STARTUP MANUAL:

A LEGAL HANDBOOK
FOR FOUNDERS
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CONTENTS
Foreword 04

About the Startup Manual 05

Structuring Your Company 06

Setting up a Dual Company Structure 06
Benefits of Discretionary Trusts 07
Corporate Trustees 08

Raising Capital 09
To Raise or Not to Raise? 09
What Are You Looking For In An Investor? 10
Understanding the Funding Process 10
Types of Investors and What They Are Looking For 11
Is Overseas VC an Option for Your Startup? 12
Insights: John Henderson, Partner at AirTree Ventures 13
Investment Philosophies from Leading Australian VCs 14
Insights: Rohen Sood, General Manager at Reinventure 15
How Much Capital Do You Need to Get to Your Next Milestone? 16
What’s Your Bargaining Position? 16
Government Grants and Investment 17
How Capital Raising Works in Practice 17
Case Study: Matt Schiller, CEO of Snappr 18
Structure of the Round 19
Equity Round 19
Convertible Notes 20
SAFE 21
Equity Crowdfunding 21
Case Study: Samantha Wong, Partner at Blackbird 22
Alternatives to Equity: Venture Debt 24
Case Study: Karthi Sepulohniam, Managing Director at 24
Partners for Growth Australia
Insights: James McGrath, Investment Manager at 25
OneVentures
Later Stage Funding 26
Secondary Sales 26
Legal Documents 27
Term Sheet 27
Shareholders Agreement 29
Subscription Agreement 29
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IP Assignment Agreement 29
Employment Contracts 29
Cap Table 30

Building a Team 32
Employee or Contractor 32
Intern or Employee 33
Employment Contracts 33
Employee Share Schemes 34
Case Study: Cliff Obrecht, Co-founder and COO of Canva 36

Dealing with Customers and Suppliers 37

Disputes with Customers and Suppliers 38
Dispute Resolution Through a Customer Centric Approach 39
Legal Documents 41
Case Study: Kate Pullinger, Chief of Staff at SafetyCulture 42

Protecting Intellectual Property 43

Trade Marks and Domain Names 43
Case Study: Evan Tait-Styles, CTO at LegalVision 44
Should You Register Your Logo as a Trade Mark? 45
Patents 46
Protecting IP with regards to Employees and Contractors 47
Going Global: Protecting Your IP Internationally 47
Protecting Your Inventions 48
Protecting Your Trade Marks 49

Insurance Considerations 50
Insight: Dominic Brettell, Head of Client Service at 51
Honan Insurance Group

Final Word 52
Glossary 54
About LegalVision 61
About The Authors 62
Our Awards 63
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FOREWORD
Having your legal structure and agreements in order may be the
furthest thing from your mind when starting out on the road to greatness.
Additionally, legal agreements are there to discuss all of the sad and
awkward scenarios upfront. But boy does it all make a difference if
you start to take off.
Having the right legal foundation in place will not make you successful,
but it will prevent you from failing when things start to go right.
When we first started investing in Australia, there were no standards
like there are in Silicon Valley, and local startup financings had many
strange and arcane terms included. Through the rise of the startup
community in Australia over the past decade and through guides like
the one you are about to read, that has all changed. You will see the
way raising money for startups should be done.
The team at LegalVision have translated all the core concepts of the
startup game into Australian law. Since the first version of this manual
came out, the startup ecosystem has grown in leaps and bounds, but
the information contained inside is as relevant as ever – a true testament
that they have stood the test of time.
Enjoy the read and all the best for your own startup journey.
To the moon!

Niki Scevak
Co-founder of Blackbird Ventures
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ABOUT THE STARTUP MANUAL

Over the past few years, we have provided advice and This manual should be treated as a “how-to” guide for
guidance to hundreds of startups. Startups face numerous founders, future founders, and broader startup management
challenges, but in the legal context those challenges can teams. As the startup ecosystem is ever-evolving and
generally be divided into the following: developing, this version of the manual contains new forms
of funding, a look at how the overseas venture capital market
• Structuring your company
is infiltrating our own, and considerations for later stage
• Raising capital
startups as well as new. We have also included a new section
• Building a team
on directors’ duties, insurance, and accounting to help you
• Dealing with customers and suppliers
protect yourself from every angle. We have aimed to cover
• Protecting your intellectual property
all the big issues, but of course every startup is different!
Knowledge is power, so to help our clients, future clients,
and the broader Australian startup ecosystem, we have put
together a comprehensive summary of the issues startup
founders need to look out for through their journey in this
startup manual.

To provide a complete overview of the issues, we have

reached out to a number of Australian venture capitalists
and entrepreneurs to provide insights into their areas of
expertise. Special thanks to the contributors who have
offered invaluable insights and lessons to include in this
manual as case studies: John Henderson (Partner at
AirTree Ventures), Rohen Sood (Investment Manager at
Reinventure), Matt Schiller (CEO of Snappr), Sam Wong
(Head of Operations at Blackbird Ventures), Karthi
Sepulohniam (Director at Partners for Growth Australia),
Cliff Obrecht (COO of Canva) and Kate Pullinger (Head
of Legal at SafetyCulture).
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STRUCTURING YOUR COMPANY

Before you can raise capital, hire employees or start Setting up a holding company requires incorporating an
selling to customers, you will need to set up your startup’s additional company. Consequently, it is costlier to implement
corporate structure. This section of the manual covers: and maintain. There are also some limited instances where
the holding company may be responsible for an operating
• how a dual company structure works
company’s action/inaction, such as fraud or other improper
• the benefits of setting up a discretionary trust
conduct, or if the companies are found not to be under
separate management in the event of liquidation.

Your goal here should be to minimise risk and

cost while maximising flexibility. Dual Company Structure

IP

SETTING UP A DUAL
COMPANY STRUCTURE Holding Company
Cash
A dual company structure involves a holding company
that owns 100% of the shares in a subsidiary operating
company. An operating company is the entity that enters
into contractual arrangements with clients, suppliers and
employees. The holding company will generally own the Owns 100%
startup’s intellectual property (IP), as well as any recently
raised capital.

A dual company structure makes sense because, in most Clients

circumstances, the holding company generally protects
the startup’s major assets (IP and excess cash) from any
liability that the operating company incurs. In the scenario
where a customer sues your startup, then they will have to Employees
sue the company that they have the legal relationship with
(i.e. the operating company). In a dual company structure, Operating Company
an operating company will hold fewer assets. While you
cannot anticipate being sued, this extra layer protects Suppliers
your company’s most valuable assets.
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BENEFITS OF
DISCRETIONARY TRUSTS
Founders can use a discretionary trust to own their
shares in their startup (rather than owning them personally),
Benefits of a Discretionary Trust
which makes sense for several reasons.
Asset protection from creditors
Asset Protection: If you are a director of your startup,
you could be held personally liable for debts incurred under
certain circumstances (e.g. fraud and wilful negligence).
Owning your shares through a trust rather than in your
own name offers some protection to your shares. However, Flexibility in distributing income
if debtors are at a stage where they are going after you and capital
personally rather than the company, your shares in the
startup are likely worthless (unless, of course, you have a
dual company structure to protect the business’ assets).

Tax Planning: In the event of a significant exit, or if your Flexible for tax planning
startup chooses to distribute dividends (which is unusual but
not unheard of), a trust can be more tax efficient than owning
the shares personally or through a company. The trustee has
the discretion to distribute the trust income. So, the trustee
Beneficiaries of a trust are generally
can distribute to beneficiaries with lower marginal tax rates
not liable for the trust debts
(e.g. a partner who is not working) for tax planning reasons.
Trusts, or individuals that have held their shares for more
than 12 months, could access a discount on capital gains
tax when they sell their shares. The size of the tax benefit
generally depends on the government of the day, so it is Entitled to a discount on capital gains
important you speak to a tax advisor when deciding on where available
how to own your shares.
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CORPORATE TRUSTEES
When setting up a discretionary trust, you will need to
consider whether you wish to appoint an individual or
corporate trustee.

While a corporate trustee allows for additional protections

(particularly, limited liability), this requires you to incorporate
another company and increases your setup and maintenance
costs. Importantly, you cannot be both the trustee of a trust
and the sole beneficiary. A trust structure will then only make
sense where there are other people (e.g. family members)
who you can distribute income to under the trust. So, if you
have a partner who makes more than you and no children,
a trust may not be sensible in the short to medium term.

Discretionary Trust Structure

with Corporate Trustee
Discretionary Trust

Corporate Trustee
(limited by shares)

Hold the shares in the Holding Company as

trustee of the Discretionary Trust

Holding Company
(limited by shares)

Holds the shares in the Operating Company

Operating Company
(limited by shares)
 9

RAISING CAPITAL
One of the most common queries we get at LegalVision is co-working space, there will likely be dozens of other
how a startup should go about raising capital. We have not founders around who will be happy to speak with you about
only assisted hundreds of companies through the capital this issue and have plenty of tips and tricks which may assist.
raising process, but we have also raised five rounds of capital
ourselves since we launched in late 2012. Finally, ask yourself, will you increase the value of
your shareholding in the company by taking on external
This section of the manual covers: investment? External investment will dilute your shareholding
• questions a founder should ask before in your startup. So, you should only raise capital if you think
looking to raise capital doing so will increase the value of your stake.
• different structures to consider when raising
• how you should document your capital raise
from a legal perspective What is a future liquidity event?

