Founder time is one of the most common gray areas in SBIR and STTR budgeting.

 

In early-stage companies, founders often do everything. They lead the research, manage the team, talk to customers, raise capital, handle commercialization, write proposals, meet with partners, and make day-to-day business decisions.

 

But when federal funding is involved, not all founder time belongs in the same budget category.

 

Some founder time may be direct project labor. Some may be indirect business activity. Some may fall outside the award entirely. The distinction matters because founder labor affects the proposal budget, timekeeping, indirect rates, billing or drawdowns, and post-award documentation.

 

At Peter Witts CPA PC, we help SBIR/STTR applicants review founder labor budgets so the proposal reflects the work being performed and the company can support the time after award.

 

 

Why Founder Time Is So Difficult to Budget

 

Founder time is difficult because founders rarely work in only one role.

 

A founder may be the principal investigator, CEO, lead engineer, commercialization lead, fundraiser, hiring manager, and operations manager at the same time. In a startup environment, that flexibility is normal.

 

In federal funding, however, labor must be tied to the work being charged.

 

If the founder is listed in the proposal budget, the company should be able to explain:

• What role the founder will perform

• Which project tasks the founder will support

• How much time will be spent on the award

• How compensation was calculated

• Whether the time is direct or indirect

• How time will be tracked after award

• How founder labor connects to payroll and accounting records

The goal is not to exclude founders from the budget. The goal is to budget founder time clearly and support it properly.

 

 

Founder Time Can Be Direct Project Labor

 

Founder time may be treated as direct labor when the founder is performing work that directly supports the funded project.

 

For example, founder time may be direct if the founder is:

• Leading technical research

• Performing engineering or scientific work

• Developing the prototype

• Conducting experiments

• Managing project-specific technical milestones

• Reviewing project data

• Preparing project-specific technical reports

• Coordinating project tasks required by the statement of work

• Performing other work directly tied to the approved project

The key question is whether the work benefits the specific SBIR/STTR project.

 

If the founder’s time is tied directly to the funded work, it may belong in the direct labor budget, assuming it is allowable, reasonable, properly supported, and consistent with the award terms.

 

 

Founder Time Can Be Indirect Activity

Not all founder work is direct project labor.

 

Founders also perform business activities that support the company more broadly. These activities may be necessary for the company to operate, but they are not always tied to one specific award.

 

Founder time may be indirect when it relates to:

• General company management

• Administrative oversight

• Hiring and employee management

• Accounting or finance oversight

• Company-wide strategy

• General operations

• Internal meetings that support the business as a whole

• Managing multiple projects

• General compliance oversight

Indirect founder time should not be charged as direct labor to the SBIR/STTR award simply because the company is small.

 

If the activity benefits the overall business or multiple projects, it may need to be treated as indirect labor and included in the indirect rate structure if appropriate.

 

 

Some Founder Time May Fall Outside the Award

 

Some founder activities may be important to the company but not chargeable to the federal award.

 

For example, founders may spend time on:

• Investor meetings

• Fundraising

• General sales activity

• Broad business development

• Non-award commercialization activity

• Unrelated product development

• Personal networking

• Activities outside the approved statement of work

• Work performed before or after the award period

• Activities that are not allowable under the award terms

These activities may still matter for the company, but they should not automatically be charged to the SBIR/STTR award.

 

This is why timekeeping matters. Without time records, it becomes difficult to show what portion of founder time supported the funded project and what portion did not.

 

 

Founder Salary Should Be Reasonable and Supportable

 

Founder compensation in the proposal should be reasonable and supported by a clear basis.

 

A founder may not have a long salary history with the company, especially if the business is early-stage. In that case, the company should still be able to explain how the salary or hourly rate was determined.

 

Helpful support may include:

• Current payroll records

• Employment agreement

• Board-approved compensation

• Prior salary history

• Comparable salary data

• Role description

• Level of effort estimate

• Budget calculation notes

• Agency-specific instructions

• Documentation of any unpaid or reduced compensation arrangement

NSF’s SBIR/STTR budget guidance states that senior/key personnel should be identified by name, time commitment, requested compensation, and responsibilities; it also notes that if a participant does not have salary history at the small business, Bureau of Labor Statistics data may be used to help determine an appropriate salary request.

