Whether you’re just starting work for a business that does federal contracting, or if you’ve been doing it for a long time, you know that the contracting and administrative side of the business speaks its own language. Mostly this is the language of federal acquisition. Acquisition, here, refers to the process of the government acquiring a product or service from the private sector – also known as procurement. It is defined and codified by Congress in a regulation called the Federal Acquisition Regulation (FAR).

Jargon is nowhere near the hardest part of administrating or operating a successful contracting business, but it is one intimidating factor that can prevent the tech experts working for federal contractors from participating in the leadership roles at their company. So if you get familiar with the terminology of the bureaucracy, you can at least get that out of the way and focus on the difficult parts, like the business plan and the customer relationships. In my experience, those who’ve mastered and understood these concepts seem to have no interest in sharing their knowledge. It’s almost as if keeping the technical staff in the dark about the administrative functions is what justifies the rigid boss/employee dichotomy.

Codes that Register A Business with the Government

DUNS Number

A credit bureau for businesses known as Dun & Bradstreet assigns these unique nine-digit identifiers. A DUNS number is used to establish a business credit file, which is often referenced by lenders and potential business partners to help predict the reliability and/or financial stability of the company in question. DUNS stands for “Data Universal Numbering System” but really it’s just a convenient backronym to incorporate the law firm’s name. You have to have a DUNS number to bid for federal government contracts. It’s free to obtain one, unless you want it expedited.

EIN: Employer Identification Number

When you register a company with the IRS for tax-filing purposes, you receive one of these EINs. If you’ve ever received a W-2 statement as an employee, you’ve seen that the EIN for your employer is on the form.

SAM: System for Award Management / CAGE Code

SAM is a fairly new system that replaces several redundant systems that existed previously. Any company that would like to do business with the federal government, or needs to report subcontract information, must register on the System for Award Management (SAM). So after you have an EIN and a DUNS, you can go to the SAM and register, after which you will receive a CAGE Code (Commercial and Government Entity). This is yet another unique identifier for your business, required for any company that does federal contracting. Applying for a CAGE code also requires knowing your NAICS code (see below) that categorizes what your business does. A company’s SAM status has to renewed every year, but at least there’s no fee.

DSBS: Dynamic Small Business Search

Optional and for small businesses only: there’s an additional system to be found by government procurement officers, called the DSBS. When registering with the SAM system, you can also create a DSBS profile through there.

Codes that Categorize Product & Service Offerings

In an attempt to standardize purchases, government has come up with multiple (redundant) classification codes. In other words, they’ve attempted to create a taxonomy of commoditized goods and services. Like with all taxonomic follies, the inherent assumption here is that all offerings from businesses can be classified as this or that, or that the whole exercise is useful for anything. In this case, it is supposed to assist government buyers in finding sellers (although this is not really how they find sellers) and it is might assist sellers in determining who is buying a particular thing (although that too does not really work in practice). The more specialized and hi-tech your offering, the less useful it is to try to fit it into a code classification.

So, choosing your own category codes is dicey, and you should not choose them based purely on your own judgment, but rather what your intended customers are purchasing. If you do some reconnaissance on public databases of past contracts, you can check what codes your competitors have used. Those are probably the ones you will use as well.

NAICS Codes

There are over 1200 of these North American Industrial Classification System codes, defined by the Census Bureau or possibly the Office of Management and Budget. This is the categorical bin you’re placing your business in. You’d choose it based on a careful review of what code your customer buys, not which one you think is most appropriate.

PSC: Product Service Codes

These are similar to NAICS codes, but as a categorical bin for the product or service being sold, as opposed to your business itself. There are even more of these: roughly 2300. They are defined by the GSA.

Use these codes for research: find bidding opportunities on FedBizOpps, or find past contracts on the Federal Procurement Data System (and the agencies that awarded them). You can also find your competition: the Dynamic Small Business Search, enter in your NAICS or PSC codes.

NIGP Codes

NIGP stands for The National Institute of Governmental Purchasing, but it’s just another code for categorizing products and services. This one predates NAICS, and is only relevant at the state and local levels, so we’ll ignore it here.

The GSA Schedule

GSA is the General Services Administration. The “GSA Schedule” is like a collection of pre-negotiated prices, sort of an accelerated buying process for commodity goods and services, where the focus is price. The term itself is a little misleading, as there are actually 39 GSA Schedules categorized by products and services, like schedule 70: IT Services.

