Equity Warrants Proposed for DoD SBIR Investments
A new proposal suggests that the Department of Defense should receive equity warrants in startups it funds through the Small Business Innovation Research (SBIR) program. This approach aims to incentivize DoD investment in scaling companies and allow the government to benefit financially from their long-term success. The idea is being discussed amid continued calls for the reauthorization of the SBIR program.
- The Small Business Innovation Research (SBIR) program, established in 1982, traditionally provides non-dilutive funding, meaning small businesses receive grants and contracts without giving up equity. This makes the proposal to take warrants a significant departure from the program's historical foundation. - The statutory authority for the SBIR and Small Business Technology Transfer (STTR) programs expired on September 30, 2025. As of early 2026, Congress has not passed a reauthorization, which has halted the issuance of new solicitations and awards across 11 federal agencies. - While new for SBIR, the DoD has recently taken direct equity stakes in private companies through other mechanisms. For example, the Trump administration invested $1 billion for convertible preferred equity in L3Harris's missile solutions business and took a $400 million stake in rare earth mining company MP Materials, making the DoD its largest shareholder. - The push for direct government investment is influenced by officials with private equity backgrounds, such as Deputy Defense Secretary Steve Feinberg, co-founder of Cerberus Capital Management. The rationale is to align long-term interests between the government and companies, give the DoD direct influence over strategic assets, and create potential financial returns for taxpayers. - The SBIR program is a major source of early-stage capital, providing over $3 billion in competitive awards annually. Since its inception, the program has played a role in over 70,000 patents and helped launch nearly 700 publicly traded companies. - The SBIR program is structured in three phases: Phase I focuses on technical feasibility with awards up to $260,000, Phase II funds prototype development with awards up to $1.8 million, and Phase III is for commercialization, which uses non-SBIR government or private funding. - The discussion around equity warrants is part of a broader debate on reforming the program to increase accountability and better transition technologies from development to fielding. The most recent multi-year reauthorization in 2022 included provisions to address security concerns and increase performance standards for awardees.