Although Venture Capitalists have longer investment

TO RAISE OR NOT TO RAISE? horizons than most other investors, they still need
to deliver a return to their limited partners (i.e. the
investors who have put cash into the Venture Capital
The moment you raise a round of capital, you begin answering (VC) fund that has invested in your startup). The
to someone other than yourself and your co-founders. only way to achieve this is for the VC’s investment to
Investors are generally looking for a return on their investment, become ‘liquid’. There are three main ways this
which means a future liquidity event must be on the cards. can happen:
Before raising any external capital, you need to ask yourself
if this is a path you want to go down. Many startups will
• trade sale; or
simply have no chance of succeeding without raising external
• secondary transaction; and
capital. While external capital has the potential to help you
• initial public offering (IPO).
supercharge growth, it is not necessary to build a fast- A trade sale happens when you sell your startup to an
growing, profitable business. acquirer (generally a larger corporation). A secondary
transaction involves your VC investor selling their
A great way of working out whether raising external capital shares in your company to another investor. An IPO
makes sense for you is to speak to founders who have raised, means listing your company on a stock exchange.
either from angel investors, VC or corporate investors.
The Australian startup community is friendly and supportive
- if you are prepared, focused and obviously not a time
waster, most founders will be up for a 30-minute chat over
coffee. So, reach out through your connections, speak to
some founders who have raised external capital, and use
those conversations to make a decision. If you are lucky
enough to be working out of an accelerator or other
 10

WHAT ARE YOU LOOKING FOR IN UNDERSTANDING THE

AN INVESTOR? FUNDING PROCESS
After you have decided to raise a round of capital, you need So you have decided to bring on board investors to help
to start thinking about the most appropriate investor. your business grow. There is a start-up funding process that
is generally followed, and if you are new to start-up funding,
In many ways, the investment community will dictate this it is worth familiarising yourself with the terminology and
decision. If you are looking to raise $20 million, a friends and steps. While this process can be fluid, the Start-up Funding
family or angel round is not going to make much sense! On Process table will give you some understanding of what
the other hand, if you are looking to raise a $200,000 seed to expect.
round, you should steer away from VC funds and look to fill
out your round in the angel community.
Startup Funding Rounds
Another consideration is looking for investors who can
contribute to the success of your startup beyond just Family and Friends
providing cash (also called ‘smart money’). Funds raised from family and friends to kick
start your idea in return for a small amount
Within the angel investment community, some of the best of equity.
investors will open up doors for your startup, whether to
VCs for future fundraising rounds or to customers
(particularly in the enterprise sales space). Seed Round
Another small round of fundraising (generally
from angel investors) to build your product
and cover expenses.
Quick Tip
Speak to startup founders who have received Series A
investment from your potential investors. A startup’s first major round of investment,
often involving venture capital investors and
fuelling the launch of the product.
Many people talk the talk but do not walk the walk. Once you
have brought an investor on board, they will usually be on
Series B
your cap table for a long time. It is also possible that choosing
This stage is focused on continuing to scale
one investor will close the door to a relationship with others.
the company. It is likely that its business
If you are lucky enough to have more than one option,
model has been established and there is
make sure you take the time to think seriously about who
traction with customers.
would be the best investor.

Series C onwards
An advisor is asking for options Subsequent venture rounds are used to scale
or stock - what should I do? the company, make acquisitions, maximise
market share, grow internationally and
prepare the company for an acquisition
We are of the view that you should steer well clear or public listing.
of an advisor (lawyer, accountant, business advisor)
who asks for shares or options in your startup.
There is no real reason for founders to issue shares
or options to anyone other than investors and
employees. Unfortunately, there are a number
of less scrupulous business people that are plugged
into the fringes of the Australian startup community
who will occasionally try to get their hands on the
shares of a promising startup. Do not be a mark!
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TYPES OF INVESTORS AND WHAT THEY ARE

LOOKING FOR
Type of Investor What they are looking for Pitch tips

Friends and Family They want you to succeed! Generally, Do not overvalue your startup
a financial return is a secondary consideration at this early stage. It is not fair
for friends and family. to you nor future investors.

Angel Investors Very variable. Some are looking for ‘home Angel investors will be looking
runs’, others are looking for a good risk at your potential as a founder
adjusted return. Angel investors are a very and your key team members.
diverse bunch, and it is fair to say that A good idea is nothing without
Australian Angels are somewhat more good people behind it.
conservative than Angels in Silicon Valley.

Micro-VC Micro-VC funds offer smaller scale investment Micro-VC funds fill a gap in
usually in a seed round. Mostly managed by the market for financing early
experienced investors looking to get in early stage companies. Research the
with the next big thing (and take more of a investment thesis and areas of
risk in doing so). focus for different micro-VC
funds and find one that aligns
with your startup.

Institutional VC Institutional VC funds can participate in Institutional VC funds are looking

any funding round but more commonly get for startups that have gained
involved post-seed round. They can provide traction and are growing fast.
large scale investment but often will ask for Show evidence that highlights
a degree of control in return. your startup’s growth.

Corporate VC/ Many large corporations now have their Remember that corporate VCs/
Investors own VC arms. Others large corporations will investors tend to invest in startups
simply invest on balance sheet. Corporate that they might end up acquiring.
VCs are generally looking for the same They may even seek a path to
things as institutional VC funds - to invest in control when initially investing.
high-growth startups that will generate an
outsized return. Having said that, corporate
VCs tend to have strategic objectives.
 12

Overseas VC may make sense for later stage startups

Quick Tip raising larger rounds, such as Series A, B or C. Generally,
these investors are looking at companies that are already
Angel investors invest their own money while VCs generating revenue and can serve a large global market,
manage an investment fund. particularly the market where the investor is based.

If you are raising a later stage round to allow your startup

to expand internationally, consider looking at investors in
IS OVERSEAS VC AN OPTION your next key market. Overseas VC can bring a different
perspective, new introductions and local market knowledge.
FOR YOUR STARTUP? It generally also means more robust due diligence, different
expectations of documents, potentially less company-
Whilst the money being invested into startups by Australian friendly terms and more time away from your business
based VC funds is rising promisingly, Australia is still way while you meet with prospective investors abroad. Be aware
behind the larger markets such as the United States and that you may also be required to move the business to the
China when comparing investment rates on a per capita VC’s country in the future, or even before the investment
basis. For some Australian startups, it may make sense to is complete. Such a move should be considered carefully,
cast the net wider than home when looking for investors. including from a legal and tax perspective, as it is can
To complement this, we are seeing an increasing interest be a costly and involved process.
in Australian startups from overseas VC funds.
 13

INSIGHTS:
THE IMPORTANCE OF CHOOSING
THE RIGHT INVESTOR

terms), for whatever reason, you make it harder for later

John Henderson stage investors to strike the right balance on ownership and
Partner at AirTree Ventures terms, and are potentially damaging your company’s long-
term prospects.

So, before accepting a seed round, remember:

Investors look for passionate founders who can find a way Build a relationship before taking investment.
through adversity and build great products. But investment is Road test your potential investor. Do they add
a two-way street. What should founders look for in investors? 1
value? Do they deliver the things they say they
will? Do you want to work with this group?
One of the most basic and important things is an investor
who will not screw up your cap table. As a founder of an
NEVER give away half of your company to
early stage company, it is critical you choose the right
partners and set your cap table up to be investable later
2 raise a seed round (67% is the worst I’ve seen;
10-25% is normal);
on. The ‘wrong’ investors can poison your cap table and
make it hard for you to raise subsequent funding rounds.
Raise from people who specialise in making early
One thing we hate to see is first-time founders giving away stage investments. Everything will be smoother
too much of their company at the seed stage and agreeing 3 and easier. Good investors will invest on standard
to unfavourable or unusual terms – simply because they (e.g. Australian Investment Council (AIC - formerly
are worried about losing an offer. This can distort your AVCAL)) terms and will want to set you up for
cap table and make you less desirable to the best Series future fundraising success;
A investors.
Complete due diligence on prospective investors
Startups rely heavily on stock options to attract and retain
4 (e.g. speak to other companies they’ve invested in
top talent. They need stellar teams with the right incentives
and find how they can help you beyond just capital).
to realise their potential. Your startup will likely require
multiple rounds of funding to scale and grow. Each round
will dilute the team’s ownership in the business. By taking
on too much dilution on your first round (or accepting crappy
 14

INVESTMENT PHILOSOPHIES FROM

LEADING AUSTRALIAN VCS

Blackbird Ventures Blackbird is one of Australia’s largest venture capital firms and invests
in startups at any stage. Their fund is based around the concept of
‘founders helping founders’ and they look to invest in ‘Australians
wanting to be the best in the world, not the best in Australia.’

AirTree Ventures AirTree is a large venture capital firm which invests in disruptive
business at both seed and Series A+ rounds. AirTree looks for
‘world-class Australian and Kiwi entrepreneurs’ and has a strong
focus on nurturing high-potential founders.

Square Peg Capital Square Peg invests primarily in tech startups from Australia,
New Zealand, South-East Asia and Israel. They look for ‘entrepreneurs
solving big problems in a differentiated way’ who have the passion
and ability to scale their startup effectively.

Main Sequence Main Sequence Ventures is the manager of the CSIRO Innovation
Ventures Fund. They invest in startups that have their roots in science,
technology and research. They look for startups who can
translate this research into global-scale businesses.

Reinventure Backed by Westpac and sporting a new model of corporate venture

capital, Reinventure supports fintech startups and disruptors for
the long term. Reinventure looks to ‘unlock maximum synergy
value between [their] ventures and Westpac’.

NAB Ventures NAB Ventures is the venture arm of the National Australia Bank.
NAB Ventures invests in startups that address NAB’s strategic
priorities and allow NAB Ventures to leverage the bank’s expertise
and market position to drive growth.

14
 15

INSIGHTS:

Rohen Sood
General Manager
at Reinventure

Reinventure is a non-traditional Corporate Venture Capital

(CVC) investor. We invest in FinTech, adjacent verticals like
data or anywhere financial services plays a key role.

When choosing a CVC investor, entrepreneurs should be The first major misalignment can come from a mismatch of
aware that not all funds are the same and you should consider capital time horizons. Most public corporates need to see a
three dimensions: return on their capital investments quarterly or yearly due to
pressure from shareholders and analysts. This is in contrast
1. how the fund and its incentives are structured to startups that may often take several years to see any
returns. This can create friction between a CVC investor
2. whether the fund is an active or passive corporate
and entrepreneurs.
investor, and which type of investor you would prefer
(in our view, active is always better as the investor can The second major misalignment can be between incentives
provide advice and useful industry connections), and of CVC fund managers and founders. CVC fund managers
traditionally operate as employees of a large corporate and
3. whether the CVC’s investment thesis is aligned with
can have incentives that are more short term. This can be
the corporate’s broader short-term strategic goals or
at odds with founders who are primarily incentivised for a
independent of them (both approaches have merits).
successful exit of their venture.
The most important of these dimensions is how the fund and
One way these misalignments can be mitigated is if the
its incentives are structured - it is also inextricably linked to
corporate investor invests into a dedicated standalone fund
the other two dimensions. Hence, it is crucial to understand
and the fund managers are incentivised to maximise the exit
this and be aware of any misalignment.
of the fund (and hence, the venture). This is the model of CVC
we operate at Reinventure.

