Grants and prizes can provide important non-dillutive funding to early-stage startups.
Grants and prizes can provide important non-dillutive funding to early-stage startups.

This post continues our Financing a Startup Company Series and focuses on grants and prizes.

What are grants and who gives them out? Grants are provided by many sources including schools, companies, non-profit organizations and governments.  They provide funding, often for a specific purpose such as funding R&D, or developing environmentally sustainable businesses. One example is Challenge Post, which runs Big Apps NYC which gives away $10,000 to the team that builds the best app using the NYC open data project.  A big source of government grants are the Small Business Innovation Research Grants.

Grants are potentially an excellent source of funding for companies ranging from pre-business plan very early stage companies, to more established businesses seeking to develop or improve their products.  The sizes of grants range in size from just a few hundred dollars to develop a business plan to hundreds of millions of dollars to promising alternative energy businesses.

What are the advantages of grants?  As a non-dillutive funding source, founders do not give up equity in their companies when they accept grants.  Some grant providers also offer access to their networks of experienced and well connected people.

What are the costs and potential disadvantages of accepting grants?  First, the money is usually earmarked for a specific purpose.  This means that to qualify for funding, founders must have a business or product that fits the grant giver’s goals.

Second, before applying for a grant, make sure that you check the limitations on how the money can be spent, the number of employees that must be hired with the money, and any documentation of expenses that the grant’s provider requires.  Non-compliance can lead to having to repay the money, and accepting a grant for a project can lock you in to pursuing that project, even if you decide that your efforts would be better spend on other ideas.

Third, applying for the grants can be a long and involved process that can take time away from developing your business and finding customers.  Fourth, if getting money before actually legally setting up your company, think about what individuals in your team might have a claim to that money and how to tie up those loose ends if they won’t be part of the company.