non-Dilutive Funding for Startups: Grants, SBIR and More

Non-dilutive funding is capital you don't pay for with ownership: federal SBIR and STTR awards, other grants, the R&D tax credit, prizes, and cash customers pay up front. For research-heavy startups, SBIR.gov lists Phase I awards up to $323,090 and Phase II up to $2,153,927 without extra SBA approval (as of April 2026). For most software startups, customer prepayments are the bigger and faster source.

Definition: Non-dilutive funding (or non-dilutive capital) is money a startup receives without issuing shares, options, warrants or convertible instruments, so existing owners keep their percentage. It is not free: it is usually paid for in time, restrictions on how the money is spent, reporting, or a discount to a customer.

No equity doesn't mean no cost. It means the price is paid in something other than shares.

Founders often chase grants as free money, then discover the bill: proposal months, a research scope that may not match the product, and a check on a government timeline. Used well, though, non-dilutive capital can fund the riskiest technical work before you price a round, and that can mean selling less of the company later. If you're still deciding between building on revenue alone and raising at all, our guide on how to bootstrap a startup covers that choice.

The main types of non-dilutive funding

Here's how we'd group the options, roughly from most to least common for an early-stage US startup:

Source	Typical fit	What it costs you instead of equity
Customer prepayments	Any company with buyers willing to pay annually or up front	A discount, plus the obligation to deliver
SBIR and STTR awards	R&D-heavy companies (deep tech, health, defense, energy, climate)	Proposal time, a defined research scope, reporting
R&D payroll tax credit	Young companies paying engineers or scientists to do qualifying research	Bookkeeping and documentation
State and foundation grants	Companies in specific states, sectors or missions	Eligibility rules and reporting
Prizes and competitions	Early teams with a sharp story	Time, and sometimes a pitch-day equity ask (read the terms)

Revenue-based financing and venture debt often get lumped in too. Both are debt you repay, and venture debt usually carries warrants, a small equity cost, so we cover them separately.

SBIR and STTR: the largest source of startup grants

The Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs are the federal government's main channel for funding R&D at small companies. SBIR.gov describes them as "equity free funding" and counts 11 participating federal agencies.

Current SBIR program status

Authorization has lapsed before, so check status before you plan around it. Per Crowell & Moring's client alert, SBIR and STTR authority lapsed on September 30, 2025. The SBA reports that the president signed S. 3971, the Small Business Innovation and Economic Security Act, on April 13, 2026, reauthorizing both programs through September 30, 2031.

Crowell & Moring's summary of the new law lists agency-set caps on proposals per company starting in fiscal year 2027, aimed at so-called "SBIR mills," a new Strategic Breakthrough award of up to $30 million at the largest agencies (with a 100 percent matching-funds requirement), and tougher screening for foreign ties. If your company has investors or partners in countries of concern, ask counsel about that screening early.

How the phases work

Phase I funds feasibility. SBIR.gov lists a ceiling of $323,090 (including modifications) that agencies can award without seeking SBA approval, as of April 2026.
Phase II funds full R&D toward a prototype, with a ceiling of $2,153,927 on the same basis.
Phase III is commercialization, funded by private money or by non-SBIR government contracts.

Many awards sit below the ceilings. In an April 2026 a16z piece on defense contracting, Ryan McEntush, Leila Hay and Alex Oliver put defense Phase I awards at $50,000 to $225,000 and Phase II at $750,000 to $1.5 million. They frame an SBIR as a "license to hunt" rather than the prize itself: the real opportunity sits in Phase III, where a company can win follow-on government contracts without a full competition. We think that framing travels well beyond defense.

SBIR vs STTR: which one fits

SBIR.gov's eligibility tutorial sets the basics for both: a for-profit company with 500 or fewer employees, at least 51 percent owned by US citizens or permanent residents (or by a small business that meets the same test), with the research done in the US. Under SBIR, the principal investigator must be primarily employed by the company during the award.

STTR adds a partner. The small business must team with a US nonprofit research institution, perform at least 40 percent of the work itself, and have the institution perform at least 30 percent. STTR tends to fit university spinouts where the founder or the key lab still sits at the institution. SBIR fits a company that does the research in-house.

Check each agency's solicitation for two things: whether it issues grants or contracts (defense agencies typically use contracts tied to published topics), and whether it accepts companies majority owned by venture funds.

Other startup grants worth checking

Outside SBIR, general-purpose "startup grants" are rarer than search results suggest. Most real grants are tied to a sector, a mission or a location.