15
 16

HOW MUCH CAPITAL DO WHAT IS YOUR

YOU NEED TO GET TO YOUR BARGAINING POSITION?
NEXT MILESTONE? Raising capital is a negotiation. Firstly, potential investors
must be interested enough in the opportunity to consider
investing. But once you have crossed this bridge, much
of the remaining decision will come down to valuation.
Quick Tip As previously mentioned, venture investors are looking for
an appropriate risk-adjusted return. It does not make sense
If you raise too much capital at a low, early stage
for them to invest in early stage startups with over-egged
valuation, you and your co-founders will take excessive
valuations, but often an investor will prioritise ‘getting in’ on
dilution, potentially undermining your long-term
a round if they feel a particular startup has great potential.
incentives to grow your startup.

The startup journey is long and arduous. If things go well, Quick Tip
you will be in a position to increase your startup's valuation
over a number of years. It is likely that you will need to raise How will I know if I’m in a strong negotiating position?
more than one round of capital. For these reasons, you should
• multiple investors want in on a round
only raise as much capital as you can deploy effectively over
• your startup is profitable, making closing
a couple of years. Remember, it is easy to spend money but
a round less of an urgent priority
much harder to use it in a rigorous manner.
• you have a strong team in place
• your startup is growing rapidly,
month on month (i.e. revenue, users etc.)
Quick Tip
• you are in a “hot” industry
A good rule of thumb is to model out what you need
to get to your next milestone, for example:
• reaching a certain number of users
• reaching a monthly revenue number, or
• breaking even.
Aim to raise enough capital to help you reach
these milestones.
 17

GOVERNMENT GRANTS
AND INVESTMENT
Government departments may also be willing to contribute
to your startup. One of the main advantages of these
investments is that the department will not usually be
looking for anything in return by way of an equity stake.

As an example, Jobs for NSW offers two

types of grants for startups. Minimum Viable
Product Grants are for startups that are not yet
generating revenue but are in a stage of gathering
feedback from customers and testing business
models. Building Partnership Grants are for
startups that are already generating revenue
and are looking to accelerate market adoption.

While the money will not necessarily make or break your

startup, it is relatively risk-free. The only cost to you is
the cost of filling out an application form and speaking
to the relevant person at the government department.

Aside from startup-specific grants, there are also grants

aimed at businesses doing particular types of work and at
groups of people, including women and indigenous Australians.
Finally, governments may also be willing to act as the
guarantor for a loan so that you can raise debt finance.

HOW CAPITAL RAISING

WORKS IN PRACTICE
Capital raising is different in practice than on paper.
Of course, if you are a startup superstar with a huge exit
under your belt, raising a first round for your second startup
is going to be potentially much easier than the first-time
round. Most founders are not in that position. So how
does raising a round actually work?
 18

CASE STUDY:

Matt Schiller
CEO of Snappr

Snappr is the Uber of photography, sending pre-vetted

professional photographers to you on-demand for
any occasion. www.snappr.co

Raising investment may be a ‘necessary evil’ if you need and firmness can actually win you respect from investors.
additional funds to grow your startup. You want your The same applies to your business strategy, expansion
investment round to be short and sweet (someone who plans, and everything else you are pitching - it is better
spends three months away from their business putting to be confidently wrong than uncertain.
together a round does not make a very good investment).
At Snappr, we have raised two rounds in our short six-month 4. Set a close date for your round. While this may mean
existence and closed both within 14 days, meaning we could you risk not hitting your target funding threshold, this
stay focused on product and growth. is outweighed by the risk of a round that meanders on
without closing.
Pitches and pitch decks aside, here are our top six tips:
5. Have your term sheet ready to go. The Handshake Deal
1. Have one co-founder who dedicates themselves almost Protocol is great, but having the paperwork prepared is
full-time to the raise when it is underway. This means the the best thing you can do for momentum, and gives your
raise is granted undivided attention while also allowing investors the impression that you are on top of things.
other co-founders to carry on working undistracted.
6. Invest in people and your network long before you
2. Find investors you connect well with on a personal level. need investment. Our rounds happened quickly, but in
You want people who are on your side for the long term, hindsight, they were built on trusted relationships over
and who will offer you unwavering support. many years. If you think you have underinvested in this
department, then this Chinese proverb might be good
3. Road-test your terms, then stick to them. Nothing kills guidance: “The best time to plant a tree was 20 years
investment traction like a founder who is uncertain about ago. The second best time is now.”
such things like the valuation. Provided you go in with
something fair and straightforward, a level of confidence
 19

STRUCTURE OF THE ROUND

There are three possible structures for an equity
capital raise:
• equity round (either ordinary or preference shares)
• convertible notes
• simple agreement for future equity (SAFE)
Each have their benefits and drawbacks, as explained below.

EQUITY ROUND
An equity round involves founders issuing investors shares
in the startup in exchange for cash.

With an equity round, the key areas of negotiation will be:

1. the company’s pre-money valuation, and
2. investor protections such as the type of shares they
are entitled to receive and their voting rights.

The company’s pre-money valuation will determine how

many shares the investor will receive in exchange for its
cash and what percentage shareholding each shareholder
will end up with after the raise.

Certain protections can minimise the risk of investors

losing their money, for example:
• issuing investors with preference shares
• the right to appoint a board member, and
• veto rights regarding critical business decisions.

Understandably, investors will want to protect their

investment. But it is unwise to give away too much control
over your startup, particularly in its early stages. You want
to maintain running your day-to-day as you are in the best
position to make decisions regarding the direction you
want to take your startup.
 20

CONVERTIBLE NOTES
A convertible note is a hybrid of debt and equity. It involves
an investor making a loan to the startup which converts
to equity on a predetermined trigger event (generally the
raising of a priced round or a liquidity event). The conversion
rate is usually calculated by reference to the share price of
the priced round or the liquidity event.

A loan will have a term (i.e. an expiry date). It is important to

determine what will happen if the loan does not automatically
convert before the term expires. Will the startup repay the
loan? Will it automatically convert to equity? Who decides
- the lender or the company? If it is to convert, at what
conversion rate?

Interest may accrue on the loan amount, and all accrued

interest will convert into equity (along with the loan
amount) upon the trigger event. Interest, however,
is not a prerequisite.

The loan (and accrued interest if relevant) will usually

convert to equity at a discount to reward your investor
for backing your startup early on.
While using a convertible note means you can technically
delay valuing your business, some notes will have a ‘valuation
cap’ (i.e. a maximum price on the note that will convert into
equity). Parties negotiate this valuation cap when raising
the round, so you are effectively negotiating a valuation
when raising under a note.

Startups typically use convertible notes at the seed round

stage, although they can be useful when raising bridging
finance between rounds. A convertible note should specify:
• how much is being invested
• what interest is payable
• when the loan will convert
• what discount rate will apply, and
• the valuation cap.

Importantly, as debt is regulated, you

should ensure you comply with any
applicable regulations when dealing
with convertible notes.
 21

SAFE EQUITY CROWDFUNDING

The Simple Agreement for Future Equity (also known In a bid to give Australian startups more opportunity
as the SAFE) is a relatively new way of raising capital. Y to access capital for their businesses, the Australian
Combinator, a leading US seed accelerator, introduced government introduced an equity crowdfunding regime
SAFEs in the United States, and it has been adopted in other in 2017, later expanded in 2018 to make it accessible for
countries with a strong startup culture. Since we published eligible private companies. Before its introduction, capital
the first version of the Startup Manual, SAFEs are becoming raising disclosure requirements in Australia meant that a
increasingly popular and appear to be overtaking convertible private company could not raise more than $2 million from
notes as the preferred early stage investment mechanism in more than 20 retail investors in a 12 month period. Private
Australia. They are being used by certain accelerators, angel companies were also restricted from having more than 50
investors and even VCs - which is great news for founders. shareholders. This prohibited startups from raising funds
from the ‘crowd’ in return for shares.
The SAFE is similar to a convertible note minus the debt
element. In consideration for paying a cash amount to your Under the new regime, eligible private companies are
startup, an investor receives a contractual right to receive exempt from these rules and able to raise up to $5 million
equity in your startup when a predetermined trigger event in a 12-month period from hundreds of investors. The
occurs. The trigger events are generally the same as those investment must be made through a licenced intermediary
found in a convertible note (i.e. a priced round and who will list the investment opportunity on their online
a liquidation event). platform and facilitate the investment.

The number of shares the investor receives on conversion The equity crowdfunding regime is heavily regulated and
is linked to the upfront cash injection they make and the startups looking to raise funds in this way will need to invest
share price of the priced round or the liquidation event time (and money) into ensuring they meet the requirements.
(as applicable). As with convertible notes, startups may For example, startups must prepare a compliant crowd-
issue equity at a discount, and there may be a valuation cap. sourced funding offer document and are subject to additional
As the SAFE is not debt, if the startup enters insolvency financial reporting and corporate governance requirements.
before the cash converts, then the startup agrees to pay In addition, the company must have a minimum of two
the investor an amount equal to its cash injection before directors, be based in Australia and fall under the $25 million
making any payments to its shareholders. assets and revenue caps. However, the growing number of
intermediaries (including Birchal, Equitise, OnMarket and
The advantages of raising capital using SAFEs, Billfolda) and increasing frequency of equity crowdfunding
as opposed to convertible notes, are as follows: raises by Australian startups is a promising sign that the
1. SAFEs do not have a term (which means that if a regime is helping to democratise startup funding and investing.
trigger event never occurs, then the investor will
never receive shares)
2. interest is not payable on SAFEs and so the complexities
involved in converting interest into equity does not apply
3. SAFEs are not debt and therefore are not regulated
 22

CASE STUDY:

Samantha Wong
Partner at Blackbird

Preference Share Round using AVCAL Docs -

Blackbird and Baraja

Blackbird Ventures mainly invests in Seed or Series A rounds.

We invest in founders who have the ambition to build a
global business from day one. As Head of Operations, I spend
considerable time working through the deal structure
with our investee companies. Below, I've discussed the
process which led to us investing in Baraja Pty Ltd, a startup
developing 3D LIDAR technology. I'll also explain the main
terms we usually invest under.

Blackbird Ventures had been involved in the autonomous

driving space for several years and knew the cost and
reliability of existing LIDAR technology was a key problem
these companies faced.

Once we had decided we wanted to invest in Baraja, the

next step was to provide its founders, Federico and Cibby,
with a draft term sheet (usually a one pager). The main
terms we include in our standard term sheets include:
 23

Term Explanation

Round terms How much we will invest, and what the minimum and maximum round size
can be. Maximum round sizes are important to VCs because we invest at the
early stage, we want to ensure that neither Blackbird nor the founders are too
diluted. Conversely, the minimum round size is important to ensure that you
raise enough money to achieve the business milestones.

