Capital raising can be a beneficial and often necessary step to allow startups to scale and grow. It can also be a daunting process, especially if it’s your first time doing it. Allied Legal sets out some preliminary issues you should consider when raising funds for your business.
Equity raise
An equity raise involves the sale of a company’s shares to investors as a means of raising funds. There are various types of investors you can tap into when conducting an equity raise, ranging from friends or family to angel investors and venture capitalists. Friends and family can be a useful resource for early stage startups. These are likely to be people who believe in you and your idea and, based on this belief, are prepared to accept a higher level of risk than strangers or professional investors.
If your startup has reached a stage at which the investments from friends and family aren’t enough to fund your business needs, it is likely to be time to turn your sights towards professional investors such as a venture capitalist or angel investor. Broadly, a venture capitalist is a professional who invests other people’s money on their behalf, whereas an angel investor is someone who is likely to be investing their own money. Professional investors such as these usually target startups who are ready to commercialise their product or service, and who demonstrate a capacity for a high return on an investment.
What to look for in a professional investor
When marrying your business with a professional investor, it is important to turn your mind to the value that prospective investor will add to your startup. A good investor is more than just a money bag, and a great investor will bring value such as expertise or profitable connections to your company.
A well-connected investor who is able to open up connections into markets that were otherwise inaccessible to your startup is a great example of value add over and above the monetary value of their investment. Similarly, an investor with a degree of expertise in the field your startup is involved in could bring valuable technical and commercial insights to your business.
Professional investors are likely to demand a degree of control in your business as part of their investment. While this can be off-putting to some founders, if the investor has a high level of expertise, prescribing them some control can be a value add for your business.
Of course, an investor like the ones discussed above are best-case scenarios, and not all startups have the luxury of waiting for an ideal or “dream” investor. Notwithstanding, this doesn’t mean you should settle for the first investor that comes your way. If you sense that your investor is only in it for the money and doesn’t care about the long-term success of your business, this is a good indicator that they aren’t the right match for you.
Disclosure obligations
If you have found an investor that is the right fit for you, you should then turn your mind to what legal disclosure requirements apply. Generally speaking, in order to issue shares to investors you need to provide adequate disclosure as is required under the Corporations Act 2001 (eg – a prospectus). There are, however, exemptions to this requirement. For example, if you are:
- offerring shares to less than 20 investors; and
- the capital raise will raise less than $2m in one year; and
- if the investment is a “personal offer”,
you will be exempt from this requirement. Broadly, the requirement of a personal offer means that there will have to be some sort of pre-existing relationship between your company and the investor. Another exemption is where the investor is a “professional investor” for purposes of the Corporations Act. Before relying on either of these exemptions you should seek legal advice to ensure that you are complying with the relevant legislation.
Even if your capital raise is exempt from the Corporations Act disclosure obligations, it is highly unlikely that an investor will buy into your business blindfolded. Investors will expect a good degree of information about your business prior to investing including information about (among other things) your team, business plan, financial projections, key contracts, customers and competitors.
The best way to approach an investors due diligence is with a high degree of preparedness and organisation. Having a pitch deck or information memorandum prepared, and maintaining a secure cloud-based folder with your business’ relevant financial and other information will help your business present itself as efficient and well organised. Remember, if an investor is conducting their own due diligence, it’s a good sign that they are considering an investment in your company. You don’t want to dissuade them by not being prepared.
Getting started
At Allied Legal, we regularly assist startups and small businesses with fundraises. We work closely with your business to ensure that your capital raise is expertly handled. If you are considering such a transaction, please reach out for an obligation free consultation by calling us on 03 8691 3111 or sending us an email at hello@alliedlegal.com.au.