NSF's America's Seed Fund is the NSF arm of SBIR and STTR. It invests up to $2 million in early-stage R&D and takes no equity, per its own site.
State programs often build on federal awards. Massachusetts' MassVentures, for example, announced START grants in May 2025 of $100,000, $200,000 and $500,000 by stage for companies that already hold a Phase II SBIR or STTR award, covering things federal research money doesn't, such as marketing and business development.
Agency and foundation programs exist across health, energy, climate and agriculture. Grants.gov is the federal government's list of open federal grants.

A warning that bears repeating. The FTC's consumer guidance states that the government won't contact you out of the blue about a grant and that no agency will demand a fee before you receive one. Unsolicited "you qualify for a startup grant" messages that ask for payment are a classic scam.

The R&D tax credit as non-dilutive capital

The federal research credit isn't a grant, but for a pre-profit startup it can work like one. Normally a credit only helps if you owe income tax, which most young companies don't. The exception is the payroll election.

Per the IRS's instructions for Form 6765 (Rev. December 2025), a qualified small business (gross receipts under $5 million for the year and no gross receipts in any year before the five-year period ending with that year) can elect to apply up to $500,000 of research credit against its payroll tax liability. The election is made on a timely filed original return, including extensions, and the credit is claimed against payroll taxes starting the quarter after the return is filed.

Qualified research expenses include wages for people doing, supervising or directly supporting qualified research, supplies used in that research, and generally 65 percent of contract research paid to others. The same IRS instructions also note that P.L. 119-21 allows domestic research and experimental costs to be deducted in tax years beginning after December 31, 2024, rather than capitalized.

In our view, it's among the most overlooked sources of cash for early technical teams, and worth having a CPA check before the return is due.

Customer prepayments: the non-dilutive capital most founders already have

For a software company, the largest non-dilutive source is usually its own customers. Annual contracts paid up front, paid pilots, deposits and advance orders all put cash in the bank before you spend it.

Fred Wilson's 2011 "Financing Options for Startups" post on AVC lists customer financing, government grants and prizes alongside equity and debt, which is a useful reminder that investors have long treated customers as a funding source. A 2022 analysis from High Alpha's Tim Page makes the case with a model: at the same revenue and growth, a SaaS company that bills monthly needed over $100 million more investment to reach $225 million in ARR than one billing annually up front. The same piece flags the catch: some companies discount 15 percent or more to win prepayment, and that discount comes off ARR.

A few ways to keep the trade fair: make annual billing the default offer, use a modest discount or extra service instead of a steep price cut, turn pilots into paid pilots with a conversion date, and take hardware deposits only when you can realistically deliver. Our guide to pricing your product goes deeper on discount structure.

Worked example: an SBIR Phase I vs a SAFE for the same money

The numbers here are illustrative.

A deep tech team needs about $300,000 to prove a core technical risk. Option A is a SAFE at a $12 million post-money cap. Option B is an SBIR Phase I award of similar size.

Option A cost: $300,000 / $12,000,000 = 2.5 percent of the company. Suppose seed and Series A each later dilute existing holders by 18 percent (Carta's July 2026 median for both stages). That stake becomes 2.5% x 0.82 x 0.82, or about 1.68 percent. In a $150 million exit, that's roughly $2.52 million. At $400 million, about $6.72 million.
Option B cost: zero ownership. Instead, budget for proposal time, months of waiting for a decision, a research scope you have to follow, and reporting.

The equity math favors the grant by a wide margin. The calendar often favors the SAFE. Which matters more depends on whether the grant's scope is the work you'd do anyway, and whether you can survive the wait. Many teams do both: a small SAFE to keep moving and an SBIR proposal running in parallel.

How to pursue non-dilutive funding, step by step

Sort your work into "research" and "product." SBIR and the R&D credit pay for the first; customers pay for the second.
Check eligibility early. Ownership, employee count, US research location and, for STTR, a research partner.
Find the right topic. Read agency solicitations for topics that match your roadmap. Don't bend the company to fit a topic.
Talk to the program manager where the agency allows it, and give the proposal an owner and a deadline.
Set up the R&D credit. Track research time and costs from day one so the payroll election is easy.
Default to prepayment. Make annual or up-front billing the standard offer.
Tell investors what you're doing. A pending SBIR or a Phase II award can de-risk your story and change how much equity you need to raise.

For a structured walk-through of how this fits around an equity raise, the 1752vc Fundraising module inside 1752 Fundraising offers video lessons and guides on how to raise from the 1752vc team.

