Raising capital in Australia, a checklist for startup founders

Raising capital is tough, regardless of where you are in the world. In Australia, the venture capital scene is relatively young compared to Silicon Valley, therefore fund raising can be competitive and, some say, more challenging.

In collaboration with Fullstack Advisory, we created this checklist to help the capital raise process in Australia as simple and straightforward as possible so you can focus on what really matters - growing your business.

This article is for you if you have already explored your funding strategy, developed a business plan and pitch deck, and identified your potential investors. If you haven't considered thosethings, you might want to start with our comprehensive guide on how to raise capital for startups.

TLDR; the Aussie capital raise checklist

How do you prepare for a capital raise? What documents do you need? And how long will a capital raise take? 

Unless you’re prepared to bootstrap your start-up all the way to the top, it is more than likely you will raise capital from investors at some point in the company’s life. If you prepare early and do all the right steps, it can really improve the investor confidence and overall outcome. 

Below we’ve set out the main steps required and major issues to consider when preparing for a raise. These can be summarised as follows: 

1. Tidy up your share registry
2. Consider the big picture questions
3. Prepare a terms sheet (if necessary)
4. Create or amend the shareholders agreement‍
5. Get your legal documents reviewed
6. Obtain the required board and member approvals
7. Execute the raise

Ready? Let's dive in.

1. Tidy up your registry

ESS / ESOP

If your Company has an Employee Share Scheme (ESS) or an Employee Stock Option Plan (ESOP), you want to make sure that it is up to date and accounted for in your share registry. The potential investors will want to see the ‘fully diluted’ share registry, meaning the share registry that takes into account all options (and option pools approved) and Convertibles Notes etc. 

If you don’t have an ESO but you want one, it is a good idea to get it approved before the raise. In fact, many early stage investors will often want to see an option pool factored into your cap table before investing. Not only does this give them transparency in their fully diluted ownership, it also increases their confidence in the team. 

You don’t necessarily have to get your ESOP completely sorted before the raise. It can sometimes be as simple as getting the right to create an ESOP factored into your shareholders agreement (discussed below) or otherwise agreed to by the shareholders. 

Share Split 

A split (or subdivision) may be useful where a company only has a small number of shares on issue. Before offering more shares to new investors, the Company can split the existing shares into a larger number. 

For example, a company could split 2 shares on issue into 20 million. As a result, each share will be worth less per share, but the company will be able to issue more shares with less dilution effect. This can allow a company to better allocate an exact proportion of ownership to an investor. 

A share split is a simple step, but one that is good to tick off early. 

Make sure it is current and clean 

Before you even start doing the calculations, check that your registry is up to date, and does not contain any errors. Have all transfers been processed? Are the member details correct? Has ASIC been updated? Do the founders have the correct class of shares?

The transparency offered to investors via Cake delivers essential transparency in investor communications and provides startups in fundraising stages with a significant competitive advantage.
^{—Stuart Reynolds, CEO & Founder at Fullstack Advisory}

2. Consider the big picture questions

It is good to pause to consider a few hypothetical questions before jumping into negotiations and signing deals. You should have your commercial intention clear before jumping into the legal execution. 

Take a step back and consider the simple questions such as: 

• How much do you actually want to raise? 
• How much equity are you prepared to give away? 
• Are you prepared to offer investors any special terms? 
• What kind of shareholders do you want on your registry – active helpers, or passive cash injectors? How many of them do you want? 
• And is your valuation realistic? If you’re not able to work out your valuation right now, maybe a convertible note would work better for this round.

3. Prepare a Terms Sheet

Heads up, not all raises will necessarily need a Terms Sheet. Some investors will want to see a Terms Sheet that summarises the terms of the investment. 

Others are happy to just review the shareholders agreement instead. Family and friends might just take your word for it. It will all depend on the raise round, and the sophistication of the investors. 

Generally, a Terms Sheet is not binding. Instead, it just sets out the general terms which will be included in the shareholders agreement and subscription agreement. It is basically an effective way for the Company and Investor to discuss whether any changes to the shareholders agreement (or subscription agreement) are required before an investor will invest. 

