Australia’s start-up ecosystem has rapidly evolved over the past decade, becoming a hotbed for innovation and entrepreneurship. With a strong talent pool, a favourable business environment, and increasing government support, Australian start-ups have access to various funding sources that can help them scale.
ANGEL INVESTORS
Angel investors are high-net-worth individuals who provide early-stage capital, often in exchange for equity or convertible debt. They not only bring funding but also valuable mentorship and networking opportunities. Prominent angel networks in Australia include Sydney Angels and Melbourne Angels, which connect start-ups with experienced investors.
VENTURE CAPITAL (VC)
VC is a significant source of funding for start-ups looking to scale quickly. In Australia, venture capital investment has been steadily increasing, with funds like Blackbird Ventures, AirTree Ventures, and Square Peg Capital as active players in the market. VC firms typically seek high-growth potential and a clear exit strategy, such as acquisition or IPO.
GOVERNMENT GRANTS
The Australian government offers various grants and support programs to foster innovation and entrepreneurship. Key programs include the R&D Tax Incentive, the Accelerating Commercialisation Grant, and the Entrepreneurs’ Programme, as well as state government business grants. These grants provide non-dilutive funding, which means founders do not have to give up their equity.
CROWDFUNDING
Crowdfunding platforms like Pozible, Kickstarter, and Equitise allow start-ups to raise funds from the general public. Rewards-based crowdfunding involves offering rewards, such as products, services, or experiences, while equity crowdfunding enables investors to own a share of the company. This model has grown in popularity in Australia, particularly for consumer-facing products.
ACCELERATORS AND INCUBATORS
Accelerators like Startmate, BlueChilli, and Muru-D provide start-ups with funding, mentorship, and office space in exchange for equity. These programs are designed to fast-track start-ups through the early stages of growth.
Incubators, such as Cicada Innovations, offer a supportive environment for start-ups to refine their business models without the pressure of rapid scaling.
BANK LOANS AND ALTERNATIVE FINANCING
Traditional bank loans are less common for start-ups due to stringent requirements and high risk. However, alternative financing options, such as revenue-based financing and venture debt, are emerging as viable options. By reason of the higher risks, those investors seek higher returns than traditional banks and security measures to offset their risk.
Companies like Lighter Capital offer start-ups non-dilutive capital in exchange for a percentage of future revenues.
LEGAL SERVICES IN START-UP FUNDING
Navigating the legal landscape is crucial for start-ups looking to attract investors, comply with regulations, and protect their interests.
STRUCTURING THE BUSINESS
One of the first legal considerations for any start-up is choosing the appropriate business structure. Common structures in Australia include sole proprietorship, partnership, company, and trust.
A company structure, particularly a private company limited by shares, is often preferred for start-ups seeking investment as it allows for equity financing and better control over shares. Legal advisors assist in selecting the right structure, ensuring it aligns with the founders’ goals, investor expectations, and regulatory requirements.
FOUNDERS’ AGREEMENTS
A Founders’ Agreement outlines the roles, responsibilities, and ownership stakes of each founder. This document is critical as it sets the foundation for the start-up’s operations and future funding rounds.
Lawyers are needed to draft this agreement to cover key areas such as equity split, decision-making processes, vesting schedules, and what happens if a founder leaves the company. A well-drafted Founders’ Agreement helps prevent disputes and ensures a clear understanding among the founding team.
INTELLECTUAL PROPERTY (IP) PROTECTION
Protecting intellectual property is vital for start-ups, especially those with unique products, services, or technologies. Legal services in IP include registering trademarks and patents, as well as drafting confidentiality agreements and non-disclosure agreements (NDAs) to protect trade secrets.
These protections not only safeguard the start-up’s assets but also make the business more attractive to investors who want to ensure that the start-up’s core assets are secure.
LAW COMPLIANCE
Raising funds from investors involves compliance with Australian securities laws, particularly the Corporations Act 2001 (Cth). Legal advisors are essential to ensure that any fundraising activities, such as issuing shares or convertible notes, comply with these regulations.
Start-ups must navigate rules around public offers, private offers, and exemptions, and they may need to prepare disclosure documents like offer information statements or prospectuses. Failure to comply with securities laws can result in significant penalties and damage to the start-up’s reputation.
TERM SHEETS, SHAREHOLDERS’ AGREEMENTS AND SHARE SUBSCRIPTION AGREEMENTS
Once funding negotiations begin, a term sheet should be drafted to outline the key terms and conditions of the investment. This non-binding document serves as the basis for the more detailed Shareholders’ Agreement, which legally formalises the relationship between the start-up, owners and its investors. Share Subscription Agreement provides investors with terms of purchase, including how shares will be issued and outlines the obligations of the startups and investors, ensuring compliance with regulatory requirements and avoiding potential legal disputes.
Retaining a lawyer is crucial in drafting and negotiating these agreements to ensure that the terms protect the founders’ interests while satisfying investor requirements. Key issues addressed include share price, number of shares, voting rights, board composition, anti-dilution provisions, minority shareholder protection and exit strategies.
BUSINESS AND LEGAL DUE DILIGENCE
Investors conduct due diligence to assess the start-up’s viability, scalability and potential risks. This process involves a thorough review of the company’s legal, financial, and operational aspects.
Lawyers help prepare the necessary documentation and ensure that the start-up’s legal affairs are in order, from corporate governance to contracts and compliance issues. Effective preparation can significantly increase the likelihood of securing funding.
EMPLOYMENT AND CONTRACTOR AGREEMENTS
Start-ups often rely on a mix of employees, contractors, and advisors to grow their business. Lawyers are needed to draft employment agreements, contractor agreements, and advisor agreements that clearly define the terms of engagement, compensation, confidentiality, and intellectual property ownership.
These agreements protect the start-up from future disputes and ensure compliance with Australian employment laws.
REGULATORY COMPLIANCE
Depending on the industry, start-ups may be subject to various regulatory requirements, such as licensing, data privacy laws, and consumer protection laws.
For example, tech start-ups handling customer data must comply with the Privacy Act 1988 (Cth) and the Australian Privacy Principles. Legal advisors help identify relevant regulations and guide start-ups through compliance to avoid penalties and reputational damage.
If you are seeking to raise start-up funds, retain The IP House Lawyers as your legal advisor to assist you in navigating the complex legal realm, protecting your interests, and complying with the laws and regulations.
For any further information or queries on the above content, please contact us.
The Author
Jean Kallmyr | Lawyer, The IP House Lawyers | t: 0435 799 831 | e: admin@theiphouse.com.au
Key Contact
Claire Darby | Managing Director/Lawyer, The IP House Lawyers | t: 0412 998 951 | e: claire@theiphouse.com.au
Disclaimer
The information and contents of this publication do not constitute any legal or financial advice. This publication is intended only for reference purposes for The IP House Lawyers’ clients and prospective clients.
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