Pre-money valuation The valuation at which we will invest in the company.

Board Whether Blackbird will get a seat on the board or not.

Voting rights The key business decisions which we want to have a say in, such as materially
changing the nature of the business and selling a majority of the assets of the
company.

Employee Share How much of an ownership stake in the company will be set aside for future
Option Plan (ESOP) employees? At Blackbird, we encourage founders to set aside 15-20%.
Attracting good employees can be difficult for startups. The ability to offer
sizeable amounts of equity can make a difference.

Founder vesting The terms on which the founders’ shares vest, we usually insist on four-year
vesting with a one-year cliff.

Liquidation When we invest, we do so through preference shares with a 1X

preferences non-participating liquidation preference. This means we get our cash
back before ordinary shareholders in the event of an exit or insolvency.
However, ‘non-participating’ means we do not also get to receive cash
according to our pro rata in the company. We have to choose either to just
get our cash back or convert our preference shares to ordinary shares and
participate in splitting the exit proceeds pro rata with other shareholders.

Preferential We often ask for non-cumulative preferential dividend rights, which means
dividend rights that if a dividend is declared, then we are paid before ordinary shareholders.

Anti-dilution rights As with other early stage VCs, we generally require standard, broad-based
weighted average anti-dilution rights. This means that if the startup issues
shares at a lower share price than the share price the VC pays in the future,
the VC will receive additional shares reflecting an adjusted share price (of all their
preference shares). The adjusted share price will be calculated by the average
of the price they paid and the lower price paid by the later investors.

Pro rata, Right Rights to invest pro rata in future capital raisings, and to have a first right to
of First Refusal buy any shares from other selling shareholders in the future. For VCs, this is
& Co sale rights probably the second most important term.

Once we agreed on the terms with Baraja, we signed the term sheet. Baraja also had their lawyers review the term
sheet before signing, and then finally celebrating with a glass of champagne!
Blackbird has now invested in multiple funding rounds with Baraja and, despite the increasing valuation and size of
the round, the smooth process has remained the same.

23
 24

ALTERNATIVES TO EQUITY:
VENTURE DEBT
Raising an equity round is not the only solution to funding
a startup. Back in 2014, when we raised LegalVision’s first
round of external finance, we did not raise an equity round,
but rather a venture debt round, using a structure known as a
revenue loan. Since we raised our first round three years ago,
venture debt has become increasingly popular, as Partners
for Growth’s Australian launch in 2016 demonstrates.

CASE STUDY:

Karthi Sepulohniam
Managing Director at
Partners for Growth Australia

Partners for Growth (PFG) provides custom debt solutions to Equity can be great to fund early commercialisation of a tech
private and public technology and life science companies as well startup. But as your company progresses, a combination of
as non-tech companies. We focus on revenue-stage companies debt and equity can work in concert to provide an optimum
– above $5 million in sales – and with a growth story. We seek mix of capital from a cost and flexibility perspective. It did not
to fund good companies who generally cannot get finance from make sense for Nimble to use equity to fund its loan book.
traditional lenders. This would have diluted their shareholding, which wasn’t
necessary for circumstances where they had a proven offering,
In January 2016, PFG provided a venture debt facility to fintech customers and growing revenue.
innovator Nimble Australia. Nimble provides small loans via
their purpose-built tech platform. They promise paperless PFG structured the Nimble facility as a three-year loan
applications where customers are approved and paid quickly. with a two-year extension. Nimble pays interest on the loan
Nimble required $20 million to fund their loan book and for commensurate with a venture debt facility (10%-13% per
general working capital. year). The deal includes customary financial reporting (no
more than what the company provides to its board) and terms
Nimble was still early in its growth cycle, so bank debt was and conditions that are typical for secured lenders.
not a viable option. Banks prefer funding profitable, asset-rich
businesses. Most young tech companies are not profitable By accessing debt finance at an early stage, Nimble could
and have few assets. Further, banks often require personal raise funds without diluting the equity pool and without the
guarantees to support even a small facility. By contrast, PFG need to give personal guarantees. Further, while PFG does
was willing to take a general security over the business’ assets not take board seats, we were able to introduce Nimble to a
without any personal or director guarantees. number of senior C-level financial executives to the company’s
management team for advice and mentorship.
 25

WHEN MIGHT YOU CONSIDER

VENTURE DEBT?

INSIGHTS:
WHEN IS IT APPROPRIATE TO USE
VENTURE DEBT?

2. Between rounds
James McGrath If you need capital but believe you are approaching a major
Investment Manager value inflection point (i.e. a key turning point in your business)
at OneVentures and are reluctant to do another capital raising round, venture
debt can give you the additional runway you need to achieve
more favourable terms. It has the added benefit of not needing
Venture debt is a beneficial alternative or complement to to be paid back at the next round. This type of loan is suitable
equity financing, as it involves less equity dilution, less loss for companies with up to $5M in revenue, a medium amount
of control, and less time spent capital raising. of burn and strong existing investors.

There are three scenarios when venture debt may 3. During later rounds to replace equity
be appropriate: If you are a later stage company with $5-10M of revenue
and a low burn (less than 10% of revenue), venture debt can
entirely replace equity financing.
1. At the same time as an equity round
If you are already conducting a round, you can supplement the It also offers significantly less dilution for founders. For
equity with venture debt. This is the best time to raise venture example, following its Series C fundraising round, Dropbox
debt as the company’s materials and management are available transitioned to venture debt and the final two rounds of
and the lender has the positive signal of investors putting capital raising had no equity. This formed two thirds of
money in. All this allows the borrower to negotiate Dropbox’s total US$1.7B capital raised. At IPO, Dropbox’s
the best terms. founders owned 36% whereas Box’s founders, which did
not use venture debt, held less than 6%.
This is most suitable for companies that are:

• making over $3M in revenue;

• burning significant cash; and
• want more capital without excessive dilution
(for example, you could raise a $5M round composed
of $3M of equity and $2M of venture debt.)

If you are looking to learn more about venture debt, download LegalVision’s Venture Debt Handbook
on our website.

25
 26

LATER STAGE FUNDING SECONDARY SALES

Whilst it is true that with every round you raise, it gets a little Some later stage raises may also contain a secondary sale.
easier, equity rounds for later stage startups, such as a Series Secondary sales are where the early shareholders of the
B or C, come with their own unique complexities: company, usually the founders, sell a portion of their shares
directly to the investors as part of the round. Whilst the
• A large portion of the funding is likely to come from majority of the investors’ funds go to the company through the
your existing investors, but you may also be bringing purchase of newly issued shares, a portion will go to the selling
onboard someone new. A lot of thinking goes into which shareholders in return for their shares.
investor will lead the round, with your existing investors
Where a startup is doing really well but a liquidation event is not
often choosing to take a back seat and let someone else
yet on the horizon, the founders may want to sell some of their
dictate the price of the round and its terms.
shares to take some of their risk off the table and reap some
• Key rights that your investors negotiated for themselves reward for the business’ growth to date. VCs are becoming
in previous rounds may need to be renegotiated, as more accepting of such secondary sales;. they appreciate the
the structure of the cap table changes and bigger founders’ considerable investment into the business and the
players require their own protections. For example, small salary that they likely took while it grew.
the appointment of an additional investor director can
But they will want the secondary sale to strike a balance
skew the founder’s control of the Board, so the decision
between being a rewarding pay-out for founders and still
making process may need to be reconsidered.
ensuring their equity stake is ample enough for them to
• You may also need to introduce a high-ranking class of stay motivated to continue the business’ success.
preference shares which would require your existing
If your later stage round involves a secondary sale, some
investors’ approval. This can often mean complex
important things to consider are:
negotiations with multiple parties.
• the class of shares being sold vs the class of shares being
• Later stage raises are also a lot larger, so whilst you
issued as part of the round (i.e. if the investors are being
may be able to use the investment documents from your
issued preference shares, but the founders are selling
previous round as a base, it is likely additional investor
ordinary shares, should these shares be converted into
protections (such a more comprehensive company
preference shares or should the price be adjusted?).
warranties) will be required.
• whether your existing shareholders have pre-emptive
rights (a right of first refusal) on the sale of shares that will
need to be complied with or waived by the shareholders.
• are the founders subject to restrictions on selling their
shares (such as vesting, or co-sale rights for investors)?
• will the sale trigger tag along rights (i.e if a significant
proportion of the shares are being sold, do the other
shareholders have a right to tag along with the sale)?
• What are the tax consequences of the sale?
 27

LEGAL DOCUMENTS Board/ Control - Will the investor/s have a board seat?
What control will the investor/s have over decision making?
What is the point in funding your business if you stand to
lose it all in an avoidable dispute in the future? Having the ESOP - Will you be setting up an employee share option plan?
right legal documents in place from the outset will protect How will the ESOP affect the pre-money valuation (i.e. is the
your startup from launch, through growth and all the way valuation the VC is offering inclusive or exclusive of the ESOP?).
to acquisition.

It is now easy to download free legal documents.

However, you should fully protect your startup by speaking ESOPs and Valuations
with a startup lawyer to draft tailored legal documents.
Founders often get confused when discussing
valuation and ESOPs. When a VC says they will
TERM SHEET invest at $10 million pre-money, they usually mean
There are circumstances where a startup will provide a term $10 million inclusive of any ESOP the startup will be
sheet to investors (generally an early stage friends and family setting aside for future employees. If you are setting
or seed round). But when an investor decides to invest in aside 20% of your stock for future issuance under
your startup, they will generally provide you with a term an ESOP, this means the real pre-money valuation
sheet. The basic terms you should look out for are below. your VC is offering you is $8 million, not $10 million.
As long as you know what you are getting into this is
Investment & Valuation - How much is the investor fine. If you are looking for a $10 million valuation not
investing (maximum and minimum)? Can you raise more inclusive of the ESOP, you will need to negotiate a
from other investors? What will be the pre-money valuation higher pre-money valuation. In this case, $12.5 million.
for the round?

