Many startups make a classic error when they look for growth funding. They assume they must rely entirely on capital to fund early research and development (R&D). However, involving angel investors or other capital sources can be incredibly expensive. They want early equity, board seats, and rapid returns.
This relationship also pressures founders to rush products to market before they are ready, leading to compromises. Fortunately, there is a better way to fund your breakthrough technology. The federal government provides a huge pool of non-dilutive federal R&D funding. It supports high-risk aerospace, software, and deep-tech engineering innovation without costing you a single share of stock.
You might wonder, “Does the government own my IP if it funds development?” The good news is that it normally does not. But it is understandable that you have this concern—it is a common misunderstanding about federal contracting.
Under federal law, the private contractor typically retains IP ownership. Instead of taking your equity, the government merely secures a limited license to use the technology for government purposes. This crucial distinction is the core of a successful dual-use technology strategy. By using this funding, you can de-risk your core technology and build your company’s value without early dilution.
How To Navigate FAR and DFARS Without Surrendering Your IP
Securing your government contract IP rights isn’t automatic. You have to manage a complex regulatory system. This means comprehending the fundamental differences between civilian agency contracts and defense contracts. Civilian awards are governed by the Federal Acquisition Regulation, known as FAR, while defense awards are governed by the Defense Federal Acquisition Regulation Supplement, known as DFARS.
These regulations treat your proprietary data very differently. Under the DFARS data rights clauses, the scope of the government’s license is determined entirely by how the development was funded. Under the FAR the scope of the government’s license is determined by the contract performance.
The three primary license levels in defense government contracts are:
- Unlimited rights. If the government fully funds your development, they receive unlimited rights. This means they can share your drawings, manuals, and code with anyone, including your direct commercial competitors.
- Government purpose rights. If development is mixed-funded, meaning both government and private money were used, the military receives government purpose rights. This allows it to share your data for specific reasons, such as public bidding or with support contractors, but they can’t release it for commercial use.
- Restricted/limited rights. If you develop technology exclusively at private expense, the government only gets limited rights. They cannot share your software/technical data outside the federal government without your written permission.
Understanding these rights is helpful, but failing to take action to secure them is a costly mistake that many companies make. Importantly, the government doesn’t automatically grant you any of these protections. Instead, guarding your rights requires understanding and strictly adhering to documenting, asserting and marking requirements.
In particular, if you share technical data, drawings, or software without the required markings, the law presumes you delivered it with unlimited rights. This can be a catastrophic mistake. Once unmarked data enters government hands, your trade secrets can be in the public domain. As a result, anyone can copy your product.
How do you protect your IP? You have to negotiate and assert your rights upfront, marking every proprietary document before delivery.
Aligning Development Timelines: Defense Deliberation vs. Commercial Velocity
Founders must also manage the massive timeline gap between the defense sector and commercial markets. Stakeholders who have worked with the military know that it relies on a structured, deliberate, and multi-year procurement process that can easily starve a startup.
In contrast, the private sector operates with rapid commercial velocity. Commercial buyers expect lab-to-shelf timelines of more like six months. If your startup relies solely on defense procurement, you might run out of cash before you win a follow-on contract.
Fortunately, you can leverage the dual-use concept as a type of feedback loop. You test and deploy your technology in the commercial market first, refining it in rigorous, real-world environments. This commercial-sector feedback helps your technology mature faster, which is good for your business.
The military also benefits because they get a field-hardened solution at a much lower cost. Meanwhile, federal research agreements help you by ensuring you have the necessary capital. This non-dilutive R&D funding carries your business through the early, capital-intensive engineering phases.
Real-World Case Study: Scaling Dual-Use Technology With Elroy Air
An excellent real-world example of this dual-track strategy is the aerospace company Elroy Air. The company recognized identical logistical needs in both the defense and civilian markets.
The military needed to deliver heavy cargo by air to forward operating bases without risking pilots and their aircraft. At the same time, logistics managers for commercial businesses faced similar challenges delivering cargo to remote hubs, such as mountain villages in Nepal, isolated mining operations, and offshore drilling rigs.
Rather than choosing between these two lucrative markets, the company structured a public-private approach. They used military prototyping funds to perfect their hybrid-electric vertical takeoff and landing aircraft architecture. While using this public money, the company was extremely careful to protect its underlying commercial rights and patents.
The commercial payoff was exceptional. Because they maintained their commercial intellectual property rights, they were able to secure massive pre-orders from global logistics companies. They built a highly valuable commercial pipeline while remaining fully eligible for defense supply-chain contracts.
How Should Defense and Tech Contractors Protect Their Intellectual Property?
Commercializing technology under government contracts requires early, strategic planning. You can’t treat federal award clauses as administrative boilerplate.
At Martensen, we work with founders to secure their proprietary assets and grow their long-term enterprise value. To succeed in this challenging market, founders should implement several core operational steps:
- Inventory your background assets. You must catalog all pre-existing patents, trade secrets, and software code before signing a federal contract to prove what you developed at private expense.
- Assert your data rights early. You should negotiate your data restrictions and document your funding sources at the proposal stage to prevent the government from claiming unlimited rights.
- Establish separate development lines. You must set up separate accounting records and technical paths to clearly distinguish your government-funded deliverables from your commercial product variants.
These actions will help protect your commercial upside. Crucially, you should not wait until a contract is signed to think about your patent portfolio.
Learn More About Commercializing Your Innovations Under Government Contracts
Consulting with experienced IP and federal contracting counsel can help you structure your agreements, avoid costly data forfeitures, and position your dual-use technology strategy for massive long-term commercial valuation.
Let Martensen help you protect what you build. Contact our team today.