Written by Jennifer Tutty (Principal) and Alyce Evans.
Creating your own business is an exciting, challenging and rewarding journey. However, the key to running a successful start-up is not simply having a great idea. It’s having a great idea, as well as the business and legal knowledge to transform that idea into a successful start-up as well as the necessary cash!
Capital raising is a powerful tool to launch your start-up if you lack the funds or network to do it yourself. Additionally, it can propel the future growth and success of your business. To prepare you for start-up success, this blog outlines the 7 key steps to shape-up your start-up for capital raising.
What is Capital Raising And Why is it Important?
Capital raising is an important step for many businesses. At a basic level, it is the process of raising money for that business. This can be a crucial tool to help businesses be launched and later, to grow. While there are many ways to raise capital (money), the two main ways involve equity raising and/or debt raising.
Equity Raising
Equity raising involves selling a percentage of your business ownership in exchange for capital. Often, this will involve investors or shareholders. Today, businesses can also use crowd funding platforms as a way to secure investments for a share in their start up.
Debt Raising
Debt raising involves exchanging a debt for capital. Here, the business is sourcing capital from a lender (such as a bank). Common examples of debt raising include taking out a loan or applying for a line of credit.
How To Get Your Start-up into Shape for Capital Raising
Undertaking successful capital raisings can be a defining move in the life of your start-up business.
However, before people invest in your business, naturally, they are going to want to do some serious due diligence on whether your business is legally, financially, and commercially sound.
Because we want you to be in the best possible position to attract investors who believe in your business, we have put together our top 7 tips on how to get your start-up ready for capital raising. Have fun ticking off the things on our list.
1. Form Your Advisory Team
If you want to make it in start-up land, you need to carefully put together a team of professional advisors to help you along the way. The sooner you do this, the fewer mistakes you will make. We recommend the following professional advisors:
The must haves:
– An accountant who can also advise on structuring, tax and capital raising issues, and has a speciality in looking after start-up clients.
– A lawyer who has experience in commercial law and IP law with a speciality in looking after start-up clients.
– A mentor who can talk shop with you regularly. Look for someone who has gone through starting up a business before and who will take a special interest in the success of your start-up. Ideally, find someone who will offer their time on a pro-bono basis. Remember, when the future arrives and you’re a highly successful business owner – pay it forward by mentoring others.
The nice-to-haves:
– A marketing agency who can assist you to create your brand and marketing strategy.
– A business coach who can meet with you regularly to set and track business goals and growth.
– A research and development (R&D) consultant who can educate you on government research and development grants and ensure your business is well placed to take advantage of these.
2. Set up the Right Business Structure
It is important to choose the best business structure for your start-up at the outset. The structure you choose will affect a number of matters such as the way tax laws apply to your business, how your assets are protected, your operating costs, whether you’re eligible for grants and investment and much more. In other words, it’s pretty important!
Choosing the best structure at the beginning will also help you to avoid additional costs down the track. If you change structures once your company has a valuation, you may need to pay tax when you move assets around. Additionally, there are accounting and legal costs associated with changing structures.
Choosing the Right Legal Structure for Your Business
Consult with your accountant and lawyer on what business structure is best for your business. They will be able to provide experience and skills in different areas.
An accountant can advise on structuring, to take advantage of tax concessions and grants. They can also make sure the structure makes sense and fits in with your personal financial plan.
Your lawyer will take a look at how to structure your start-up to protect your assets. They can also provide advice on structures that will allow investors to invest more easily into the start-up.
Using Grants and Concessions to Your Advantage
To take advantage of research and development (R&D) grants and incentives, you will generally need to be a proprietary limited company.
Read more about R&D grants and concessions here.
Early Stage Innovative Companies (ESICS)
If you are an early-stage innovative company (ESIC), investors may also be able to take advantage of significant ESIC tax concessions. Alongside other requirements, an ESIC must be a company.
Jump on the ATO website to learn about whether your business can qualify as an ESIC here.
3. Write Your Co-Founders Agreement
We recommend getting in early (really early) with the drafting up your co-founder agreement. It’s important that everyone is 100% clear at the outset about the journey ahead.
A co-founder agreement could take the form of:
– A Shareholders Agreement (if you are trading as a company);
– A Partnership Agreement (if you are trading as a partnership); or
– A Unitholders and Shareholders Agreement (if you are trading as a trust).
Your lawyer will typically draft this document after seeking detailed instructions from you on how you want to be in business together.
Alternatively, if you are limited by funds and are unable to get a lawyer to prepare one of these agreements, you could write out some key terms on a word document and get your co-founders to each sign the document. This is much better than not having anything.
We note that there are open-source documents online, however, we don’t recommend using these unless you have a lawyer to check over and edit the drafting to make sure it all lines up.
A co-founder agreement will cover things like:
– The identities of the co-founders.
– What percentage of the business they each own.
– Whether any co-founders’ shares are required to vest over time.
– What their respective contributions are to the start-up.
– How critical and operational decisions are to be made (for example, is a board of directors set up).
– Who will own IP relating to the start-up.
– Confidentiality provisions.
– What happens if someone wants to leave (i.e. how are shares sold and transferred).
– Plus lots more!
4. Understand What Laws Apply to Your Start-up
It’s all well and good coming up with a great idea, but do you understand the laws that apply to the type of business you intend to operate?
For example, if you are in the food or nutrition space, will the Therapeutic Goods Administration (the TGA) or Foods Standards Australia New Zealand regulate your start-up?
If you are in the music tech space, what type of music and other copyright licences will you be required to acquire in relation to your business, and is this even viable?
There are lots of industries that are highly regulated in Australia and it’s important to understand the legal landscape before developing your business plan. You may have to consult with your lawyer about what legal advice you need, and whether they can recommend a specialist to speak to you.