 

The compensation basis should be documented before submission.

 

 

Level of Effort Should Match the Work Plan

 

Founder labor should be tied to the technical and project plan.

 

If the founder is budgeted for a specific percentage of time or number of months, the proposal should explain what the founder will do during that time. The budget should not simply assign founder effort because funding is available.

 

A strong founder labor budget should connect effort to:

• Specific project aims or tasks

• Technical milestones

• Management of the funded work

• Reporting requirements

• Commercialization activities allowed under the award

• Project timeline

• Deliverables

• The founder’s actual role in the company

If the founder’s level of effort seems too high or too low for the work described, reviewers may have questions. After award, the company may also struggle to support the labor if actual time does not match the proposal assumptions.

 

 

Founder Time and Fee Are Not the Same Thing

 

Founder labor and SBIR/STTR fee or profit should not be confused.

 

Founder labor is compensation for work performed on or in support of the project. It should be budgeted as labor when appropriate and supported by payroll, timekeeping, and accounting records.

 

Fee or profit is separate. NIH explains that profit or fee must be included in the budget request at the time of application if requested and is not considered a cost for determining allowable use, program income accountability, or audit thresholds.

 

This distinction matters.

 

A company should not underbudget founder labor because it assumes fee can cover it later. It also should not treat fee as a way to avoid timekeeping or payroll documentation.

 

Founder labor, indirect costs, and fee each have a different purpose.

 

 

Founder Time and Indirect Rates

 

Founder time can affect indirect rates.

 

If founder labor is charged directly to the project, it may increase direct labor and affect the allocation base used in the indirect rate calculation. If founder labor is treated as indirect, it may become part of an indirect cost pool. If founder activity falls outside the award, it should not be charged to the award.

 

The classification should be intentional and supported.

 

Before finalizing the budget, companies should ask:

• Is the founder performing direct project work?

• Is the founder supporting the company generally?

• Is the founder working on activities outside the award?

• How will time be recorded?

• How will labor flow into payroll?

• How will labor affect indirect rate calculations?

• Can the accounting system separate these activities?

Poor founder labor classification can distort the budget, indirect rates, billing, and reporting.

 

 

Timekeeping Is Essential After Award

 

If founder time is included in the budget, timekeeping should begin as soon as award activity starts.

 

SBIR.gov identifies timekeeping and labor distribution as accounting system requirements for certain SBIR/STTR award situations. DCAA’s pre-award accounting system checklist also focuses on whether contractors can support costs, labor, and accounting system requirements when federal cost tracking is needed.

 

Founder timekeeping should show:

• Date worked

• Hours worked

• Project or award charged

• Activity performed

• Whether the time was direct or indirect

• Any non-award activity

• Employee certification

• Supervisor or management review, when applicable

• Corrections or adjustments

Founders are often the hardest people to get into a timekeeping habit. But founder time is also one of the areas most likely to be questioned if it is unclear.

 

 

Avoid Reconstructing Founder Time Later

 

Recreating founder time after the fact is risky.

 

If the founder waits until the end of the month, quarter, or project period to estimate time, the records may be less reliable. The company may also lose the ability to distinguish direct project work from investor meetings, general management, unrelated product development, or commercialization activity outside the award.

 

A stronger process is to record time daily using clear project and activity codes.

 

This helps the company support:

• Direct labor charges

• Payroll allocations

• Budget-to-actual reporting

• Indirect rate calculations

• Drawdowns or invoices

• Agency questions

• Audit readiness

• Award closeout

Timekeeping should be treated as part of award management, not a cleanup task.

 

 

Founder Time Should Connect to Payroll

 

If founder labor is charged to an SBIR/STTR award, it should connect to payroll and accounting records.

 

That means the company should be able to show:

• Founder compensation rate

• Payroll records

• Timesheets

• Labor distribution reports

• General ledger entries

• Project cost reports

• Approved budget

• Drawdown, invoice, or reimbursement support

• Any adjustments or corrections

If a founder is not paid through payroll or compensation is deferred, reduced, or handled unusually, the company should review how that arrangement affects the budget and award management.

 

The proposal should not include founder labor assumptions that the company cannot support after award.

