I was talking with a prominent Canadian VC this week who said: “If I was an investor and one of my companies was not putting in an SR&ED claim, I’d be pissed.”
I’ve seen companies that have raised tens of millions of dollars who don’t file an SR&ED claim because they feel that they can get better leverage from spending time to bring solutions to the market. It is mind-blowing to think that companies are willing to leave millions of dollars on the table.
No matter how successful a company you’ve built, how quickly it is growing, or how much capital you’ve raised, it is always smart to file an SR&ED claim. Investors not only look at the go-to-market results but also want to see prudent cash management. Knowing that their equity investment is not being leveraged with free government funding is quite upsetting and off-putting for investors (potential or current). So let’s dive into how SR&ED can win over investors.
SR&ED in a Nutshell
Some companies feel that they do not have time to file SR&ED, but others don’t even know that their work qualifies for SR&ED. If you’re in the second camp, here is a quick review of the SR&ED program. This article provides a step-by-step guide on what is eligible for SR&ED in 2025.
The SR&ED program provides an incentive for Canadians to build innovative solutions ans address challenging techgnical problems right here in Canada. If the solution to a problem is widely known, it is unlikely that the work that is done would qualify for SR&ED. However, if a company has an idea on how to fix a technical problem, experiments with different methods of fixing the problem, and documents the work, then most likely the project would qualify for SR&ED.
For eligible work, a company can receive up to two-thirds of the salary back from the CRA as a cash refund. If you’re spending $100K on SR&ED-eligible salaries, in most provinces, a company would get back ~$64K. The government is paying for two-thirds of the work you’re doing to solve technical challenges! Check out our SR&ED calculator here to estimate your SR&ED refund in 30 seconds.
SR&ED for Capital Efficiency
Capital efficiency is a fancy way of saying spending money wisely. We’ve all heard of a company blowing through millions of dollars with little to show for it. Conversely, most companies struggle to raise capital and need to be very conservative with their spending, often not having sufficient capital to invest in critical activities.
Turning one dollar into a dollar and sixty cents is exactly what the SR&ED program does. Investors love to see how a company can grow with client acquisition, revenue and non-dilutive funding from government sources, rather than needing more dilutive funding. Thanks to the SR&ED program, companies don’t need to cut corners and can rather invest more in R&D to fuel product improvements, enhanced features and differentiation.
Investors and founders think similarly. Everyone wants to make money. There is a great Canadian success story where investors funded $15M over 2 rounds and less than a decade later went public for $1B. The founders, investors and employees made a ton of money. This is in comparison to a company that raises $100M and sells for $200M. In the second scenario, it is highly likely that the last round of investment made an OK return, but the prior investment rounds probably did not.
The question is how to raise the “right” amount of equity and stretch every dollar so founders can retain a greater proportion of ownership? One of the best ways to smartly fund growth is with non-dilutive funding, such as the SR&ED program.
How SR&ED Strengthens Your Financial Model
Receiving an SR&ED refund has multiple positive outcomes. Even though the refund is received only once a year, it will significantly increase your company’s runway. Funding up to ⅔ of the costs associated with paying technical team members can be a big boost to your bottom line.
A good financial model will include this source of cash and show that, especially for early-stage companies, it can materially extend the runway. However, management may elect to increase headcount or spend more on go-to-market rather than extending the runway. For some companies, time to market or accelerating networking effects may be critical. Rather than raising dilutive equity, SR&ED provides an excellent source of non-dilutive capital.
Oftentimes, claiming SR&ED is a good barometer for the value of R&D a company is doing. Since the SR&ED program provides an incentive for innovation, and not routine engineering, a larger SR&ED claim gives investors a signal that difficult problems are being solved, and that the company is truly as innovative as they say that they are. If the company can solve these problems, this often relates to a unique solution that is more valuable to customers, investors, and the company. Investors may use the size of the SR&ED refund as a metric for future financial success.