It requires a cumbersome application process that asks you to provide several years of past-performance, and a commitment to sell at least $25k/year of goods or services through this contracting vehicle. Being on the GSA Schedule seems might be a competitive edge for mid-size or larger businesses. But as a small business you’d probably just subcontract to one of the 20,000 businesses that are on the GSA Schedule.

SIN: Special Item Number

Under a particular GSA schedule, there may be subcategories for more specific goods or services. These are identified by SINs, another GSA-provided identifier. So if you are on Schedule 70 (IT) you might be selling a service under the Cloud SIN (132-40) that applies to cloud services, or if you’re just consulting maybe you’d use the broad “IT Professional Services” SIN (132-51). As of October 2016 there are even a few SINs for cybersecurity services.

Small Business Set-Asides

The federal government has a mandate to deliver 23% of its prime contracts to small businesses. Just being a small business means there are opportunities marked for you, but many entrepreneurs also look to certify under an officially recognized disadvantaged status so that they bid for even more exclusive “set-asides.” Set-asides are federal contracts that restrict bidding to only members of certain qualifying groups. Not only that, but sometimes small businesses can receive sole-source contracts, also known as no-bid contracts.

The Small Business Administration (SBA) is an agency of the federal government set up to provide support to entrepreneurs and small businesses, through loan guarantees and these special “disadvantaged status” programs. The SBA defines most of the disadvantaged-status titles that you see attached to company profiles. “Joe’s Cyber Shop: a Service-Disabled Veteran-Owned Small Business.” There’s at least one other status, Veteran-Owned Small Business, that is certified by the Department of Veterans Affairs rather than the SBA.

8(a) Business Development Program

This program (named for a section of the Small Business Act) is for minority groups. An eligible business needs to apply for this status with the SBA, and be certified. Once certified, the SBA offers specialized business training, counseling, marketing assistance, and high-level executive development.

HUBZone

Historically Underutilized Business Zones (HUBZones). If the company’s principal office and 35% or more of its workforce resides in one of these zones, it can receive this other kind of preferential status. There’s a map of these zones on the SBA site. No it isn’t broken; it just really is that slow. Chances are these are not desirable places to move your headquarters and yourself to, solely for the chance that you might have an edge in competing for contracts. But even if you did relocate, you’ll probably lose the status as soon as you make your first hire. You’ll be competing for highly skilled individuals to work technical contracts, and you’re just not going to find people like that living around a recently closed military base.

Procurement Terms

There are a whole host of terms related to the government’s offering of contract opportunities, and the contracting industry’s pursuit of them. Quickly, here are some common ones:

• BAA: Broad Agency Announcement. This is how the government solicits for proposals for research and development (specifically). If the government agency is looking for specific products or services rather than basic and/or applied research, then they will issue an RFP instead of a BAA.

• BD: Business Development. This is a pretty loosely-defined term. If used by an engineer, “BD guy” might be considered an insult. Sometimes BD is proposal-writing, sometimes it is relationship-buidling.

• COTS: Commercial Off-The-Shelf. This is a term used to refer to anything that can be commercially purchased or is for sale to the general public. Also see GOTS.

• FPDS: the Federal Procurement Data System. This is a database that is intended to be a single source for government-wide procurement data (information about awarded contracts). It’s a reporting system. What I’ve found is that not all contracts get reported here, so there must be some exceptions. You can use it to recon your competition, but perhaps don’t rely on it too much.

• GOTS: Government Off-The-Shelf. As opposed to COTS, something that is GOTS is not for sale to the general public, and typically is developed by the technical staff of one federal agency (or an outside source at their direction), for use by them and/or other government agencies. This is rare, compared to COTS.

• GFP / GFE: Government Furnished Property / Equipment. Any time the government offers its own equipment in order for a contractor to perform a task, it is referred to as GFE. Technically, GFE is a kind of GFP. Another kind of GFP is GFM (Material). You may also see GFI (Information).

• RFI: Request for Information. This is not a solicitation for proposals, it’s much more preliminary than that. If the government needs more information in order to create a good RFP, then it will put out an RFI. Sometimes the desired response to an RFI is a Capabilities Request: the government occasionally wants to know the available contractors that can perform certain kinds of work. They may use an RFI as a process by which to accept a short (generally 5-10 pages) profile of your company’s offerings and qualifications.

