Even agencies that award grants, like the National Science Foundation (NSF), have rigid accounting standards.
Key Takeaways:
- NSF SBIR grants provide critical, non-dilutive funding to help small businesses and startups de-risk cutting-edge R&D projects that might otherwise struggle to attract early-stage private investment.
- Phase I awards up to $256,000 to prove technical feasibility, while Phase II offers up to $1 million (plus $50,000 for commercialization support) to develop and scale toward commercialization. Compliance and financial management expectations rise significantly in Phase II.
- NSF expects awardees to track all project costs, time, and labor using federally compliant accounting systems. This includes separating direct vs. indirect costs and rigorous timekeeping for all employees.
- Expenses must follow federal cost principles under 2 CFR 200. Misallocating indirect costs, charging unallowable expenses, or submitting inaccurate reports can jeopardize current and future NSF funding.
- Small businesses that partner with experienced SBIR accounting teams are better equipped to stay compliant, pass audits, and manage cash flow, allowing founders to focus on innovation instead of administrative stress.
Winning an NSF SBIR grant is a significant milestone for any startup or small business. But landing the grant is just the beginning—the real challenge is staying compliant while managing your funds wisely.
This guide covers everything you need to know, from NSF SBIR basics to mastering grant accounting, setting up compliant systems, and confidently navigating complex federal regulations.
What is the NSF SBIR Program?
The National Science Foundation’s (NSF) Small Business Innovation Research (SBIR) program, also called America’s Seed Fund, is one of the largest and most respected sources of non-dilutive capital for startups and small businesses in the U.S. It’s designed to fuel scientific breakthroughs that solve significant challenges while building new businesses and creating jobs.
Unlike loans or venture capital, NSF SBIR grants don’t require equity or repayment—they fund research and development (R&D) so innovators can test feasibility, reduce technical risk, and move closer to market readiness.
Here’s what makes it unique:
- Backed by federal dollars: NSF SBIR is part of the broader federal SBIR/STTR program, mandated by Congress to allocate a portion of federal R&D budgets to small businesses.
- Focus on commercialization: More than funding experiments, NSF helps entrepreneurs turn science into products and services that meet real market needs.
- High-risk, high-reward: The program specializes in funding deep-tech and high-risk R&D that may be too early-stage for traditional financing.
- Non-dilutive capital: Keep your equity and decision-making power. NSF grants don’t dilute your ownership.
Since 2015, companies funded by America’s Seed Fund have attracted over $6.5 billion in private investment and generated thousands of new jobs. That proves the program isn’t just academic; it’s building impactful businesses.
How America’s Seed Fund Supports Deep-Tech and Science Startups
Turning science into a scalable business requires funding, time, and risk tolerance. Powered by NSF, America’s Seed Fund makes funding possible for startups working in biotechnology, advanced manufacturing, quantum computing, and clean energy—industries where traditional venture capital often hesitates due to long development cycles and technical uncertainty.
Most private investors want fast returns and proven traction. On the other hand, deep-tech startups often face years of R&D before bringing a product to market. That gap is where NSF SBIR funding allows companies to de-risk their innovation without giving up equity or control.
Take Ginkgo Bioworks, now valued at over $2.5 billion. The company received early SBIR funding to advance its synthetic biology platform, long before investors lined up. Or consider Living Ink Technologies, a small business funded by the NSF to develop sustainable ink from algae cells, aiming to replace petroleum-based inks with eco-friendly alternatives.
NSF SBIR provides momentum to:
- Help companies validate technical feasibility
- Support IP development and protection
- Build credibility with future investors and partners
- Position startups to win follow-on funding (Phase II and beyond)
NSF SBIR Grant Eligibility: Who Can Apply?
You don’t need to be a university or a Fortune 500 company to win an NSF SBIR grant; in fact, you can’t be. This program is specifically for small businesses, and the eligibility criteria are clear but flexible enough to include a broad range of innovators.
Here’s what you need to qualify:
- • For-profit, U.S.-based business
- • Fewer than 500 employees
- • At least 50% U.S.-owned and controlled
- • A Principal Investigator (PI) who works primarily (51%+) for the applying business during the grant period
- • Ability to conduct R&D within the U.S.
You don’t need a Ph.D. to be the PI. NSF focuses on technical expertise and execution capability, not academic credentials. Many successful NSF SBIR awardees have PIs with real-world experience in product development, engineering, or science, regardless of degrees.