Vesting - Will the founders’ shares vest? Standard procedure

on a Series A round is four-year vesting with a one-year cliff.
What this means is if a founder leaves the startup before
the first year, none of his or her shares will have vested.
25% of the founder’s shares will then vest at the one year
anniversary, and the remaining 75% will vest over the next
three years, generally on a monthly schedule. You may want
to negotiate a good leaver provision. So, if you stop working
for the company within 12 months and you are a good leaver
(i.e. left the company due to events outside of your control,
such as death or health reasons), then 25% of your shares
will automatically vest. Try to ensure that accelerated vesting
occurs on an exit event, so that you do not lose all your
shares if there is an exit event.
 28

Liquidation Preferences - If you are issuing preference Legal Documents - A term sheet will typically set out the basic
shares, what level of liquidation preference will you be offering legal documents to be used in the deal (in Australia more and
(1X non-participating is standard - any more is greedy!) more Seed/ Series A rounds are being completed using the
AIC documents).
Anti-Dilution - What anti-dilution rights will you offer
investors (if any)? If possible, you want to avoid offering
anti-dilution rights to investors so that all shareholders are
diluted (pro rata) when the company issues additional shares. What are AIC Documents?
Early stage VC investors will generally require broad-based
weighted average anti-dilution rights. This means that if Australian Investment Council (AIC) is an association
the startup issues shares at a lower share price than the of sophisticated investors (principally private equity
share price the VC pays in the future, the VC will receive and venture capital investors). Under their previous
additional shares reflecting an adjusted share price (of all their name, AVCAL, they created a suite of documents
preference shares). The adjusted share price will be calculated named “Open Source Seed Financing Documents” with
by the average of the price they paid and the lower price paid the input of a number of key industry stakeholders,
by the later investors. If you are bringing on investors who including LegalVision. The documents are free and
insist on anti-dilution rights, it is essential to engage a lawyer available for public use.
who understands how they work and the different types
of anti-dilution rights available.

Dividends - If you are issuing preference shares, it is unlikely

you will be offering preferential dividend rights. However,
if you have to, you want to offer non-cumulative rather than
cumulative preferential dividend rights. Non-cumulative
means that if the company does not pay a dividend in a
particular year, then the investor loses its right to receive a
dividend. On the other hand, cumulative means that even if
the company does not pay a dividend that year, the investor
carries over its right to receive a dividend. The company
must then pay the investor all dividends before paying
any ordinary shareholders.
 29

SHAREHOLDERS AGREEMENT IP ASSIGNMENT AGREEMENT

Your shareholders agreement is your startup’s most Your IP is critical to your startup's value. Startup founders
important document as it sets out the relationship between may have owned their IP personally in the early stages.
shareholders and directors. It will cover matters such as: It is important to ensure you have assigned your IP to
• issuing new shares the same company your investor is investing in. To do so,
• sale of existing shares you will need an IP assignment agreement to transfer the
• directors duties ownership of the IP to the company. You may also need an IP
• conduct of board and shareholder meetings, and assignment agreement if you use external developers without
• dispute resolution. a development agreement, or incorporate a holding company
to hold the assets of your operating company.
You can have your shareholders agreement drafted before
looking for external investment or when raising a round,
based on your term sheet. EMPLOYMENT CONTRACTS
Some startups will raise a round without the founders having
signed employment contracts, but this is rare. Investors want
SUBSCRIPTION AGREEMENT to make sure the startup has employed its founders.
A subscription agreement formalises the terms of the
investment with a specific investor. It is typically based on
the final term sheet and specifies:
• how many shares the startup is issuing
• the subscription price for those shares
• when the startup will issue the shares, and
• company (and sometimes founder) warranties.

Company warranties are statements which an investor

can rely on saying everything has been done above board.
 30

CAP TABLE
Your capitalisation table, or cap table, is a spreadsheet that
sets out who owns shares in your startup. The formulas
needed to work out shareholdings are not that complicated,
but it is remarkably common to mess up cap tables!

Cap table management comes down to accurately recording

all transactions that affect the valuation of a company such
as option issuances, sales transfers, conversions of debt to
equity and any exercises of options. We have built a cap table
spreadsheet for founders to record options.

This cap table template allows you to easily take control

and manage your startup's equity. You can also analyse
and compare new financing rounds to make the best
decisions around raising capital.

With this free template, you can:

• Easily view and manage your startup's
shareholding and options
• Eliminate time-consuming calculations so you
can focus on making smarter equity decisions
• Track all types of equity events
• Calculate pre-money and post-money valuations
 31

You can download LegalVision’s cap table at http://bit.ly/lvcaptable

 32

BUILDING A TEAM
Startups are about teams. Although your team may begin Control: Does the hirer have the right
with one or two founders, you will soon bring on board to exercise detailed control over the way
employees. Many successful startups scale quickly, work is performed or does the worker
so you need to plan for how you will help motivate your have full autonomy?
team members and ensure they stay with your company.

There are two legal matters concerning employees

that almost every startup will need to think about, Separate place of work and advertises
both covered in this section: services: Is the worker required to wear
a uniform or display material that associates
• employment contracts them with the hirer’s business?
• employee share schemes

EMPLOYEE OR CONTRACTOR Provision and maintenance of significant

tools and equipment: Is the worker required
When hiring new team members, the first thing you need to supply and maintain any tools or equipment
to consider is whether they are an employee or contractor. (especially if expensive)?
Taxation, superannuation and employment law obligations
differ for each and this issue can get early stage startup
founders into trouble. Some factors that determine whether Right to delegate or subcontract work: Is the
a worker is a contractor or employee are set out below. worker free to work for others at the same
time? Can the worker subcontract the work
Importantly, you cannot call a worker a contractor while or delegate work to others?
treating them as an employee (also known as 'sham
contracting'). The ATO frowns upon businesses that
mischaracterise workers to avoid their employment law Income taxation deductions: Is taxation
obligations. If you are unsure, use the employee/contractor deducted by the hirer from the worker’s pay?
decision tool on the ATO's website to determine whether
your team member is an employee or a contractor.

Remuneration: Is the worker paid according

to task completion, rather than receiving
wages based on time worked?
 33

INTERN OR EMPLOYEE Internship Duration

We commonly speak to startups that misunderstand an
Startups may also host interns looking to obtain work internship’s primary function is for the intern to derive
experience. An internship can be a worthwhile learning benefit through observing and learning from others in the
experience, offering the intern access to mentors and skill business rather than directly contributing to its productivity.
development. However, it is important founders remember Parties should agree on the internship’s length at the outset
that an intern does not replace an employee. (4-12 weeks for example) rather than an indefinite placement.

Internship Purpose Consequences for Mischaracterising a Relationship

Before engaging an intern, ask yourself what is the purpose If a startup founder is found to have engaged interns,
of the arrangement? Is it to provide a benefit to the individual but the relationship is in fact employee-employer, they will
or the business? If it is the latter, it is likely to resemble an be liable for back pay and other employee entitlements.
employment arrangement. Remember that the primary The business could also face fines of up to $51,000-$54,000
benefit derived from the internship should flow to the for each breach of the Fair Work Act. Directors/managers of
individual. It is a genuine opportunity for him or her to the business are also exposed to individual fines for breaches
observe and learn. Startups should consider bringing on of the Fair Work Act.
interns that are required to undertake an internship as part

EMPLOYMENT CONTRACTS
of a vocational placement for TAFE or university. In this way,
the intern can provide a greater contribution to the business
rather than just observe (for example, during work experience).
Employees all need employment contracts. It is remarkable how
many founders do not bother with ensuring their employees
Internship Pay
have an agreement in the early days. Your employment
If you bring on an intern, ensure that your internship
contracts should address a number of standard issues
agreement clearly states that the role is unpaid and for a
(intellectual property, restraint of trade, leave requirements,
finite agreed duration. You may choose to offer a stipend
etc.). In the startup space, it is especially important to include
to cover lunch and travel expenses. However, payments
an extended probation period (ideally six months). Startup life
comparable to wages can point to an employment
is not for everyone and a lengthy trial period helps both the
relationship, for example:
startup and team member work out if there is a good fit.
• Regular payment calculated with reference
to time or hours worked
• Large lump sum payments, or If you decided to host any interns, ensure that
• Allowances that far exceed the expenses incurred. you have an internship agreement template
in place so when he or she starts, you can fill
out their role, learning aims and both parties’
obligations together. Avoid the trap of falling
into an informal intern arrangement.
 34

EMPLOYEE SHARE SCHEMES

Obviously, you want the best person for the job, in the job. As previously mentioned, a startup must meet certain
But as a startup (unless you have raised plenty of capital), eligibility criteria for the tax concessions to apply.
it is unlikely that can pay top dollar for team members. Enter
an Employee Share Scheme (ESS). Under an ESS, you can The ATO has issued two safe harbour valuation
offer team members shares or options to buy shares in the methodologies which startups can use to value their
company. Nearly every high-growth startup will have an ESS. shares for an ESS. One is essentially a formal valuation,
Offering team members shares or options in the startup and the other is a net tangible assets test. To use the net
can help bridge the gap between their startup salary and an tangible assets test, a startup must satisfy certain eligibility
equivalent corporate salary. An ESS is also a great way to criteria. If it meets the criteria, then the startup's valuation
ensure your employees feel like they have a real ownership can be calculated using the following formula.
stake in the business and that their interests align with your
startup. The startup’s success will be their success. (A - B) / C = Valuation
In July 2015, the ATO made changes to how they taxed ESS Where:
in startups. If your startup meets certain eligibility criteria, A means the company’s net tangible assets at that time
you can issue shares, or options to purchase shares, to an (disregard any preference shares on issue);
employee who is taxed only when they make a financial gain B means the return on any preference shares on issue at that
(usually when they sell their shares). In other words, the ATO time if the shares were redeemed, cancelled or bought back;
will not tax your employee when your startup issues him or and C means the total number of outstanding shares (e.g.
her shares or options, when their shares or options vest, or ordinary shares) in the company.
when they exercise their options (if applicable). It does not
make sense for employees to pay tax on something that Startups tend to have few, if any, tangible assets. So, the net
may ultimately prove worthless if the startup goes under. tangible assets test enables startups to issue shares or grant
Once the employee sells his or her shares (generally on options with a share or exercise price that is lower than the
an exit event), the gain made will be taxed as a capital gain. share's market value.
If the employee has held the shares or options for longer
than one year, he or she will receive a 50% reduction in
the capital gains tax he or she must pay.
 35

ELIGIBILITY CRITERIA FOR TAX CONCESSIONS

Shares cannot Company’s shares (and the shares of any holding, subsidiary
be listed or sister company) are not listed on an approved stock exchange

Company The company (and any affiliated or connected company) was

Incorporation incorporated less than 10 years before the end of the most recent
income year before the employee acquires the share or option

Aggregated The company (together with any connected or affiliated entities) has
Turnover aggregated turnover of no more than $50m in the most recent income
year before the employee acquired share or option was acquired

Residency The employer company must be an Australian resident

Company’s The predominant business of the company is not the acquisition,

Predominant Business sale or holding of shares, securities or other investments

Employee’s Status When the employee acquired the shares or options, they are
employed by the company or a subsidiary of the company

Operation of the ESS ESS participants cannot dispose of their options/shares earlier than three
years from the grant date of when the employee ceases employment

Type of Shares The shares or options granted to an employee under an ESOP must be
ordinary shares

Percentage of An employee cannot hold a beneficial interest in more than 10% of

Shares Held the shares in the company and cannot control the casting of more than
10% of the maximum number of votes at a general meeting

Discounted Shares When issuing shares, any discount to the share price must be no
more than 15% of fair market value

Exercise Price When issuing options, the exercise price must be at least fair
market value of a share at the date of grant of the options

35
 36

CASE STUDY:

Cliff Obrecht
Co-founder and COO of Canva

Canva’s recruitment philosophy starts with one

fundamental principle - hire the smartest people we can
and give them the freedom to manage themselves and
determine how they want to work.