• RFP: Request for Proposal. When the government knows its problem (not basic or applied research) but wants proposals with approaches and prices, then they put out an RFP.

• SoW: Statement of Work. There are many formats and templates for what a SoW must include, but basically it is a list of obligations that the contractor states they will fulfill on the contract.

• WBS: Work Breakdown Structure. This is project manager speak for the work that needs to get done, in outline form. That’s it, it’s an outline. But listen to this pretentious definition they teach in business school! “A hierarchical decomposition of the total scope of work to be carried out by the project team to accomplish the project objectives and create the required deliverables.”

Contract Terms

I’ll make another blog post later about contract types, which is too much to cover here. But there are a few common terms to define up front, related to reading the contracts themselves:

• CDRL: Contract Data Requirements List. This might be specific to military contracts. Some might pronounce it “see drill.” It is a list of deliverables that the contractor is responsible for producing for the government. It is derived directly from the contractor’s Statement of Work in their proposal.
• CLIN: Contract Line Item Number. CLINs are specified in the FAR part 4.10. I think for the contractor, they are basically just numbers that identify deliverables. On the government side, it’s part of an accounting and traceability system.

• CO: Contracting Officer. This is the government person with the authority to enter into, make changes to, or terminate a govnerment contract. In other words, they have been delegated the authority to represent the government in the contracting process.

• COR: Contracting Officer’s Representative. This is a person who helps the CO administer the contract with the performer. The COR is not authorized to make any commitments or obligations on behalf of the government.

• COTR: Contracting Officer’s Technical Representative (COTR). A COTR is a particular kind of COR, designated by the CO to be their technical liason. It’s often the case that the CO does not have a sufficient understanding of the specialized work being performed on the contract in order to accurately assess its progress, and this is when they appoint a COTR. Again, the COTR is not authorized to make any commitments or obligations on behalf of the government. Only the CO is.

The traditional model of entrepreneurship is:

1. concept
2. plan
3. venture funding
4. exit

It seems like most people just unquestioningly accept that this is the natural sequence of events, but why is it this way? Isn’t there something missing from this? Like what about the focus on the customer, or about actually making a great service or product? If a business is working, why do you need to leave? What’s the rush? Why do you immediately go from borrowing money to looking for a buyer? This sounds more like house flipping than entrepreneurship. Accepting venture capital funding means accepting their short-sighted outsider influence, and this is what creates the pressure for an exit (rather than the creation of a stable, sustainable business).

The frothy market of dollar-chasing VC-backed pump & dump schemes is probably the worst way to try to generate a world-changing technological breakthrough. We live in a world where every problem left worth solving is a difficult multi-disciplinary one that requires long-term-horizon thinking. If you are just planning to make money, you may not care. If you are paying some lip service to making the world a better place, though, this seems like a case of some misaligned values.

What about the technical staff, in all of this? The scientists, engineers, programmers. They get left holding the bag on step 4, that’s what. They get rolled. At best, after “exit,” they have a new management team and a 5-10% retention bonus for a couple of years. More likely, everything they liked about the job culture goes out the window and they get to watch the 2 or 3 founders drive off in their new luxury sport sedans, with a cash cushion that makes them set for life. At worst, the technical staff will get laid off shortly after the acquisition and/or the business will implode.

Most people over the age of 25 have become wise to this trajectory of events. For tech labor, it’s theoretically still a seller’s market (seller, here, being the employee in the employee-employer relationship). So prospective employees naturally want to be paid not just a salary, but to actually feel like they are sitting at the table. High-value employees want to be cut in (to use another poker metaphor). If you as the employer don’t cut them in, science has shown: you will be getting 5% less value out of them than you could be, if you can even hire and retain them in the first place.

Offers of equity to new employees are exceedingly common in venture-capital startup land. But even in government land, it’s not unheard of to work for a company with strong employee-ownership values. SAIC is (was, before its board took its stock public and then the model imploded) one well-known success story, and in the early 2000’s I worked for another lesser-known company that used an identical compensation system (the founders of the two companies were friends, actually, and launched the companies in parallel). I have actually worked under a few different equity models over the years: a fully-employee-owned model (some in stock, some in NQO options), a profit-sharing “equity” model, and a no-equity model.

Business finance is not my specialty, but I believe that we as engineers should not adopt a learned helplessness. Many of us have a disinterest in the topic of money. Yes, equity compensation is complicated – even suspiciously so – and dry. Boring, even crass. But we should take an interest in ourselves, because nobody else will. Don’t accept being exploited. This is about the empowerment of labor vs. capital.

