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Navigating the Startup Fundraising within Private Equity Landscape in Australia

As we delve into the entrepreneurial landscape of Australia in 2023, the startup ecosystem continues to thrive, marked by innovation, resilience, and a constant pursuit of funding to fuel growth. The process of fundraising for startups has evolved, shaped by market dynamics, investor expectations, and regulatory frameworks.

COMPLIANCE WITH REGULATORY REQUIREMENTS

In Australia, startups and investors must adhere to regulatory requirements set by Corporations Act 2001 (Cth) (CA) and the Australian Securities and Investments Commission (ASIC). Compliance ensures that the fundraising process aligns with legal standards, protecting the interests of both parties.

STARTUP FUNDRAISING PROCESS

MARKET RESEARCH AND PREPARATION

Entrepreneurs often begin by conducting thorough market research to identify potential investors interested in their industry. A well-prepared pitch deck that articulates the startup’s value proposition, market opportunity, and growth strategy is crucial.

Following Chapter 6D of the CA, to issue securities of a body, such as a share or an interest in a managed investment scheme, an entity must comply with the disclosure requirement unless an exception applies.

If your fundraising is exempt from disclosure requirements under section 708 of the CA, startups should prepare the investment memorandum to communicate to investors regarding the planned fundraising round and the comprehensive overview of the startups’ businesses, including the performance and outlook.

ENGAGING WITH INVESTORS

Entrepreneurs connect with potential investors through networking events, pitch competitions, and introductions. This stage involves building relationships, sharing the business vision, and gauging investor interest.

TERM SHEET NEGOTIATION

Before conducting the due diligence, investors present a term sheet outlining the key terms and conditions of the investment. This may include the investment amount, valuation, rights of the investors, and the structure of the deal.

DUE DILIGENCE

Investors perform business due diligence to assess the startup’s technological value, financial health, market potential, and team competence. If the outcome of business due diligence is satisfactory, investors will request their legal representatives to carry out legal due diligence to review, among others, corporate structure, business contracts concerning finance, property, employment, IP rights, IT systems and information regarding litigation, insurance, tax and compliance.

Startups must be transparent in assisting the due diligence process and prepared to share relevant documents.

LEGAL COUNSEL INVOLVEMENT

The IP House Lawyers can assist both startups and investors in conducting legal due diligence, preparing, reviewing, drafting and negotiating the following agreements:

Term Sheet

Entrepreneurs typically engage legal counsel to review and negotiate the terms outlined in the term sheet. The term sheet serves as a non-binding agreement that outlines the basic terms of the investment. While not legally binding, it provides a framework for negotiations and sets the stage for drafting the formal investment agreement.

Investment Agreement

The investment agreement is a legally binding contract that details the terms and conditions of the investment. It covers issues such as the rights and obligations of both parties, the amount of investment, equity stake, governance rights, any protective provisions for investors, exit strategies and dispute resolution.

Share Subscription Agreement

This agreement provides investors with terms of purchase, such as share price and number of shares. It also outlines the obligations of the startups and investors, ensuring compliance with regulatory requirements and avoiding potential legal disputes.

Shareholder Agreement

This agreement outlines the rights and responsibilities of shareholders, including issues such as voting rights, transfer of shares, and dispute resolution mechanisms. It helps in managing relationships among shareholders and provides a framework for decision-making.

Convertible Note or SAFE (Simple Agreement for Future Equity)

In some cases, startups opt for convertible notes or SAFEs, especially in early-stage fundraising. These are debt instruments that convert into equity at a later funding round, providing a simpler and quicker way to secure initial funding.

For any further information or queries on the above content, please contact us.

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