Venture Capital Investment in a Small Business? Know the SBA rules first.

In recent months, there have been a number of articles about an increase in venture capital interest in entities that do business with the federal government. In fact, this interest is not new. Small entities with venture backing have used programs like the Small Business Innovation Research (SBIR) program to obtain early stage research and development funding and government entities, like the Department of Defense, have tried to encourage smaller firms with cutting edge technology to enter the federal market. However, traps for the unwary remain. Specifically, many small businesses and venture capital firms assume that minority investments on standard market terms will not change a company’s status under the Small Business Administration (SBA) affiliation rules. This assumption can be a mistake and is one of the most common pitfalls we see companies get caught in when making a minority investment in a small business.

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