For example, an Investor may want a right to appoint a director under the Shareholders Agreement. Or, she/he may want to ensure an ESOP has been factored into the Shareholders Agreement and the cap table, and so, this would be included in the Terms Sheet. 

Even though the terms sheet is optional, it can give your investors a quick overview of the opportunity and the existing company governance. This is particularly important where your investors might be time-poor. 

Once a Terms Sheet is ‘agreed’ with an Investor, all the terms agreed should be reflected in the Shareholders Agreement. Once the Shareholders Agreement is finalised and signed by current shareholders, that will become the binding agreement. 

4. Create or amend the Shareholders Agreement

‍
Put simply, a shareholders agreement is the document that sets out the ongoing relationship between the company and its Shareholders. 

Shareholder agreement vs subscription agreement

The shareholders agreement is different to the subscription agreement. The subscription agreement is a document used specifically in relation to a certain share issue. 

The shareholders agreement is an ongoing document which is often referred to throughout the life of the Company.

Cake provides an automated subscription agreement through its capital raise platform for each investor, as part of the automated process. Our contract engine also includes other contract templates that you can use for your raise. Sign up today to get started.

If your company doesn’t have a shareholders agreement, it is good practice to get one before the cap table grows. Generally, whenever there is more than one shareholder, a shareholders agreement is worthwhile. 

The shareholders agreement often serves as the main document protecting the founders’ interests (and the investors). It sets out the process for things such as which decisions will require shareholder approval, how directors can be appointed and removed, and how shares can (or cannot) be transferred. 

If you have an existing shareholders agreement and the investor wants to make changes, it is worth starting the process early – an amendment to a shareholders agareement won’t be binding until all existing shareholders agree and sign. 

5. Get your legal documents reviewed

It is best practice to get your primary legal documents reviewed by experienced start-up lawyers, if not drafted by them in the first place. For example, a shareholders agreement is a document that could survive the entire life of your company. A small error in it now could cause a huge headache years down the track. 

It is also worth making sure you are aware of the relevant Corporations Act obligations. For example, do you know what exemption to disclosure you will be relying on for each investment, and have you created a record to manage this? Are you aware of the 50 shareholder limit for private companies?

Here's a handy checklist of the key legal contracts you need for your raise.

6. Get the required approvals

Most Shareholder Agreements and Constitutions contain ‘pre-emptive rights’ provisions. Pre-emptive rights require that before the Company issues shares to new investors, it first has to offer them (on those same terms) to the existing shareholders. Pre-emptive rights will also often apply to transfers. 

If your Company documents have pre-emptive rights, you should either: 

1. Request that all shareholders sign a ‘Members Resolution’ for the raise. In this resolution, the members will agree not to enforce those rights and approve the raise to proceed (i.e. they waive their rights); or 
2. Follow the pre-emptive rights process. Keep in mind that current shareholders will often be the best investors anyway – so keep them in the loop! 

In practice, existing shareholders in early stage companies are generally happy to provide a waiver. The basis for this is that if the Company is raising again, it is likely growing, and that is a good thing for their investment. 

You should also get the required board resolution before proceeding, in accordance with your company rules. You will be able to create and issue members and board resolutions, and handle all online signing, through Cake.

7. Execute

After you’ve ticked off the above, it’s time to execute. 

You can use the automated Cake platform to send your offers to investors and have it all signed and processed online. This will include an automated subscription agreement, and the ability to attach all documents for review (terms sheet, shareholders agreement etc). 

With Cake, investor will be automatically transferred onto your cap table and create share certificates to be issued to the investor through their account. 

Outside of Cake, this can be a messy process. If you have a few investors all investing through different structure types and signing in different capacities, it can take weeks of emails to get the basic documents sorted. In Cake, it will automate that process for you. 

I have spent days chasing signatures in complicated deal documents and I saw how the Cake platform can seamlessly manage the process in minutes. It's a game changer for startups raising their next round and investors who want to streamline their investment process.
^{—Dean McEvoy, CEO & Co-founder at TechSydney}