Raising funds & Investment

How to Raise Funds for Your Startup

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.