NSF encourages applications from women-owned, minority-owned, and rural small businesses as well as first-time applicants. This program rewards merit and impact potential, not just pedigree or connections. The NSF SBIR program also supports spin-outs from universities or national labs, as long as the applying business is independently owned and operated.
Understanding NSF SBIR Funding & Requirements
The NSF SBIR program is structured to meet startups where they are in their innovation journey. Phase I and II serve distinct purposes, each with unique funding levels and compliance expectations.
Phase I vs. Phase II: Funding for High-Risk Scientific Innovation
The NSF SBIR program is intentionally split into two core phases to help small businesses progress from an early-stage concept to a product poised for real-world impact. Each phase builds on the last and comes with escalating expectations for technical achievement and financial accountability.
Phase I – Feasibility & Proof of Concept
Phase I is your opportunity to show the NSF that your innovation is technically viable and ready for deeper investment. It’s designed for projects still in the early development or validation stage. It’s for early-stage R&D, prototypes, feasibility studies, and initial market validation.
Reality check: The NSF receives thousands of proposals annually but only awards about 300-400 Phase I grants annually, making competition fierce.
Phase II – Development & Commercialization
Phase II is for projects that cleared technical feasibility in Phase I and now need significant support to move closer to commercialization. It’s for product design, manufacturing readiness, regulatory testing, and beta customer engagement.
Reality check: Advancing from Phase I to Phase II is competitive—NSF typically advances less than half of Phase I awardees into Phase II funding.
NSF SBIR Grant Funding Amounts
NSF SBIR funding is structured to cover the critical early phases of R&D, with amounts scaled to meet the distinct needs of feasibility testing and product development. Understanding how much is available—and where those funds typically go—is key to managing your project successfully and staying compliant.
Current NSF SBIR Funding Levels
- Phase I: Up to $256,000 (subject to inflation adjustments), with a project duration of 6 to 12 months
- Phase II: Up to $1 million, with an additional $50,000 for Commercialization Assistance Program (CAP) support, and a project duration of up to 24 months.
These amounts are consistent with NSF’s focus on deep-tech and high-risk R&D, offering meaningful financial runway to address technical challenges before commercial viability is fully proven.
Where awardees typically allocate funds:
- Personnel Costs: A significant portion is typically directed toward paying technical team members (e.g., engineers, scientists, developers) whose work directly advances the project.
- Subcontractors and Consultants: Specialized tasks like prototype fabrication, regulatory consulting, or customer discovery often require outside experts.
- Materials and Equipment: Budget is set aside for lab supplies, testing equipment, hardware components, or other consumables directly tied to project milestones.
- Travel for R&D Purposes: Allowable travel includes site visits, field testing, or NSF program-related events (like conferences or commercialization training).
- Indirect Costs: If your company has secured a Negotiated Indirect Cost Rate Agreement (NICRA), you can recover a portion of overhead expenses, including rent, utilities, or administrative salaries.
Key Steps to a Successful NSF SBIR Grant Application
To secure NSF SBIR funding, you must present a compelling, well-structured proposal that meets NSF’s stringent evaluation criteria. Here’s how to navigate the process like a seasoned applicant.
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Craft a Targeted Project Pitch
Before you can submit a full proposal, you must complete a Project Pitch via NSF’s portal. Here, you will succinctly explain:
- • The core innovation (What makes your technology novel?)
- • Technical objectives (How will you prove feasibility?)
- • Commercial potential (What market pain point are you addressing?)
- • The company and team (Why is your team the right group to solve this?)
Successful pitches are clear, jargon-free, and focused on technical and societal impact.
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Get Invited to Submit a Full Proposal
If your Project Pitch aligns with NSF’s goals, you’ll receive an invitation to submit a full Phase I proposal. Without an invite, you won’t proceed further.
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Prepare Your Full Proposal
Your proposal must include:
- • A detailed Technical Narrative (how you will execute the R&D)
- • A Work Plan and Milestones
- • A Commercialization Strategy (even in Phase I)
- • Biosketches for key personnel
- • A fully compliant budget justification
Be meticulous. NSF reviewers weigh both scientific merit and your ability to manage public funds effectively.