 

 

Founder Time in Phase I vs. Phase II

 

Founder labor may look different in Phase I and Phase II.

 

In Phase I, founders may be more directly involved in early technical feasibility work, prototype development, or research planning. In Phase II, the company may add technical staff, subcontractors, consultants, commercialization support, or a more formal management structure.

 

That means founder time should be reassessed as the company grows.

 

A Phase II budget should not automatically copy the founder labor assumptions from Phase I. It should reflect the work that will actually be performed during the Phase II period.

As the company matures, some founder time may shift from direct project work to indirect management, commercialization strategy, fundraising, or general operations.

 

The budget should reflect that shift clearly.

 

 

Founder Time and Multiple Projects

 

Founders often work across multiple projects at the same time.

 

For companies with more than one grant, contract, customer project, or internal R&D effort, founder time should be allocated based on actual work performed.

 

A founder should not charge all time to the SBIR/STTR award just because it is the current source of funding.

 

Instead, the company should track founder time across:

• The SBIR/STTR project

• Other federal awards

• Commercial projects

• Internal R&D

• Administrative activities

• Fundraising or investor activity

• Sales and business development

• General management

• Unallowable or non-award activities, when applicable

This helps prevent mischarging and gives leadership better visibility into how founder time is actually being used.

 

 

Budget Narrative Should Explain Founder Labor

 

The budget narrative should explain founder labor clearly.

 

A strong founder labor narrative should include:

• The founder’s role

• The founder’s project responsibilities

• The level of effort

• The salary or rate basis

• The calculation of requested compensation

• The project tasks supported

• Why the time is necessary

• How time will be tracked after award

A weak narrative might simply list the founder’s salary and percentage of effort without explaining what the founder will do.

 

The goal is to help reviewers understand why founder time is needed and how the proposed effort supports the project.

 

 

Common Founder Labor Budget Mistakes

 

Founder time creates problems when it is treated too casually.

 

Common mistakes include:

• Charging all founder time to the award

• Not separating technical work from general management

• Treating fundraising or investor activity as award time

• Using unsupported salary assumptions

• Copying Phase I labor assumptions into Phase II without review

• Not explaining founder responsibilities in the budget narrative

• Failing to track time daily after award

• Not connecting timekeeping to payroll

• Mixing direct and indirect founder labor

• Using fee or profit as a substitute for founder labor

• Budgeting founder time the accounting system cannot support

• Waiting until closeout to organize labor records

These issues are easier to prevent before submission than to correct after award.

 

 

Questions to Ask Before Budgeting Founder Time

 

Before including founder time in an SBIR/STTR proposal, ask:

• What work will the founder actually perform?

• Is that work directly tied to the funded project?

• Is some of the work indirect or general business activity?

• Are any activities outside the award?

• What salary or rate support is available?

• How much effort is realistic?

• Does the level of effort match the work plan?

• How will time be recorded after award?

• How will labor connect to payroll?

• How will founder time affect indirect rates?

• Does the budget narrative explain the founder’s role clearly?

• Can the accounting system support the labor budget?

These questions help turn founder labor from a gray area into a documented budget strategy.

 

 

Final Thoughts: Founder Time Should Be Clear, Supported, and Trackable

 

Founder time can absolutely belong in an SBIR/STTR proposal when the founder is performing work that supports the funded project. But that time needs to be budgeted carefully.

Some founder activity may be direct project labor. Some may be indirect business activity. Some may fall outside the award. The company should understand the difference before submission and track it properly after award.

 

At Peter Witts CPA PC, we help SBIR/STTR applicants review founder labor budgets, timekeeping processes, indirect rate impact, payroll support, and accounting system readiness so the budget is realistic and manageable after award.

 

 

Need Help Reviewing Your Founder Labor Budget?

 

If your company is preparing an SBIR/STTR proposal and you are unsure how to budget founder time, Peter Witts CPA PC can help review your labor assumptions, compensation support, timekeeping plan, indirect rate impact, budget narrative, and post-award documentation process.

 

Backed by 35+ years of government contract accounting experience and first-hand DCAA knowledge, our team helps innovators build SBIR/STTR budgets that are clear, supportable, and ready for federal funding management.

 

 

Schedule a strategic consultation with Peter Witts CPA PC to review your founder labor budget.