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DHS S&T SBIR Program: Cost Match Feature

The DHS S&T SBIR Program has a Cost Match feature for Phase II SBIR projects that attract matching cash from an outside investor. The purpose is to focus SBIR funding on those projects that are most likely to be developed into viable new products that DHS and others will buy and that will thereby make a major contribution to homeland security and/or economic capabilities. The cost match can occur at the time of award, or during the Phase II period of performance.


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Who qualifies as an "outside investor" for DHS SBIR Cost Match?

Outside investors may include such entities as another company, a venture capital firm, an individual investor, an individual "angel" investor, or a non-SBIR government program, or any combination thereof. Outside investors do not include the owners of the small business, their family members, and/or affiliates of the small business, as defined in Title 13 Code of Federal Regulations (CFR), Part 121.103. Although DHS SBIR is guided by this definition of affiliation in the CFR, we exercise our own discretion in determining whether a particular entity qualifies as an "outside investor."

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How does the Small Business Administration (SBA) determine "affiliation"?

Please refer to Title 13 Code of Federal Regulations (CFR) Part 121.103.

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What qualifies as a "Cost Match Investment" for the DHS SBIR Cost Match feature?

The investment must be an arrangement in which the outside party provides cash to the small company in return for such items as: equity; a share of royalties; rights in the technology; a percentage of profit; an advance purchase order for products resulting from the technology; or any combination thereof. The investor's funds must pay for activities that further the development and/or commercialization of the company's SBIR technology (e.g., further R&D, manufacturing, marketing, etc.). The additional work proposed, covered by the cost match investment, should be an expansion of the technical work being performed in the Phase II project and must fall within the general scope of the SBIR Phase II project for which the cost match investment is proposed.

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What are the dollar amounts for the DHS SBIR Cost Match feature?

The outside investors must commit a minimum of $100,000. DHS will, at its discretion, match up to 50% of the funds received, contributing up to a maximum of $250,000. Outside investors may contribute funding above the $100,000 minimum; however, DHS SBIR will only match 50% up to the $250,000 maximum. The SBIR Phase II basic award will be made for a maximum of $750,000 and the DHS cost match award will be made for a maximum of $250,000. The total cumulative SBIR funding for the Phase II award plus DHS cost match cannot exceed $1,000,000.

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How does a company qualify for DHS SBIR Phase II cost match?

To qualify for the DHS SBIR cost match, a company must be a DHS SBIR Phase I awardee submitting a Phase II proposal or a DHS SBIR Phase II awardee. The awardee must follow the Phase II proposal instructions and guidance, and also must provide the cost match documentation and request for matched funding as outlined in each SBIR solicitation.

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Can a small company contribute its own internal funds to qualify for the DHS SBIR Cost Match?

No. DHS SBIR is seeking outside validation of the commercial potential of the company's technology, and therefore requires that the funds come from an outside investor. Also, cash from an outside investor shows up clearly on the company's books and therefore can be more readily verified than a company's own matching contribution.

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Company A spins off company B, which wins a Phase I SBIR award. Company A then wants to contribute matching funds to qualify company B for cost match. Can A be considered an outside investor for purposes of the DHS SBIR Cost Match?

In making the determination of whether company A is an outside investor, DHS is guided by the definition of "affiliates" in 13 C.F.R. Part 121.103. The presumption is that in this example, A and B would be considered an "affiliate," and that A would therefore not be an outside investor for purposes of the Cost Match feature. However, that presumption could be rebutted by showing, for example, that the spin-off occurred several years ago and that A and B do not exercise control over one another, do not have common ownership or management, and/or have different business interests, etc.

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Small company S wins a Phase I SBIR award. The president of S is a major shareholder in another company Y, which wants to contribute matching funds to qualify S for cost match. Can Y be considered an outside investor for DHS SBIR cost match?

No. The presumption is that Y would not be considered an outside investor. The determination would be guided by whether the president's stake in Y is large enough that S and Y would be considered "affiliates" under 13 C.F.R. Part 121.103. Subsection (c.) of Section 121.103 specifically discusses affiliation based on stock ownership.

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Does the outside investor have to be a single entity (e.g., a single venture capital firm) or can it be more than the entity (e.g., two angel investors and a venture capital firm)?

It can be more than one entity.

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Small company A contributes matching funds to small company B in order to qualify B for DHS SBIR Cost Match, and, at the same time, B contributes matching funds to A in order to qualify A for DHS SBIR Cost Match. Do A and B qualify as outside investors under the DHS Cost Match feature?

No. A and B's relationship is such that their investment in each other would not provide outside validation of the commercial potential of their respective SBIR projects. Therefore, DHS SBIR would not consider them to be outside investors for purposes of the Cost Match feature.

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Can the brother of an employee of small company S contribute funds to qualify S for DHS SBIR Cost Match?

Probably not. The definition of "affiliates" in 13 C.F.R. Part 121.103 serves as a guide. The brother presumptively would be an affiliate of company S and not an outside investor.

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Venture capital firm V currently is a 22 percent shareholder in small company S. Can V invest additional funds in S to qualify S for DHS SBIR Cost Match?

