What is a grant?

<aside> 💡 Grant – a fund given by a public body, charitable foundation, or a specialized grant-making institution, to an individual or another entity for a specific purpose or public benefit.

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Tips and tricks

• Startups must meet certain criteria (e.g. product/tech, industry/region, target market) to be eligible for a grant.
• Applying for grants can be competitive and time-consuming. Startups usually need to send a comprehensive proposal that outlines their business plan, potential market, and the effect their product or tech will have.
• Grants are usually non-repayable, which means that startups do not need to repay the funding if their business does not succeed.
• Startups need alternative funding sources in case a grant isn't available, as grant amounts are usually limited.
• Grants may require startups to provide periodic reports on use of funding & business progress, which is time-consuming.
• Grants may have conditions, such as creating jobs, R&D spending, or tech transfer to a partner.

Pros

• “Complimentary money”.
• Founders have full ownership, control, and vision over the company.
• Waterfall effect: once you raised one grant, you have high chances to raise another one.

Cons

• Founders lack access to smart money and other support/opportunities.
• Limited capital can limit visibility, marketing, and customer service, stifling growth.

Deal example

• There are 2 founders: Steve and Ben. They decided to start a startup called Smoogle.

• Steve had an operational background, so he serves as CEO. Ben, an ex-engineer, serves as CTO. They establish the company in Delaware and issue 10,000,000 shares (basic number).

• Steve and Ben have agreed that Steve will receive 6,000,000 shares (60% equity) and Ben will receive 4,000,000 shares (40% equity). Take a look at how the cap table will appear:

  	Stocks	Number	Price / share	Equity
  Steve	Common	6,000,000	$0.00	60%
  Ben	Common	4,000,000	$0.00	40%
  Total		10,000,000		100%

• To cover pre-seed expenses ($100,000), they decide to take grant from the non-profit organization LIFE. They apply for a grant and commit to creating 500 jobs in the first year and 1,000 in the second.

• They receive a grant and commit to report the number of jobs created each month. Their cap table will remain unchanged.

• This is a general example. Usually cap table and deal terms are more complex.