Gail & Jim Greenwood, Greenwood Consulting Group, Inc.

Copyright © 2004 by Greenwood Consulting Group, Inc.

The term "affiliation" and variations thereon has innocently appeared for years in the definition of small business in the SBIR and STTR programs. For example, an agency’s solicitation might include a statement like "a small business, for purposes of eligibility for the SBIR or STTR program, is defined as a firm with not more than 500 employees, including affiliates." However, this innocent little word is taking on a prominent role in current discussions about the SBIR and STTR programs, and therefore we want to make sure that you are up to speed on what it means.

An affiliation is defined as a relationship in which one entity has, or has potential for, significant control or ownership in the small firm applying for the SBIR/STTR award. If an affiliation is deemed to exist, then the small firm’s eligibility for SBIR/STTR depends on whether the total employment of itself and the affiliated entity exceeds 500 persons.

Possible situations in which an affiliation might exist and cause you eligibility problems include:

In return for some of its intellectual property, a university requires that you give it equity in your small business

Your former employer, a large firm, offers to invest in your start up company in return for equity and some seats on your board of directors

You are a professor who starts a small business; your small company then applies for an SBIR or STTR award with your university department as the research partner on the project.

These are but a few situations where an affiliation might exist, and which might disqualify you from the SBIR/STTR programs.

To better understand when an affiliation exists, let’s look at several key words in the definition:

ENTITY. The organization that is deemed to be affiliated with your company could be another for-profit business, a non-profit research corporation, a venture capitalist, a university, a Federal Laboratory, or pretty much anything you can think of. In other words, you probably can’t easily circumvent the affiliation issue by linking with a particular type of entity.

POTENTIAL. The other entity does not have to actually have any ownership or control in your small business for an affiliation to exist—the language is pretty broad to include situations such as someone who has stock options in your company.

CONTROL or OWNERSHIP. The former (assuming your small business is a corporation) might be the result of the other entity having seats on your board of directors, while the latter could come from the ownership of stock.

SIGNIFICANT. We would define "significant" as being "more than insignificant." More seriously, we think it would be defined in part on the basis of the circumstances of a particular situation. For example, if an entity owns 25% of your SBIR company and if the other 75% is owned by one person, this probably would not be "significant." But if that other 75% is owned by 75 persons each of whom own 1%, then that 25% ownership now probably would be "significant." What if the one guy or gal who owns 75% is elderly and in frail health? Then "it depends" would probably be the best answer, depending on who has the rights to that 75% ownership in the event of his or her death.

Most folks have not paid much attention to the concept of "affiliation" for years in the SBIR/STTR programs, but it is a term that is coming up quite frequently now in the debates (among others) as to which small businesses can compete in these programs. We urge you to keep an eye out for "affiliation" in these and other discussions, and consider the aforementioned definitions in determining if they affect your SBIR/STTR eligibility. You may also want to read up on the discussion of "affiliation" in the Federal Regulations in 13 CFR 121.103 available website http://www.sba.gov/size/part121_03-sects.html.

And don’t forget that there are lots of other issues surrounding eligibility, such as the requirement that at least 51% of the SBIR/STTR applicant firm be owned by individuals (not institutions) who are US citizens or permanent resident aliens. Don’t just assume that you are eligible for SBIR/STTR funding, but instead read the eligibility requirements carefully and keep on top of the latest interpretations.