Our equity scheme is a big part of that philosophy. As Canva The purpose of a disclosure document is to protect
continues to grow, we have found that giving our team an employees (or retail investors) and aid them in making
equity stake in the business has been a powerful way of informed investment decisions. There are four disclosure
increasing engagement. Equity makes people feel invested document types, but if you are issuing less than $10 million of
in a business, and that level of investment is crucial in equity, then you will probably be lodging an Offer Information
motivating people to do their job to the best of their ability. Statement (OIS). The OIS must explain the intricacies of the
corporate/equity structure and business risks and must attach
If you are thinking about using equity as part of your audited financial statements for a 12-month period including
remuneration framework, you need to be fully aware of your comparatives. Unfortunately, it is probably fair to say that
obligations under the Corporations Act. ASIC grants some these obligations have not really kept up with the realities of
relief to startups - these include senior manager exemptions the startup movement, which relies heavily on share option
and the 20/$2 million rule that allow issuances of up to $2M plans to attract and retain talent.
of equity across 20 employees in a 12-month period - but
soon enough you will find yourself needing to lodge a public Remember, you only have six months from the end of your
disclosure document. That is something you should plan financial year to lodge the OIS. This is not a long time,
for well in advance. particularly if you need to bring the business’ historical
financial information in line with prescribed Accounting
Standards. It always pays to be prepared, and it is important
that you have a strong finance team with financial reporting
experience that are aware of any complex accounting
challenges. You should also seek guidance from trusted legal
advisors to navigate the Corporations Act requirements.
 37

DEALING WITH CUSTOMERS

AND SUPPLIERS
Your relationships with external stakeholders such as
customers and suppliers will continue to become more
important in driving your startup’s success as you grow.
From resolving customer complaints swiftly to identifying
trusted suppliers, a big key to your startup’s success will
be how you deal with people.

Commercial considerations will largely drive how you source

suppliers so it is important you are familiar with what you
want from the relationship, for example:
• How will you ensure consistent product quality?
• Who is responsible if product quality is below standard?
• Does the supplier require a minimum order?
• Will you pay upon receiving the goods?
• What happens if the supplier sells out or
discontinues particular stock?
• How can you compare suppliers?

Your legal documents, namely your supplier or distributor

agreement, should address issues around quality, payment
and subcontracting. Addressing early on how you will deal
with suppliers will ensure you protect your business and
comply with any relevant laws.
 38

DISPUTES WITH CUSTOMERS

AND SUPPLIERS
Unfortunately, even if your startup has a great product The reasons that a dispute with a customer may arise will
which customers love, there may come a time when you find depend on what your business does. If you have a SaaS
yourself in a dispute with someone that you are working with business, disputes may arise where the service you are
or someone that you are working for. These types of disputes providing is not available to customers when they want it,
are tricky for a number of reasons: is operating too slowly or has glitches. If you provide a print
on demand business, it may be because the quality of the
• You can lose a customer and all of the revenue that the physical products that you produced aren't up to scratch.
relationship might have generated going forward
• There are reputational risks, which are a particular
issue if your startup has a social media presence
• If the dispute is with a supplier, you may need to find Quick Tip
a new organisation to work with, which can have Ensure your business terms and conditions include
significant cost implications suitable limitations of liability and warranties as to
• If the dispute is very serious, you could get sued or the level of service or quality of product you provide
find yourself needing to sue someone, and to limit your risk.
• A dispute will take time away from the most important
thing for any founder - running your business.
Disputes commonly arise because of a difference in Doing this can provide you with some measure of protection
expectations between you and your customers. A customer if a customer tries to sue you for damages they claim to have
may be upset because what they thought your business suffered as a result of a failure in the product/service you
would provide, the quality of the product or the delivery have provided.
speed differed to their expectations. In this context, disputes
will unlikely begin with a letter threatening legal proceedings.
It is much more likely that you will get a call or an email from
the person who is unhappy asking for you to fix whatever
the problem is or to refund their money.
 39

DISPUTE RESOLUTION THROUGH A

CUSTOMER CENTRIC APPROACH
If you want your startup to succeed long-term, the majority
of disputes will require a customer-centric approach. Offering
discounts, free services and other commercial resolutions will
go a long way so it is sensible to think about your approach to
retain dissatisfied customers. For example, Uber employs teams
of 'customer happiness officers' who will not hesitate to refund
a user for anything less than stellar service.
If the worst-case scenario does happen, and you find yourself
in a situation where a customer is threatening to commence
proceedings against you, you have two options:
• settle on commercial terms (ideally recorded in
a formal deed of settlement), or
• go to court.
Court proceedings are very expensive, can take years to
finalise, and can be disastrous from a PR perspective. If you
are considering going down this route, make sure you are
doing so for the right reasons and that you have spoken with
a lawyer about your prospects for success.
 40

A CUSTOMER CENTRIC APPROACH TO

DISPUTE RESOLUTION

Offer a discount

Refund the service or good

Offer a free upgrade

Train staff on dispute resolution processes

Open up communication channels

Give personalised attention

Resolve quickly
 41

LEGAL DOCUMENTS Business Terms and Conditions

Your business terms and conditions will differ depending
Website Terms of Use on the type of business you run. If your startup is an
Most startups will have a website. Website terms of use are e-commerce business, you will need a set of sale terms
the terms which govern how visitors can and cannot use your and conditions for your customers. This would generally
website. They help protect your intellectual property and be provided online through a clickwrap agreement
limit your liability in relation to matters such as third party (i.e. the customer must click-to-agree to before proceeding
links, service outages, prohibited or unintended use and loss to purchase).
as a result of reliance on information (but only to the extent
If you provide services, you will need a client agreement
allowed under the Australian Consumer Law). Website terms
or service terms which set out what you will and will not
of use can be drafted cost effectively, so do not spend lots on
do for the customer as part of any particular engagement.
getting them drafted.
If your business is a marketplace, you will need a set of
Privacy Policy marketplace terms and conditions which set out your
If your website collects personal information, you will be relationship with your suppliers and customers, as well
likely be required to have a privacy policy. There are various as any relationship between the two. If you are running
rules around what size business you need to be before you a SaaS business, you will need SaaS terms.
are required to provide a privacy policy to visitors and users,
but it is easier just to put one together from the start - they Ultimately, your business terms and conditions will be one
are rarely complicated and should not be costly. Your privacy of your most important contracts. We often find that the
policy states how your business will deal with the personal process of drafting your terms can help a founder identify
information it collects. exactly how their business will operate.

Types of Business Terms and Conditions

Business Type Legal Document

Service business Client Agreement

Shop/E-Commerce Store Sales Terms and Conditions

Marketplace Marketplace Terms and Conditions

SaaS Business SaaS Terms and Conditions

 42

CASE STUDY:

Kate Pullinger
Chief of Staff at SafetyCulture

SafetyCulture is a global SaaS business that develops

software applications for improving workplace safety and
quality. SafetyCulture is the maker of iAuditor, the world’s
most used inspection app.

We interact with businesses of different sizes and levels Having our contractual terms standardised simplifies the
of commercial sophistication. We are rolling out standard processes we need to put in place for accounting, renewals,
agreements such as nondisclosure agreements, customer etc. as these key terms will be the same for each customer. As
terms and conditions and partnership agreements on a daily soon as changes are made to these terms, you need to have
basis. Due to the nature of SaaS, the volume of contracts with systems in place so that your team can easily identify which
customers and partners is high. It is therefore really important customers get a particular set of conditions that are different.
for us that these documents are as robust as possible at the This adds to time spent on contract administration, which
outset but sufficiently balanced for our customer base. adds to costs.

Requests for changes to the kinds of standard documents that

we use on a day to day basis are fairly common, but we need
to push back where we can. Changes in these documents,
especially customer terms and conditions, can quickly become
burdensome, risky and expensive. This is a particular problem
for startups with a low average revenue per user, as the cost of
making changes to the documentation can quickly erode any
margin. Even for the largest companies, we try to initially push
back on significant changes unless the potential for a longer-
term relationship matches the risk.
 43

PROTECTING
INTELLECTUAL
PROPERTY
TRADE MARKS AND
DOMAIN NAMES
When you first launch, it is tempting to try and save as much
cash as possible. Applying for a trade mark is not necessarily
a priority. However, if your startup gains traction, your brand
will become valuable, and you will want to protect your IP.
We generally recommend that founders apply for trade mark
protection early in the growth phase.