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Navigate Submission Channels
Submit via Research.gov, FastLane, or Grants.gov, depending on NSF’s current requirements. Each platform has slightly different workflows, so give yourself time to learn system quirks.
Common mistakes to avoid:
- • Underestimating the importance of the commercialization narrative
- • Budget justifications that lack sufficient detail
- • Proposals heavy on science but light on customer discovery or market validation
You Won an NSF SBIR Grant—Now What?
Now, it’s all about accounting. The real work begins once the congratulatory emails are sent and the excitement fades. This is where technical R&D must be paired with financial discipline and compliance infrastructure. The NSF expects awardees to carefully track every dollar, hour, and milestone.
Here’s how to get set up for success from day one.
Setting Up Grant Accounting Systems for Compliance
A common pitfall for first-time grantees is relying on basic bookkeeping software or informal systems. NSF-funded businesses must operate with an accounting setup that can pass federal audit scrutiny.
At minimum, you’ll need:
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A Segregated Chart of Accounts
Direct and indirect costs must be tracked separately in your ledger. This means establishing clear account codes for project-specific expenses versus general company overhead.
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A Formal Timekeeping System
NSF requires daily timesheets for all personnel charging time to the grant, including leadership. Manual spreadsheets don’t cut it. A compliant system must:
- • Be filled out daily (no retroactive entries)
- • Capture time by project or funding source
- • Include supervisory approval
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A Cost Allocation Policy
You need a documented process for allocating indirect costs (e.g., office rent, utilities) across projects. If you pursue a NICRA, this policy becomes even more critical.
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A DCAA-Compliant General Ledger
While NSF is not DOD, the Defense Contract Audit Agency (DCAA) framework sets the gold standard for federal awards. This means your system should:
- • Track expenses at the line-item level
- • Maintain supporting documentation for every transaction
- • Create an unbroken audit trail
Managing Your NSF Grant Budget Efficiently
Poor financial management is probably the quickest way to lose funding or miss project milestones.
Here’s how to manage your budget on the way to receiving your grant:
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Build a Realistic Spending Plan
Go beyond the NSF-approved budget. Create an internal spending plan that maps your approved funds to project milestones and cash flow needs.
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Monitor Burn Rate
Track your burn rate monthly to ensure spending aligns with your work plan. Avoid overspending early, which could starve critical tasks later in your project.
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Conduct Regular Variance Analysis
Compare actual expenses to budgeted amounts on a line-by-line basis. If you see cost overruns or underspending, you may need to:
- • Adjust project priorities
- • Submit a budget reallocation request to NSF
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Stay Ahead of Reporting Deadlines
All NSF-funded businesses must submit quarterly and final financial reports. Late or inaccurate submissions can trigger NSF scrutiny.
Reality check: Failure to manage grant funds correctly could make you ineligible for Phase II or other federal funding.
Staying Compliant: Financial Best Practices for NSF SBIR Grants
Keeping your grant means playing by the rules—specifically, NSF’s financial and compliance rules. Proper financial management and accounting practices position your business for future NSF awards, private investment, and a smooth audit trail.
This section explains how to maintain unimpeachable compliance without losing momentum on your R&D.
Why Proper Financial Tracking is Critical for NSF-Funded Startups
You’re now a steward of public funds, and the NSF holds awardees to high standards of transparency. Every dollar needs to be:
• Allowable
• Allocable
• Reasonable
• Consistently applied
- These come directly from 2 CFR 200, the federal cost principles NSF (and all federal agencies) follow. Noncompliance can result in:
- • NSF requesting reimbursement of disallowed costs
- • Loss of future funding eligibility
- • Damaged credibility with private sector partners and future grant reviewers
Private investors often see clean, federally compliant accounting as a positive signal. It tells them you know how to handle external oversight and large capital responsibly. Many NSF-funded companies later secure SBIR/STTR grants from DOE, NIH, or DoD—all of which require DCAA-style audit readiness. Getting your system right now opens doors later.
Allocating Direct vs. Indirect Costs
One of the most common pitfalls in NSF SBIR accounting is misallocating costs between direct and indirect buckets.
Direct Costs = Tied directly to project work
• Salaries and wages for personnel working specifically on the NSF-funded project
• Materials, supplies, and lab equipment used for your R&D
• Subcontractor costs related to project-specific work
• Project-related travel (e.g., site visits, prototype testing)
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Indirect Costs = Shared business expenses
• Rent and utilities for your office/lab
• Administrative salaries (e.g., HR, accounting, leadership not working directly on the project)
• Office supplies used company-wide
• Depreciation on shared equipment
What Expenses Are Allowed (and Not Allowed)?