Unfortunately, we have seen plenty of start-ups with great ideas, who later find out that it is pretty much impossible legally to execute their ideas and vision. Therefore, it’s definitely better to know this sooner rather than later, so that you can pivot early on if you hit a roadblock.
5. Secure Trade Mark (TM) and Other Intellectual Property (IP) Registrations in Australia and Globally
We definitely harp on a lot about the importance of protecting your brand and IP here at Studio Legal. That’s because we are passionate about businesses creating and securely owning their valuable IP assets, so they can confidently go to market and commercialise their ideas.
For anyone who’s watched Shark Tank (i.e. a TV show dedicated to capital raising!), you’ll know what we’re talking about. Time and time again, contestants with great ideas are rejected because they have no IP protection when it comes time to pitch.
Therefore, a solid IP asset portfolio, complete with TM and other IP registrations, can be incredibly valuable to investors and lenders looking to provide capital to your business.
Creating an IP Assets Portfolio
To protect your IP and give your idea the best chance for success, take action from the get-go. We recommend identifying and drafting an IP Assets Portfolio early in the game. You may ask your lawyer to assist you or you may simply write up a table on Microsoft Word.
Your IP Assets Portfolio table should include your:
– TMs (brand name, logos, slogans)
– Patents (your inventions including innovation patents applied for)
– Designs (your design drawings and product designs)
– Copyrights (for example, software, logo image, photography, website assets, template documents, proposals, videos)
– Trade Secrets (i.e. your ways of doing things, recipes, confidential information).
6. Get a Non-Disclosure Agreement (NDA) and some IP Disclaimers Drafted
If you are planning on talking about your start-up and ideas to those that are not already in your trusted inner circle (for example, tech developers, branding agencies, manufacturers, retailers, other business partners or investors), we highly recommend treading carefully to protect your ideas.
Remember that IP laws generally do not protect ‘ideas’ or ‘concepts’ themselves. Therefore, getting interested collaborators to sign a written contract and make contractual promises is really important.
Non-Disclosure Agreements
Asking your lawyer to draft up a tailor-made confidentiality agreement (also known as an NDA) for your start-up is money well spent. We recommend getting this sent off and signed prior to any meeting where you share your ideas.
The NDA should include provisions about IP, as well as confidentiality. For example, a useful term to include would be that the interested party agrees that the IP shared is owned by you and that they cannot reproduce or share the IP or come up with a similar business using your ideas and concepts.
Be wary of getting a template NDA online without it being checked over by your lawyer. These can sometimes have errors in them, which render the agreement void.
IP Disclaimers
We also recommend putting some copyright and IP disclaimers on any written materials you send out to interested collaborators. This will make it clear that you own the IP. For extra protection, get these disclaimers embodied in the documents as non-removable digital watermarks.
7. Get Your Suppliers To Transfer the IP They Create to Your Business
Engaging someone to help you develop or to create content for your start-up? If they are hired as a contractor (which they typically will be), we recommend getting a supplier contract drawn up and signed.
Copyright Law and Contractors
A contractor legally retains ownership of all copyright they create for your business. Copyright includes things like software code, graphic designs, recordings, photographs, copywriting, design drawings and much more. This transfer is called an assignment at law. Consequently, it’s very important to ensure that the contractor transfers to your business, in writing, all of the copyright they create for your business.
If you don’t get your IP assigned to you, there can be disputes in the future. If a contractor still owns the IP they create for your business (as it hasn’t been assigned), they may later take advantage of your business’ success. The contractor may ask for a lot more money than what they originally charged you, in exchange for them transferring the IP rights to your business.
To learn more about hiring contractors, read our blog ‘Are You Hiring Contractors? The New Legal Test Explained’ here.
How to Secure Ownership of Your IP
We recommend asking a lawyer to prepare a template supplier contract, which automatically transfers all applicable IP rights to your business. This contract can be given to all of your suppliers to sign when they are engaged.
If you haven’t sorted out IP ownership in your past contracts, don’t distress. A lawyer can draft a deed of assignment for your contractors to sign, which retrospectively transfers ownership of the IP they have created to your business.
Key Points
- Set your business up for success with a solid team of professional advisors, including an accountant, lawyer and mentor.
- If your funds allow, go all out on your dream team by adding a marketing agency, business coach and research and development consultant to the list of advisors above.
- Choosing the right business structure will have a significant impact on the way tax laws apply to your business, your eligibility for grants and investment, how your assets are protected, your operating costs, and more. In other words, it’s pretty important! Try to get this right from the outset by consulting an accountant and a lawyer.
- Write a co-founders agreement at the very beginning of your start up journey. Make sure everyone is on the same page and get that page (or, more likely, many pages) in writing and signed!
- Learn the law. Well, not all of it. However, prior to starting your business, make sure you seek advice on the specific laws or regulations that will apply.
- IP is the key! Prepare an IP Assets Portfolio and apply for trade mark and other IP registration as early as possible.
- Keep things confidential with non-disclosure agreements and IP disclaimers.
- Own your business (and the IP your contractors create for it!). Use supplier agreements to ensure that all contractors properly transfer any IP they create FOR your business TO your business.
Further Information
If you have any legal questions related to establishing or running your start-up business, or any of the topics covered in this blog, please contact us at hello@studiolegal.com.au.
Written by Jennifer Tutty (Principal) and Alyce Evans.
Photo by Micheile Henderson on Unsplash
Published 2 May 2023.
DISCLAIMER
The information in this article is of a general nature. It does not constitute formal legal advice, and should not be relied on as such. Please see the full disclaimer in our website terms. Please contact Studio Legal if you are seeking advice about a specific legal matter.