The Open Guide to Equity Compensation is a community project to aggregate information to help improve the financial literacy of people in tech, specifically, to spread the kind of sophistication necessary to evaluate a compensation offer that is either all or partially made in terms of company equity. If you’ve never read this guide, do so now! There is seriously good info there, and you may save yourself from making an expensive mistake.

The Open Guide still has a gap when it comes to LLCs, though, so I will add some wisdom from personal experience. If you plan on working at a small less-established or newly established LLC, and are considering an equity offer:

• know that LLCs’ equity sharing structure is different from Corporations, and advice on LLC equity is much harder to find, since LLCs are newer and less common than Corporations
• the equity offer should be in writing, signed
• the offer should specify the award and vesting timeline. If an option award, it should specify the award price
• the offer should specify the valuation method
• the offer should be in percentage terms, not in terms of some malleable unit (fraction with an unknown denominator)
• the offer should contain no loophole words like “intend to,” but be worded as a commitment, like “shall” or “will”
• if the equity-sharing plan structure is still TBD, consider the offer worthless

Especially that last bullet, since it supercedes everything else. Once you accept the offer of employment, you lose all leverage. Once you have lost leverage, your “equity” (if you ever get it) will be defined as something worth nearly zero, in a way that most favors the company. Your award of, say, a defined percent of the valuation of the company can be interpreted to mean an option grant to purchase some equity. Remember, it’s not an award if you have to buy it, it has no present value if you have to buy it at-or-above the present value when granted, and it’s not worth anything if you can’t sell it. Check: are you basically buying an illiquid asset with a tax consequence? Is this thing going to pay dividends until you can sell it? And for an LLC, also realize that you might have to give up employee (W-2) status and start paying more taxes on your salary, too.

See, with LLCs, you cannot get stocks, you can only get “membership interest units.” In an LLC, equity might be in the form of Profits Interest Units (not to be confused with profit sharing). “Profit interest” is a junior form of equity in every sense of the term – if you want the Big Boy equity (ownership) in an LLC you want “Capital Interest.” Either way though, unlike a stock, these two kinds of LLC Interests may be restricted in a way that prevents them from being freely transferred. You might have to hold it until the company itself is sold. And there are complicated consequences for taxation and accounting, that all threaten to make them more trouble than they are really worth, especially for small amounts.

Here is a table to help roughly compare LLC equity offers with traditional coporation equity offers.

The more established an LLC company is, the less attractive a Profits Interest Unit becomes, relative to a Capital Interest Unit. That is because a Profits Interest value is only in the future appreciation of the value of the company, whereas a grant of Capital Interest is an immediate share of the value of the LLC as of the date that the interest is granted. In addition, the longer an employer can drag its feet and delay the award of a Profit Interest Unit, the less value it is to you. That’s why award date, strike price, and vesting schedule are all very important.

If Amazon were an LLC, would you rather be granted – today – a 1% profit interest? Or 1% equity? Amazon is infamously unprofitable, but also enormous. And if it were a profit interest, would you rather have that five years ago, or today? Five years ago obviously: even though Amazon is unprofitable, a PIU represents both profit and appreciation of company valuation, which for Amazon is like a 450% increase.

Also, keep in mind that an LLC can always allocate its gross profit in any given year so as to lower (or eliminate) net profit, disbursing the money in (almost) any way that it sees fit. The management team feels like paying all the profits out as bonuses this year? That comes at the expense of the PIU holders. A company car for the CEO? Sorry PIU holders. If you get a great PIU award and it’s fully vested today, but tomorrow the LLC is sold? Sorry, there hasn’t been any growth in the company value over that period, so your PIUs are worth zero.

Anyway, I hope this has been useful. If you disagree or think I am misinformed, I am open to discussions; find me on Twitter. I encourage everyone to educate themselves using multiple sources, and I don’t claim to be an authority on this subject. In fact, here’s a disclaimer.

Disclaimer

*This blog post and all associated comments and discussion do not constitute legal or tax advice in any respect. The author has prepared this material for informational purposes only, and it is not intended to provide, and should not be relied on for, tax, legal or accounting advice. The author is not a licensed practitioner in taxes, law, or accounting. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. The author(s) expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this guide or associated content.