The presumption is yes. In making the determination, we are guided by whether V and S are "affiliates," as defined in 13 C.F.R. Part 121.103. Part 121.103 provides (in subsection (b)(5)) that a venture capital firm is not affiliated with a company if the venture capital firm does not control the company -- e.g., by owning more than 50 percent of the stock of a small company (prior to its investment under the DHS SBIR Cost Match feature), as described in 13 C.F.R. 107.865.

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Large company L makes a cash investment in small company S, and then serves as a subcontractor to S on an SBIR project. Can L's investment in S count as a matching contribution for purposes of the DHS SBIR Cost Match feature?

Only L's cash investment net of its subcontracting effort can count as matching funds for purposes of the DHS SBIR Cost Match. For example, if L invests $750,000 in S and subcontracts with S for $250,000, only L's net contribution ($500,000) can count as matching funds for purposes of the DHS SBIR Cost Match feature.

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Large company L makes a cash investment in small company S, and then serves as a subcontractor to S on an SBIR project. Can L's investment in S count as a matching contribution for purposes of the DHS SBIR Cost Match feature?

Only L's cash investment net of its subcontracting effort can count as matching funds for purposes of the DHS SBIR Cost Match. For example, if L invests $750,000 in S and subcontracts with S for $250,000, only L's net contribution ($500,000) can count as matching funds for purposes of the DHS SBIR Cost Match feature.

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A group of investors wishes to invest funds in small company S to qualify S for DHS SBIR Cost Match. One of the investors is the mother of S's president, who wants to contribute $50,000 toward the effort. Can the group's investment in S count as a matching contribution to qualify S for DHS SBIR Cost Match?

The mother's investment of $50,000 does not count, because she is not an outside investor. Contributions of the other investors can count provided that they meet the other conditions for DHS SBIR Cost Match (e.g., each must be an outside investor).

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Can a loan from an outside party qualify as an "investment" for purposes of DHS SBIR Cost Match?

No. The rationale behind the DHS SBIR Cost Match feature is that an outside party is betting on the company's success in bringing the technology to market -- not just its ability to repay a loan.

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How about a loan that is convertible to equity?

A loan that is convertible to equity at the company's discretion would count as an investment under the following circumstances: (1) the loan is provided by a public entity (e.g., a state agency); or (2) the loan is provided by a private entity, and the SBIR company actually converts the loan to equity before the end of Phase I.

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Can in-kind contributions from an outside investor count as matching funds under the DHS SBIR Cost Match feature?

No. The matching contribution must be in cash. A cash contribution is a stronger signal of the outside investor's interest in the technology, and can be readily verified.

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Can a purchase order from an outside investor count as a matching contribution under the DHS SBIR Cost Match feature?

An advance purchase order for new products resulting from the SBIR project can count as a matching contribution under the DHS SBIR Cost Match feature. The purchase order must be for one or more products directly resulting from the SBIR project (including, for example, a duplicate of the prototype that will be delivered to DHS SBIR at the end of Phase II). The investor must provide its cash payment to the small business during Phase II, within the time frame set out in the solicitation. To ensure that the investor's funds are "at risk," the payment cannot be refundable to the investor if the product is not delivered or does not work.

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Can the funds raised from an initial public offering (IPO) count as matching funds for purposes of the DHS SBIR Cost Match feature?

Yes, as long as the offering memo indicates that a portion of the funds from the IPO will pay for work (e.g., R&D, marketing, etc.) that is related to the SBIR project.

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If large company L pays small company S for work related to S's SBIR project and expects a deliverable (goods or services) from S in return, would that qualify as an "investment"?

With the exception of an advance purchase order, this arrangement would not qualify as an investment, for the same reason a loan does not qualify. Specifically, in this situation the large company is not betting on the small company's success in bringing the technology to market, but merely on its ability to provide the deliverable.

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Can entity E's investment in small company S during the first month of S's Phase I SBIR project count as a matching contribution to qualify S for DHS SBIR Cost Match?

Yes, provided that E is an outside and that the other DHS SBIR Cost Match conditions are met. The investment can occur any time after the start of the Phase I project.

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Small company A, which has won a Phase I award, spins off small company B to commercialize the SBIR technology. Small Company A then convinces angel investor I to invest funds in B. Can I's investment in B count as a matching contribution to qualify A for DHS SBIR Cost Match?

For I's investment in B to qualify A for DHS SBIR Cost Match, DHS SBIR must determine that A and B are substantially the same entity, as evidenced, for example, by their meeting the definition of "affiliates" in 13 C.F.R. Part 121.103. If DHS SBIR determines that A and B are substantially the same entity, I's investment in B could qualify A for DHS SBIR Cost Match. The parties must also meet the other conditions for the Cost Match feature (e.g., I must be an outside investor).

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Must the activities funded by the investor be included in the statement of work for the small company's Phase II contract?

No. The investor's funds must pay for activities that further the development and/or commercialization of the company's SBIR technology (e.g., further R&D, manufacturing, marketing, etc.), but these activities need not be included in the Phase II contract's statement of work. In practice, cost match funds from the private sector investors generally are not included in the Phase II contract's statement of work, whereas cost match funds from the government investors (such as DHS SBIR acquisition programs) sometimes are.

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