Getting familiar with NSF’s allowable cost structure early will save you from making expensive mistakes later.
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Allowable Expenses (common examples):
• Project-related salaries and wages
• Fringe benefits (healthcare, retirement plans)
• Materials and supplies directly supporting R&D
• Subcontractor and consultant fees tied to project milestones
• Domestic travel directly tied to NSF-funded work
• Rent and overhead costs (if indirects are properly calculated)
Unallowable Expenses (often misunderstood)
• Entertainment. No meals or social events unless tied to official NSF activities
• Lobbying or fundraising
• Marketing costs. Unless they are part of customer discovery within the technical objectives
• Capital expenditures outside of project scope. For example, buying unrelated office furniture
• Bonuses not tied to project performance
Gray areas: Conference attendance is often allowable when directly related to project outcomes (e.g., presenting technical findings at a relevant scientific conference). Always double-check NSF’s specific guidelines before booking.
Timekeeping, Payroll, and Reporting Requirements for NSF Grants
If you don’t already have a culture of rigorous timekeeping, now’s the time to establish one.
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Timekeeping
- • Every employee—even leadership—must complete daily timesheets for any period in which they are billing NSF funds.
- • Entries must be broken down by project and task (e.g., NSF SBIR Phase I – Prototype Development).
- • No pre-filled or retroactive entries—NSF (and auditors) will flag this.
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Payroll Alignment
- • Payroll records must match timekeeping records. This means salaries paid from NSF funds need to reflect the actual hours worked on the project, not just an internal estimate.
- • Fringe benefits must be applied consistently, in line with your written policies.
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Financial & Technical Reporting
- • Quarterly financial reports through NSF’s ACM$ portal
- • Quarterly technical reports via Research.gov
- • Final project report, including financial closeout and project deliverables, submitted at the end of the funding period
Don’t forget: Missing a deadline or submitting incomplete reports can delay future fund disbursements and hurt your relationship with NSF. Some awardees even find themselves on NSF’s “high-risk list,” triggering more intensive oversight on subsequent awards.
Let Team 80 Help You Stay NSF Grant Compliant
Accounting and compliance become more complex as your project progresses. What worked for your lean startup in Phase I may not work once you’re managing a $1 million Phase II award with layers of reporting, payroll, subcontractors, and a growing team.
Your team will need a system built for SBIR accounting standards—not just off-the-shelf software. That’s where Team 80 provides a genuine advantage. Our work is grounded in the specific needs of NSF SBIR awardees and small businesses navigating government grant compliance.
How we help SBIR grant recipients stay ahead:
- Payroll Setup and Processing: NSF grants require precise payroll distribution aligned with your timekeeping system. We help set up payroll processes that meet federal expectations and integrate seamlessly with your grant accounting framework.
- Accounts Payable and Receivable Management: From paying vendors to invoicing partners, we’ll manage AP/AR while maintaining the cost segregation required for federal awards—clearly separating direct and indirect expenses.
- Cash Management: We help you stay in control of your cash flow by identifying spending patterns, flagging areas of concern, and aligning expenditures with your approved project budget and burn rate.
- Monthly Financial Statement Preparation: Your NSF reports don’t just need to be timely—they need to be fully compliant and audit-ready. We provide detailed financial statements that meet NSF SBIR Phase I and Phase II reporting requirements.
- Dedicated Chief Accounting Officer Support: Many small businesses can’t justify hiring a Controller internally. We step in as your outsourced financial leadership, providing the expertise needed to meet NSF and federal expectations without overburdening your team.
- Sales Tax and Expense Report Management: Even outside of your NSF award, your business needs to stay on top of complex sales tax rules and employee expense reporting. We ensure your broader compliance picture is buttoned up.
Grant winners who invest early in federal-compliant accounting systems avoid costly mistakes like misallocating expenses or underreporting costs. More importantly, they’re ready to meet the increased demands of Phase II funding or future grants without scrambling to overhaul their internal processes.
You’ve already proven that your innovation deserves NSF’s support. Don’t let back-office inefficiencies or compliance missteps limit what’s possible next.
