Capital raising can be a beneficial and often necessary step if
you want your startup to scale and grow. It can also be a dauting process as there are numerous investment pathways you can take. Each
process will involve unique rules and laws under which your startup must operate, otherwise you could face legal penalties and reputational
damage as a result. You should also be mindful of what
investors consider before parting with their funds.
This will include aspects such as startup valuation, intellectual property ownership, and validation of your startup’s idea. At Allied
Legal,
we have listed some key ways your startup can raise funds to grow your venture below:
Convertible Notes
Suitable for investors and early-stage startups
Convertible notes, if well structured,
can be a simple, flexible, and cost-effective way for your startup to raise funds. Rather than source seed funding investors or angel
funding, you can offer convertible notes which can ‘convert’ into shares or equity. Convertible notes can be advantageous for the noteholder
as it provides a source of ongoing revenue. Investors holding convertible notes will also generally have less control over the
decision-making power of the venture compared to shareholders, meaning you won’t have to value your startup in its early stages of
operation. If your startup wants to integrate convertible notes, you will need a convertible note agreement. To find out what a convertible
note agreement should include you can follow
the link.
Crowd Sourced Funding
Suitable for innovative and early-stage startups
Crowd sourced funding (CSF) is an alternative way
of raising funds to scale your venture. It can be beneficial in cultivating a community of investors and potential clients, particularly
during the early stages of your startup. Crowdfunding typically takes place on crowdfunding websites which facilitate the interaction
between fundraisers and the ‘crowd’. There are numerous crowdfunding
models
which provide varying benefits and pitfalls for startups which you can read more about here.
Under the Corporations Amendment (Crowd Sourced Funding Proprietary Companies) Bill 2017, there are strict criterion in place if
you are seeking to raise funds using crowd sourced funding. So, as well as consulting a commercial
lawyer,
we recommend conducting your due diligence to find the best option for your startup. To learn more about these requirements and additional
governance obligations you can follow the link.
Donations
Suitable for charities or non-for-profits
If you are a charity or a non-for-profit you may be considering donations as a startup financing method. At Allied
Legal,
we recommend consulting a commercial lawyer prior to accepting donations due to the complex charity laws you will need to navigate. Each
state has its own charity laws, which means that if you are operating a charity in several states or territories, or even accepting
donations online, you will need to ensure that you are complying with multiple jurisdictions’ charity laws. If you are a Victorian startup,
you will need to register your charitable organisation. This requires you to submit
several forms
in accordance with Consumer Affairs Victoria’s (CAV) regulations. It is also important to note that there are a few charitable activities
that are exempt from regulations in Victoria. For a full list you can follow
the link.
Friends and Family
Suitable for early-stage startups
Friends and family can be a useful resource for early-stage
startups. These are likely to be people who believe in you and your offering and, based on this belief, are prepared to accept a higher
level of risk than strangers or professional investors.
Professional Investors
Suitable for early-stage or growth stage startups
An equity raise involves the sale of your startup’s shares to investors as a means
of raising funds.
Investors like angel investors and venture
capitalists
(VC) may be a suitable option if your friends and family aren’t able to provide enough capital to suit your startup’s needs. When deciding
whether to engage a venture capitalist or an angel investor, it is wise to understand the key differences between the two. Broadly, a
venture capitalist is a professional who invests other people’s money on their behalf, whereas an angel investor is likely to be investing
their own money. Angel investors will generally invest during initial funding for startups, whereas venture capitalists will often prefer
more established ventures. Both angel investors and venture capitalists seek new startup investment opportunities as their return on
investment – if your startup succeeds – can be superlative at the event of a startup exit. For further distinctions between angel funding
and venture capitalists you can follow the link.
If you have found an investor that is the right fit for your startup, you should then turn your mind to what legal disclosure requirements
apply. To issue shares to investors you will need to provide adequate disclosure as is required under the Corporations Act 2001.
You should also seek legal advice to ensure that you are complying with the relevant legislation. To find out more you can follow
the link.
Seed Funding
Suitable for early-stage startups
Seed financing can provide useful initial funding
for your startup, particularly if you are in the research or development phase of your venture. Seed funding requires an investor to provide
capital in exchange for interest in your startup. Initially, these investors are often family members, friends, or angel investors. Angel
funding is crucial to seed financing, as these investors will have the capacity to provide significant capital and are more likely to take a
chance on your venture. In seed financing there are a few key stages or seed funding ‘rounds’ in which you can generate capital. Depending
on the scale of your venture, you may feel that only one seed funding round is needed, where others may require multiple. For a full break
down of each seed funding round you can follow the
link.
Selling Assets and Shares
Suitable for early-stage startups
We recommend that the decision to sell shares or assets be made early in the transaction. This will require an understanding of the
differences between what is classed as ‘shares’ and ‘assets’. Your startup’s shares can be sold by your shareholders whereas your startup’s
assets are purchased by the company which undertakes your venture. Your startup’s assets include (among other things) plant and equipment,
goodwill, business contracts, licenses, and approvals. A buyer will normally prefer to buy the assets of a startup and the seller will
prefer to sell the shares. You can read more here for a
further breakdown of shares and assets.
Selling Your Startup
If you are thinking about selling your
startup,
for whatever reason, it is best practice to speak with a commercial lawyer first. In
the fervour of negotiating a business sale deal, it can be easy to lose perspective as you get caught up in legal and accounting paperwork. A
commercial lawyer will be highly experienced when it comes to advising you on the sale
of your startup. For practical tips on how you can embark on the process, you can click
on the link.
Raising startup financing for your startup, from choosing your preferred pathway, preparing legal documentation, to negotiating the terms of
investment, is a complex process. At Allied Legal, our team of specialised legal advisors can
guide you through the complicated procedures and obligations involved. If you would like to speak with one of our commercial
lawyers,
you can connect with us on 03 8691 3111 or send us an email at hello@alliedlegal.com.au.
In the world of startup financing, Simple Agreements for Future Equity (SAFE notes) have emerged as a popular instrument for early-stage
funding. Created as an alternative to traditional equity and debt financing, SAFE notes represent a forward-thinking approach to investment,
especially for seed-stage startups. They are unique convertible securities, converting into equity at a future date, thus simplifying the
fundraising process for young companies.
The aggregation of private capital for investing in startups and emerging companies remains a driving force in the global economy. VC funds
are commonly associated with this type of investment. However, the term "VC fund" encompasses a wide range of variations and complexities.