Non-dilutive funding vs equity: when each one fits

Non-dilutive capital tends to fit when a grant program is built to fund your specific technical risk, when customers will pay before you build, and when the time to the check is shorter than your runway. Equity tends to fit when you need speed or a large amount, when the money funds go-to-market (which grants rarely cover), and when you want investors' networks and follow-on capital.

Once you know what grants and customers can cover, the rest is a sizing question. Our guide to how much money to raise covers the milestone method, and who to pitch first helps you sequence the equity part.

"But grants slow startups down"

It's a fair objection. A team that spends a quarter on proposals instead of customers can lose the momentum that makes a company fundable. Grant-funded research can also drift toward what reviewers want rather than what buyers will pay for. The a16z authors and the new law both point to the "SBIR mill" problem: companies that collect awards without moving the technology into real use at scale.

But the comparison isn't grants versus speed. It's grants versus the alternative way of paying for the same research. For a team with a hard technical problem, the alternative is often selling a slice of the company at its lowest valuation. In our view, a well-chosen SBIR that funds work on the critical path is one of the cheapest forms of capital a deep tech startup can get. One that pulls you off it is expensive at any price.

Common mistakes with non-dilutive funding

Treating grant money as runway for everything. Awards fund a defined scope. Payroll for sales usually isn't in it.
Ignoring the timeline. Plan as if the decision and the check will take months, because they often do, and check the plan against your burn rate and runway.
Missing the payroll election. It has to be made on a timely filed original return.
Over-discounting for prepayment. A deep discount can cost more than the cash is worth.
Paying for "guaranteed" grant access. Per the FTC, a fee demand for a government grant is a red flag.

Where we land

For deep tech, health, climate and defense founders, we'd look at SBIR or STTR before pricing a first round, with the R&D payroll credit set up from day one. For most software founders, we'd focus on prepayment and pricing first, and treat grants as a bonus rather than a plan.

It's our answer, not the answer. A company whose roadmap matches an agency topic exactly may do far better with grants than this suggests.

The bottom line

Non-dilutive funding is about choosing which currency to pay in: time, scope, discounts or shares.

Equity is often the priciest money a startup raises.

Unless the cheap money costs you the year.

Key takeaways

Non-dilutive funding avoids issuing shares but is paid for in time, restrictions, reporting or customer discounts.
SBIR and STTR were reauthorized on April 13, 2026 through September 30, 2031 after a lapse that began September 30, 2025, per the SBA and Crowell & Moring.
SBIR.gov lists Phase I awards up to $323,090 and Phase II up to $2,153,927 without SBA approval as of April 2026, though many awards are smaller.
A qualified small business can elect to apply up to $500,000 of research credit against payroll taxes, per the IRS Form 6765 instructions.
For most software startups, annual prepayment and paid pilots are the largest and fastest non-dilutive source.

Frequently asked questions

Are there grants for startups that aren't research-based?

Some, but fewer than search results imply. Most real grants are tied to research, a sector, a mission or a state program. General "free money for startups" offers are often scams: the FTC notes that agencies don't contact people unsolicited about grants or charge fees to receive one. For non-research companies, customer prepayments and prizes are usually more realistic.

Is the SBIR program active in 2026?

Yes. SBIR and STTR authority lapsed on September 30, 2025, and the president signed S. 3971 on April 13, 2026, reauthorizing both programs through September 30, 2031, per the SBA. Agencies set their own solicitation schedules and topics, so check each agency's current solicitations on SBIR.gov before planning around a specific deadline.

Can a venture-backed startup apply for SBIR?

Often, yes. The baseline rules require a for-profit US company with 500 or fewer employees that is at least 51 percent owned by US citizens or permanent residents. Companies majority owned by venture funds face separate rules that vary by agency, so read the specific solicitation. Many founders apply before or alongside a seed round.

How long does it take to get an SBIR award?

It varies by agency. Budget several weeks to write a strong proposal, then plan for a review and award process that commonly takes months before money arrives. Because of that lag, many teams pair an SBIR application with a small SAFE or customer revenue so the company keeps moving while it waits for a decision.

Does non-dilutive funding make it easier to raise venture capital?

It can. A Phase II award or a strong prepaid customer base shows outside validation and reduces the amount of equity you need, which can improve terms. It can also hurt if investors see the team spending more time on grant proposals than on customers. How you explain the fit with your roadmap tends to matter more than the award itself.

Sources

Disclaimer: This guide is for general education only and is not legal, tax or investment advice. Laws, market data and program terms change, so it may not reflect the latest developments or fit your situation. Treat it as a starting point, not a source of truth, and talk to a qualified lawyer, accountant or financial adviser before you make decisions.