Small Business Size and Affiliation for Software Companies: Investors, Options and Size Protests

2026-10-27#small-business #set-asides #saas

By Philip Luca — Founder of GovExpress; prior domain experience at Bloomberg Government and GovWin IQ.

Being small is the entry ticket to a large share of federal buying. A set-aside is closed to any firm that is not small under the solicitation’s size standard, and the small business programs all start from the same test. Most software companies assume they pass it because they are a startup. The test does not ask how young you are. It asks how big you are together with everyone who controls you or whom you control.

This guide covers how SBA measures size, how affiliation works for companies with venture investors or a corporate parent, how options and convertible instruments are treated, when you have to recertify, and how size protests work. It is written for founders and finance leads deciding whether they can check the small business box on their next offer.

How size is measured

Size is not a single fact about your company. It is measured per solicitation, against the size standard for the NAICS code the contracting officer assigned. You can be small on one bid and other than small on the next. Our NAICS guide covers how codes are chosen; SBA publishes the current dollar and headcount limits in its table of size standards, so read them there.

Two kinds of standards matter for software companies:

Receipts. Most software and IT services codes use a receipts standard. Under 13 CFR 121.104, receipts generally means total income plus cost of goods sold as reported on your federal tax return, averaged over your last five completed fiscal years.
Employees. Some codes count employees instead, and so does the SBIR and STTR eligibility test. Under 13 CFR 121.106, that is generally the average number of people employed per pay period over the preceding 24 months, counting full-time, part-time and temporary staff.

Either way, the count includes your affiliates. That is where most of the surprises come from.

Affiliation: the rule that decides most cases

13 CFR 121.103 says two companies are affiliates when one controls or has the power to control the other, or a third party controls or has the power to control both. It does not matter whether the control is exercised. The power is enough. Once two companies are affiliates, SBA adds their receipts or employees together.

The rule identifies several kinds of control. The ones software companies meet most often:

Stock ownership. A holder of 50 percent or more of the voting stock controls the company. A minority holder can also be found in control when its block is large compared with every other holder.
Negative control. A minority investor controls the company if it can block ordinary business decisions. Typical examples are a veto over the annual budget, hiring or firing officers, setting executive compensation, or entering ordinary contracts. Quorum rules that let one investor stop the board from acting can have the same effect.
Common management. When the same officers, directors or managing members control two companies, the companies can be affiliates.
Identity of interest. Family members with closely aligned business interests can be treated as one party. Economic dependence can also create affiliation: SBA may presume it when a company has derived 70 percent or more of its receipts from another company over the previous three fiscal years, which matters for a software company that sells mainly through one prime or reseller.
Newly organized concerns. Former officers or key employees of one company who start a new company in the same or a related industry, with help from the old one, can make the two affiliates.

SBA also looks at the totality of the circumstances. Several ties that are each too weak alone can add up to affiliation.

Venture investors and corporate parents

For a venture-backed software company, the question is usually not the investor’s stake but the investor’s rights. Read the investor rights agreement, the voting agreement and the charter, not just the cap table.

Protective provisions over extraordinary actions are generally fine. SBA’s rule recognises that a minority investor may hold a veto over extraordinary actions to protect its investment without that alone causing affiliation. Examples include selling the company or substantially all its assets, issuing additional stock, amending the charter, changing the line of business, entering bankruptcy or dissolving.
Vetoes over ordinary operations are the problem. If an investor can block the budget, the hiring of officers or ordinary contracts, SBA may treat that investor as controlling your company.
Control spreads across a portfolio. If an investor controls your company and also controls other portfolio companies, those companies are your affiliates through common control, and their receipts or employees count toward your size.
A corporate parent counts in full. A subsidiary of a larger company is measured with its parent and the parent’s other subsidiaries. A carve-out or a spin-off with an ongoing services relationship should be checked under the same rules.

SBIR and STTR have their own eligibility rules on ownership, including limits on participation by firms majority-owned by venture capital, hedge fund or private equity firms. Our SBIR and STTR guide covers them.

Options, convertibles and pending deals

SBA generally gives present effect to future rights. Stock options, convertible securities and agreements to merge are treated as if they had already been exercised or completed when SBA decides who has the power to control a company. Options that are subject to conditions outside the holder’s control, or that are not yet exercisable, may be treated differently, and the rule text sets out the detail.

For a software company, that means:

Convertible notes and similar instruments should be read as if they had converted, with whatever voting and veto rights the resulting shares would carry.
A signed term sheet or merger agreement can change your size before the deal closes.
Large option grants to a single holder can shift the ownership picture.

If a financing or acquisition is in progress while you are preparing an offer, check how it affects your size before you represent small.

Joint ventures and subcontractors

Affiliation can also arise from how you perform a contract.

Ostensible subcontractor rule. If a subcontractor performs the primary and vital requirements of a contract, or the prime is unusually reliant on it, the two can be treated as affiliates for that contract. Our guides to teaming and subcontracting and the limitations on subcontracting cover how to structure work to avoid it.
Joint ventures. A joint venture is generally small when each partner is small under the solicitation’s size standard. A joint venture between an SBA-approved protégé and its mentor is an exception, and our mentor-protégé guide explains how it works.