Once you have momentum, it is equally important that

you purchase all relevant domain names. This is typically
inexpensive ($10 per year for a .com domain name)
and could save you a great deal of cash down the track.
 44

CASE STUDY:

Evan Tait-Styles
CTO at LegalVision

As a startup founder, you are juggling building your and discredit your reputation. If you intend to sell your
MVP, preparing for launch, acquiring users, responding business in the future, your domain name is a valuable asset.
to their feedback, iterating your product and effectively Although you may think you are saving money, you could
using your limited time and capital. It is overwhelming. So, end up spending significantly more long term.
when we started LegalVision, we were not thinking about
long-term plans. We registered legalvision.com.au but did When it comes to protecting your brand, you cannot register
not bother with any international domain names including generic words that are commonly used to describe a type
legalvision.com. of business such as “online grocery store”. You are also
prohibited from registering geographical names, the names
Fast-forward two years. We were growing quickly and had
pivoted. Our minds turned to expanding internationally, and
we were thinking about registering the legalvision.com and
.co.uk domain names. Unfortunately, domain name squatters Quick Tip
were also watching our traction with interest and had already A good way to go about selecting a name/domain
purchased these names. The squatters demanded USD name is to decide on a few names for your startup,
$50,000 for the .com domain name. then do a domain name and trade mark check.
Startup founders should think global from day one. If you have
the foresight to register your domain name internationally, of international organisations and offensive marks. Once
you can protect your brand from cyber squatters, competitors you have picked a name that you like, and that is not in use
who try to replicate your success using your business name or registered by someone else, apply for the trade mark and
abroad, and individuals who seek to redirect your customers register all of the relevant domain names at the same time.
 45

SHOULD YOU REGISTER YOUR LOGO

AS A TRADE MARK?
A trade mark is a sign used to distinguish one person’s
goods or services from those of others. A trade mark exists
whether it is registered or not, but registration provides you
with rights that you would not otherwise have.

Quick Tip
Each ‘sign’ is considered a separate trade mark, and
you must register each separately with IP Australia
(for example a business name and logo are two
different marks). This means you will submit two
applications and pay two sets of fees.

When you register a word trade mark (for example, your

business name), you are protecting the word or phrase.
If you choose to register your logo, you are protecting
the image and its overall impression, taking into account
the shape, orientation and configuration. If your logo is
just a stylistic representation of your name, then you
may be sufficiently protected by registering the name
or phrase only as a trade mark. However, if your logo has
a distinctive appearance or is key to your branding, you
should also consider registering the image to ensure
maximum protection of your IP.
 46

PATENTS
If you have invented something new - a device, substance,
method or code - you might want to consider applying The basis for the patent system is that it encourages people
for patent protection. A patent is a legally enforceable, to invent new and useful things. In exchange for temporary
exclusive right to exploit an invention. As an exclusive right, monopoly rights, an inventor must explain to the world
a patent allows you to prevent others from making, using, exactly how to make the invention. So, when applying
selling, or otherwise dealing with the invention. for patent protection, you must provide a clear written
description that would enable another person to make your
Filing a patent application is a complex process. invention.
To receive patent protection, your invention must be:
• new (not publicly disclosed) In Australia, there is one patent type, called the Standard
• involve an inventive or innovative step (not obvious), and Patent (a second patent type, the Innovation Patent,
• capable of commercial application (useful). ceased to exist on 25 August 2021). A standard patent
offers protection for up to 20 years, and there is no limit
The invention must also be a 'manner of manufacture', on the number of claims you can make. The patent office
which means that it must be or produce something in will then examine your patent application to determine
a tangible form. Ideas and discoveries, for instance, whether it meets the requirements for patentability (in
are not patentable, nor are mental processes or ideas. Australia, a patent examiner from IP Australia). This process
This ‘manner of manufacture’ requirement is a common can take several months or years.
barrier to many computer related inventions.
 47

Importantly, lodging an Australian Patent does not mean property assignment deed. The common law makes certain
that you will have protection worldwide. To protect your presumptions to the effect that intellectual property created
invention in other jurisdictions, you will need to lodge an by employees in the course of their employment will be
application directly with those countries or under the Patent owned by the company, but it pays to spell out what the
Cooperation Treaty. expectation is in an employment contract.

Most startups will not actually be in a position where

applying for a patent makes sense. That is perfectly fine.
Even if you do register a patent, you are unlikely to have
GOING GLOBAL:
the capital to enforce it against a competitor copying your
invention. However, you should speak to a patent attorney
PROTECTING YOUR IP
about how to best protect your invention.
INTERNATIONALLY
PROTECTING IP WITH
Your intellectual property is one of your startup’s most valuable
assets. It is easy to overlook investing time registering your

REGARDS TO EMPLOYEES
trade mark or domain name internationally. You’re focusing
on building your MVP and developing a marketing strategy for
its launch. But planning for your startup’s growth and entry into
AND CONTRACTORS global markets will save you considerable time and costs which
may later side-track your efforts.
You should ensure that your startup’s intellectual property
is appropriately protected and assigned when it comes to The World Intellectual Property Organization (WIPO)
employees and contractors. administers systems enabling you to protect your inventions,
designs and trade marks internationally. This significantly
All employees and contractors should sign appropriate reduces costs and saves time, as businesses do not need to
contracts that include strict confidentiality protections. file several separate national or regional applications, which
This will mean that they cannot use or disclosure the may be in different languages and require payment
startup’s intellectual property to anyone during their of duplicate fees.
employment or after they leave.

You should also ensure all the intellectual property created

by the founders, employees and contractors of the startup
is appropriately assigned to the company. This should
include intellectual property created before the company
was incorporated. You can do this through terms in the
employee/contractor agreements, or with an intellectual
 48

PROTECTING YOUR INVENTIONS

Intellectual property rights are matters of national law,
and patents are no exception. A patent will only have effect
in the countries in which it is registered. This means that if
you need patent protection in multiple countries, you will
need to apply for a patent in each country. Fortunately,
there is a system in place to facilitate this - the PCT system.

The Patent Cooperation Treaty (PCT) is an international

treaty that sets up a system allowing inventors to protect
their patents by filing one international application.
The PCT has more than 145 member states. Importantly,
each country’s national or regional office still controls the
granting of patents (the ‘national phase’).

Process
1. File an international application with a national or
regional patent office;
2. International Searching Authority (ISA) conducts a
high-quality search of the published patent documents
and technical literature and produces a written opinion
on your invention’s potential patentability;
3. Content of your international application is disclosed to
the world (usually 18 months from earliest filing date);
4. You can begin applying directly to patent offices
in the countries in which you want a patent granted
(usually 30 months from earliest filing date).

Registering a Patent Under the PCT

File an international ISA conducts an

application international search

Content of your patent Apply in the countries

application is published in which you want a
patent granted
 49

PROTECTING YOUR TRADE MARKS An online presence is practically a requirement for all
new businesses, and so, startups should be wary of domain
In a similar way to patents, there is no such thing as a ‘global’ name squatting or cybersquatting. Cybersquatting is when
or ‘worldwide’ trade mark. Startup founders can protect an individual or company registers in bad faith an identical
their trade mark internationally by filing an application in or similar domain name. They usually do this with the intention
each country directly or via a system known as the Madrid of either:
Protocol. The Madrid Protocol is an international treaty
that facilitates registering trade marks in member countries.
• transferring the name to the legitimate owner
at an inflated price;
WIPO administers applications for international trade
mark protection.
• exploiting the brand’s reputation by setting up
a competitor website; or
Process
• damaging the reputation by creating a slanderous website.

1. Trade mark owner submits an application to IP Australia;

2. Trade mark owner submits international application
Quick Tip
through IP Australia and designates the countries in
which they require protection; Monitoring your IP
3. WIPO receives the international application and performs • Set up a Google alert to keep updated on when others
a formalities check. If formalities are satisfied, the trade are using your trade mark without permission
mark will be given an international registration number; • Search IP Australia’s database for registered trade
4. Application passed to the offices of the designated marks and pending applications
countries, who each assess the trade mark under their own • Check ASIC to see if others are using your trade mark
national law. Each office separately issues a certificate of in their business name
registration if the mark complies with national law.
• Search the domain name register (Australia) or
www.whois.com.au to see if someone has registered
Monitoring for Infringement
your domain name
If you have registered a trade mark or domain name,
it is your responsibility to monitor for infringement.
You should be vigilant against unscrupulous (or even
innocent) individuals who use your mark without permission.

Registering a Trade Mark Under WIPO

Submit international Designate the countries WIPO receives the

application through IP in which the trade mark international application
Australia requires protection and performs a formalities

Trade mark will be Application passed to the Each office separately issues
given an international offices of the designated a certificate of registration
registration number countries
 50

INSURANCE
CONSIDERATIONS
The type of insurance your startup will need will be highly
dependent on the industry you operate in. Common
insurance requirements for startups include:
• Workers Compensation Insurance;
• Public Liability Insurance;
• Directors and Officers Insurance; and
• Business/Office Insurance.

More information about insurance types that you should

be considering, and why, is set out in ‘Insights: Choosing the
Right Insurance’. Ensure you speak with an insurance broker
about the types of insurance necessary for your business
and put these in place early.
 51

INSIGHTS:
CHOOSING THE RIGHT INSURANCE

Dominic Brettell
Head of Client Service at
Honan Insurance Group

As a startup, it is important to think about insurance not only Workers Compensation

for contractual reasons, but also to protect both yourself and Businesses are required to have workers compensation by law,
your growing business. One mistake made in these early stages as you have an obligation to protect your employees if they are
could mean the downfall of your business you have worked so hurt in a work-related injury or illness.
hard to build. It is imperative that you protect your investment
from the start – we have set out below key insurance you should Business/Office Insurance
consider. If you run your business and operations onsite, it is important
to protect the premises and its contents against loss of damage
Management Liability from fire, theft or natural disasters. Office insurance is often a
A Management Liability policy is specifically designed to protect requirement of commercial property leases.
your company’s financial wellbeing and directors’ personal
wealth. The cover commonly includes legal costs and potential Cyber Liability Insurance
damages associated with liability claims arising from actual or As cyber attacks become increasingly common and regulations
alleged wrongful acts associated with managing your company. become more stringent with data privacy, cyber liability
insurance is critical. Malware protection alone may not be
Professional Indemnity sufficient for your startup with breaches leading to potential
If your startup provides professional advice or consulting financial losses, claims from third parties and irreversible
services to clients, ensure you have protection against potential reputational damage. Consider cyber insurance to protect you
claims and disputes arising out of actual or alleged breaches of in case of breaches to your IT security or employee errors.
your professional duty.
Corporate Travel Insurance
Public and Products Liability In businesses where employees travel often, a Corporate Travel
As a startup, many of the contracts that you will be asked to Policy will cover employees. A comprehensive policy may also
execute will require Public & Products Liability insurance. It cover family members.
is also important if any claims are made against you or your
business for personal injury or property damage. Selecting an insurance partner should include choosing one that
understands your business and your day-to-day risks. Factors to
include in your decision include their ability to support you with
expertise and experience as your startup evolves and grows.

51
 52

52
 53

FINAL WORD
Australia’s startup ecosystem is still in its infancy. However,
we are seeing a nationwide political and commercial
commitment to investment in innovative businesses that
contribute to a knowledge-based and technology-driven
economy. This emphasis on innovation, and the increased
funding that accompanies it, has the potential to positively
impact Australian startups in a more profound way than
perhaps any other industry.