Due Diligence Bonus: Paper Trail & Technical Validation
A comprehensive due diligence will ask for your prior corporate tax returns. Not only does the tax return contain a treasure trove of financial data, but the SR&ED claim provides a peek into the technical challenges that the company is solving. This provides investors with another data point that the company is pushing technological boundaries and doing something innovative.
Discipline and organization are required to properly document SR&ED throughout the year, leading to a strong SR&ED claim. This paper trail can be used to show investors the level of organization and tracking the company is doing. Investors love seeing innovation and risk-taking, but also want to know that the founders are diligent custodians of their investment and are focused and organized.
There is no doubt that significant effort goes into shipping features. However, without unique intellectual property, the barriers to entry for the feature are most likely low. Showing investors that an SR&ED claim is being filed goes a long way to show that a company has moats around its business. The technical moats may be so challenging for others to overcome that it is the core reason for the success of a company. Investors want to see that these moats are real and that their funding is going towards something that would be difficult to replicate.
Tips to Maximize Your SR&ED Impact for Investors
Investors love to see consistency and predictability. If a company can demonstrate that every year an SR&ED claim is filed on time, investors will appreciate that the company has financial discipline and predictability. Showing that an SR&ED claim is growing over time as the engineering team grows also provides investors with the comfort that the company is consistently improving the product and addressing challenges that make the value offering more unique and impressive to clients.
Most investors will only look at the results of the SR&ED claim and determine if they believe it is reasonable. However, if internally a company has a process whereby they are tracking that the claim is being maximized, it will impress investors even more. Imagine if investors knew there was a process to evaluate the top 20% of SR&ED consulting vendors every three years to ensure that the company is getting the best value. This process shows a maturity and level of organization that sets the stage for growth, and just as importantly, efficient use of capital. Tips on selecting the best SR&ED consultant for you are available here.
In data conversations, provide a forecast model that includes SR&ED with realistic refund timelines. It is best to show SR&ED as a line item under “Other Revenue.” If the financial model is parametrically driven, the easiest way to estimate an SR&ED claim is to have it based on a percentage of the R&D expenses. Remember that over time, the percentage of SR&ED-eligible activities often declines as a company matures. Therefore, in financial models that are predicting far into the future, the percentage of total R&D that is SR&ED-eligible should decrease. As companies mature, there are more feature requests, bug fixes and other activities that may not qualify for SR&ED, and less true technical innovation in addressing difficult challenges.
Mention SR&ED in pitch decks under “Capital Strategy” or “Funding Sources.” Because SR&ED is a right of taxpayers, it is often considered a reliable source of funding. Compared to grants, which are corporate beauty contests. SR&ED refunds are a fundamental source of funds and should be considered a consistent source of cash.
Many investors want to know that they are not the only ones at the table. They also want to see how sophisticated the CEO is. Is the CEO focused exclusively on equity? Have they considered bank debt? What government grants have been considered? What tax incentives, such as SR&ED, form part of the capital plan? By showing that options have been considered, investors are often impressed with the drive to create optionality.
How SR&ED Can Win Over Investors
Founders who focus on financial discipline are rewarded by investors. It is not to say that this is the most important aspect of a business, but it is a key component of the complete package. Investors want to see a great idea, an ability to execute, an understanding of the market and many other drivers. If investors know that you have a great idea and run a business based on data, analysis, and financial acumen rather than emotion, you’ll have a better chance of raising funds.
Founders should have a good understanding of their accrued SR&ED claim throughout the year. Because SR&ED is received after the fiscal year end, some companies take advantage of SR&ED financing to better match the R&D expenses. More about SR&ED financing here.
Whether it is to have additional working capital, have multiple sources of capital, impress investors or create a realistic financial plan, using SR&ED as a strategic lever is one key component for great leaders.
Want to talk SR&ED strategy and make sure you are maximizing your claim to keep your investors happy? Book a call with us today.