When size is fixed, and when you recertify

Under 13 CFR 121.404, size is generally determined as of the date you submit your initial offer including price. If you were small then, you are generally treated as small for the life of that contract, even if you grow past the standard during performance.

Recertification interrupts that. You generally have to recertify your size:

Within 30 days after a novation, merger or acquisition. FAR 52.219-28 implements this for contracts. Our guide to novation and change-of-name agreements covers the deal side.
Before the end of the fifth year of a contract longer than five years, and again before each option exercised after that.
When a contracting officer asks for it on an order under a multiple-award contract. See IDIQ contracts and task orders.

Recertifying as other than small usually does not end the contract, but the agency can generally no longer count later options or orders toward its small business goals, and you may lose access to orders reserved for small business. Plan for that before a financing or acquisition closes.

Size protests

Your size representation is self-represented. The contracting officer generally accepts it unless someone challenges it, and size is the most common challenge to a small business award.

Who can protest. Another offeror, the contracting officer or SBA.
When. An offeror generally has five business days after receiving notice of the apparent successful offeror to file with the contracting officer (13 CFR 121.1004).
What it needs. Specific facts that give a reason to believe the awardee is not small. A bare allegation is dismissed.
Who decides. The contracting officer forwards the protest to the SBA Area Office, which asks the challenged company for its ownership documents, financial statements, tax returns and agreements. The Area Office decision can be appealed to SBA’s Office of Hearings and Appeals.

Size protests go to SBA, not to GAO. Our bid protests guide covers the other protest routes.

The stakes are high. Under 15 U.S.C. 632(w), a willful misrepresentation of small business status to obtain a set-aside contract creates a presumption that the government lost the full value of the contract, on top of possible False Claims Act liability and suspension or debarment.

Self-represented is not verified

The small business box in your SAM.gov registration and in each offer is a representation you make. Nobody checks it until there is a protest, an SBA review or an audit. That makes it different from an SBA certification such as 8(a) or HUBZone, where SBA has reviewed the company before it competes.

The distinction cuts both ways. For your own company, a size representation is a legal statement, so make it from documents, not assumptions. For anyone evaluating a vendor or teaming partner, a company’s own size claim tells you what it says about itself. Only an SBA size determination or certification tells you what SBA has checked. Our guide to small business set-asides covers the certified programs.

What this means for a software company

Read your investor agreements before your cap table. Vetoes over ordinary decisions, quorum rules and board control matter more than percentages.
List your affiliates. Include any controlling investor’s other controlled portfolio companies, a parent and its subsidiaries, and any company you depend on for most of your receipts.
Treat options and convertibles as exercised. Include pending financings and signed deals.
Check each solicitation. Compare your receipts or employees, with affiliates, to the standard for that solicitation’s NAICS code, as of the offer date.
Calendar recertification. After any merger, acquisition or novation, before year six of long contracts, and before options after that.
Keep a size file. Tax returns, cap table, investor agreements and your affiliate analysis, ready if a protest arrives within days of award.
Read the current rule text. SBA’s size rules are in 13 CFR Part 121 and change by rulemaking, and the FAR is being rewritten under the Revolutionary FAR Overhaul, so clause numbers and wording may change. Confirm the provisions in your solicitation, and get advice from counsel before representing small if your ownership is complex.

Where this fits

Size status is one of the first things a federal buyer checks on a set-aside, alongside your registration, your compliance posture and your record of federal work. Score your company’s federal readiness to see how your profile looks next to the other categories federal buyers review.

Frequently Asked Questions

Does a venture capital investor make my software company other than small?

Not automatically. SBA counts an investor's other holdings only if the investor controls your company, or has the power to control it. A majority stake is control. A minority investor can also have control through negative control, meaning the power to block ordinary business decisions such as approving the budget, hiring officers or entering contracts. Protective rights over extraordinary actions, such as selling the company or issuing new stock, do not create affiliation on their own.

When is my size measured for a federal contract?

Generally as of the date you submit your initial offer including price, against the size standard for the NAICS code on that solicitation. Under 13 CFR 121.404, you keep that status for the life of the contract unless you have to recertify, for example after a merger or acquisition, before the sixth year of a long contract, or when a contracting officer asks for recertification on an order.

Do stock options and convertible notes count for affiliation?

They can. SBA generally treats stock options, convertible securities and agreements to merge as if they had already been exercised or completed when deciding who controls a company. Read your convertible instruments and investor agreements against that rule before you represent your size.

Who can file a size protest, and when?

Another offeror, the contracting officer or SBA can challenge an apparent awardee's size. An offeror generally has five business days after receiving notice of the apparent successful offeror to file with the contracting officer, who forwards it to the SBA Area Office. The Area Office decides, and its decision can be appealed to SBA's Office of Hearings and Appeals.

The CMMC brief

What the Phase 2 suspension changed and what it did not — the obligations that still bind, the assessment path a contract puts you on, the scoping decision that drives the cost, and the sequence that fits inside a pipeline. Sourced from the primary record.