LegalVision is itself a young, technology driven business.

In our six years in operation we have grown from two team
members to over 120. In that time we have assisted founders
of startups with many of the challenges we have examined
in this guide. In our experience, Australian startup founders
are driven by a strong entrepreneurial spirit and a desire
to create lasting economic change. We are committed to
nurturing that spirit in the coming years.
 GLOSSARY

Accelerator A program which supports and facilitates the growth of startups,

usually for a specified time through mentorship and training,
networking events, hosting startups in co-working spaces and
investing small amounts of capital in return for equity.

Advisor This could be a lawyer, accountant or general business advisor who

markets him or herself as a startup advisor. They may ask for a fee or
equity in return for their services and should be carefully considered
before being brought on board.

AIC Documents Open source (free) capital raising documents prepared by the
(also referred to as the Australian Investment Council (AIC) (formerly the Private Equity &
AVCAL Documents) Venture Capital Association Limited (AVCAL)). The AIC is comprised
of Australian venture capital funds, angel groups and other industry
stakeholders. The documents are commonly used as a basis for a seed
round. The suite includes a subscription agreement, shareholders
agreement, employment agreement, and IP assignment agreement
and SAFE instrument.

Angel Group A network or organised group of angel investors who may share
networks or pool investment funds to make joint investments.

Angel Investor A high net worth individual who generally invests in startups in an early
capital raising round. While they may not be willing to invest a large sum
of money into your startup, they can bring know-how and connections
to the table.

Anti-Dilution A term commonly requested by VC investors to apply to their

shareholding. It protects shareholders from dilution of their
shareholding if the startup chooses to issue future shares at a price
lower than the price previously paid by the investor. As a result of
this term, the investor will receive an adjustment (similar to repricing
of their shares) which will either lessen the effect of, or completely
prevent, dilution.

Assignment Transferring ownership in something from one person or entity to

(Intellectual Property another (often used in the context of intellectual property, for example,
Assignment) the assignment of intellectual property rights from an operating
company to a holding company). Should be distinguished from a
licence (defined below).

Bankruptcy Occurs when an individual becomes unable to pay its debts.

Beneficiary A beneficiary is someone who is entitled to a benefit/advantage from a

trust. However, in the context of a discretionary trust, a beneficiary has
no claim to any particular portion of the trust income or assets and will
only receive such benefit at the discretion of the trustee.

Board of Directors A group of people appointed to oversee a startup and make

major decisions (with or without the approval of shareholders,
depending on the circumstances).

54
 Bootstrapping A startup is said to be bootstrapping if it is funding itself based on
its revenue, usually generated through customers paying for the
goods or services the startup provides. A bootstrapped startup is
one that has generally not received external capital.

Bridge Financing Money given to a company by an investor which aims to fund the
company until its next equity round. It will usually be replaced or
increased by a larger investment in the upcoming round.

Burn Rate The rate in which a startup spends its cash to pay its expenses.
Used in finance forecasting to determine how much capital will
be required in each round.

Buy-Sell Agreement An agreement that sets out how a co-founder’s share of the
business will be dealt with if they can no longer work in the business.
Commonly, the departing co-founder is bought out by either the other
co-founder or the company itself. An entitlement to an insurance
payment to finance this purchase is common.

Capital Gains Tax Tax which is to be paid on a profit made from the sale of property
or other assets (such as shares).

Capitalisation Table A spreadsheet which sets out (i) all shareholders in the company
and their shareholdings, and (ii) all shares allocated to the company’s
employee share option plan.

Cliff The period before shares or options which are subject to vesting
provisions begin to vest. For example, a common vesting schedule for
founder shares is four years, with a one year cliff. In this case, no shares
will be released from the vesting provisions until after the first year.

Confidentiality Also referred to as a non-disclosure agreement, a confidentiality

Agreement agreement is a contract between two parties that sets out how
certain confidential information is to be dealt with. It is used to
protect a startup’s sensitive information from becoming public
or being used in a damaging way.

Contractor A person who performs work for your startup on a contract basis
(rather than as an employee). Usually, this is at a fixed price, for a fixed
period and the scope of work is predetermined and adjusted as necessary.
A contractor will have their own ABN and will generally invoice your
startup for work performed.

Conversion Discount A discount applied when a convertible loan converts to equity

at a trigger event.

Convertible Commonly used in a startup’s first investment round, a convertible

Note/Debt note is a loan made to a startup by an investor which is to convert to
equity at a predetermined trigger event (and generally, not be paid back).

Crowdfunding The raising of smaller amounts of capital from a larger number of

investors, usually via the internet and usually in return for future
access to products or services.

Debt Financing Raising capital for your startup by borrowing money in return for the
payment of interest (rather than receiving money in return for shares).

55
 Default Inability or failure to repay a loan or make a required repayment.

Dilution Dilution occurs when the percentage that a shareholder owns of a

company is reduced as a result of the company issuing new shares.

Director A person validly appointed to govern a company on behalf of

its shareholders.

Discretionary Trust A discretionary trust is a trust under which the trustee can exercise
its discretion when distributing trust income amongst the trust’s
beneficiaries.

Dividend A payment made by a company to its shareholders. Startups usually

make the payment of dividends discretionary and it is rare for them
to be paid at all in the early stages.

Due Diligence A process whereby potential investors investigate a company they are
looking to invest in. Investors are looking to confirm that everything
promised in the pitch is accurate.

Employee A person employed by your startup for a wage or salary either on

a casual, part-time or full-time basis. Distinct from a contractor,
the business is obliged to provide an employee with entitlements
such as sick leave and superannuation contributions.

Employee Share A scheme in which employees are granted shares or options to buy
Option Plan/Employee shares in the company in order to incentivise and reward them.
Share Scheme

Equity Share ownership in a company.

Equity Crowdfunding Equity capital raising where a large number of investors make small
investments into a company in return for shares via an intermediary
crowd-sourced funding service.

Equity Financing Distinct from debt financing, equity financing involves the issuance
of shares to investors in return for capital.

Escrow Funds held by a third party until certain obligations/conditions are

fulfilled by the contracting parties.

Exercise When an option holder purchases shares under their option

entitlement.

External Capital/ Money given to a startup (whether by debt or equity) which does not
Investment come from the founders.

Fair Market Value The price that a third party would pay for shares in the market assuming
they were interested (but not too interested) in purchasing such shares.

Founder Someone who sets up, or is instrumental in setting up, a new company.

Friends and Usually the very first round of capital raising for a startup where a
Family Round small amount of capital is raised from friends and family members
of the startup founders.

56
 Fund The vehicle through which a group of people can invest in a startup.

Future Liquidity Event An event which will allow an investor to cash out on their investment,
such as when a company is sold or publicly listed.

Government Grants Government funding for selected and qualified startups. These include
small grants (up to $25,000) to help get a startup off the ground or
larger grants (up to $100,000) to accelerate growth and facilitate
partnerships.

Guarantor Someone who is responsible for the repayment of a loan made to a

company in the event that the company is unable or unwilling to repay.

Holding Company The top tier of a dual company structure, a holding company is a company
which holds the valuable assets of the business (such as IP and cash)
and owns 100% of the shares in the subsidiary operating company.

Incorporation The process by which a business becomes a corporation (most

commonly, a proprietary limited company). It involves registration
with ASIC, issuance of an ACN and drafting the company documents
including the company constitution.

Incubator A program or entity which facilitates the growth of startups through

mentorship, networking events, invitations to co-working spaces and
potentially a small amount of funding. An incubator will likely be looking
for a particular type of startup.

Indemnity Security against a potential loss arising out of a contractual relationship

between two parties. Generally, this is a promise by one party to protect
the other should something go wrong.

Initial Public Offering The process in which a company offers shares to the public for the first
(IPO) time. After an IPO, the company will be considered a listed company and
its shares can be traded on the stock market.

Insolvency Occurs when a company becomes unable to pay its debts.

Institutional Investor/ A large professional entity which pools money to offer larger-scale
VC investment to startups which have gained traction.

Intellectual Property Intangible property which is generally created as a result of creativity

(IP) or knowledge. It includes copyright, trade marks and patents.

Issuance The allocation of shares to a particular person or company,

generally in return for payment.

Lead Investor An investor in a startup who leads an investment round. Generally,

the person/VC making the largest investment, they will take over the
negotiation and can sometimes act on behalf of other investors.

Liability Occurs when you are legally responsible for something.

Licence The granting of the right to use or exploit something for a

specified period of time, usually in return for a fee.

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 Liquidation The process by which a company ends, usually as a result of
insolvency/bankruptcy.

Majority Shareholder The shareholder who holds the largest number of shares in the
company.

Micro-VC A fund which is larger than an angel group but smaller than a VC
and made up of professional investors.

Non-Disclosure See “Confidentiality Agreement”.

Agreement

Non-Compete A clause in an agreement which restricts a person from working

for competitors of a business within a certain geographical area
or time period.

Operating Company The bottom tier of a dual company structure, the operating company
is the entity which enters into contracts and conducts the day-to-day
operations of the business. Its profits flow up to the holding company.

Option A right/benefit granted to someone (often an employee) which allows

them to buy or sell shares in the company at a future date (and usually
at a discount or pre-fixed price).

Option Pool A proportion of shares set aside for the company to issue as options
to employees in the future.

Pay to Play A clause which accompanies an anti-dilution provision which says that
if an investor does not participate in the future equity round, they will
lose their anti-dilution protection.

Post-Money The value of a startup immediately after an investment round.

Valuation

Preference Shares Shares which have preferential terms, rights and privileges when
compared to ordinary shares.

Pre-Money Valuation The value of a startup immediately before an investment round

which is used to determine the equity an investor should be given
in return for their investment.

Private Equity Investment in private/proprietary companies.

Professional Investor Someone who holds a financial services licence or at least $10 million
in gross assets.

Proprietary Company Often referred to as a private company, a proprietary company

is one with less than 50 non-employee shareholders which is not
listed/publicly traded.

Public Company A company which is either listed or unlisted and which offers shares
to the general public. Public companies are subject to a high level of
regulation by ASIC.

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 Return on Investment The percentage profit an investor makes on their initial investment.
(ROI)

Revenue The amount of money a company receives as a result of its

business activities.

Scalability The capability of a startup to expand and grow in a way that is

effective, maintainable and does not negatively affect performance.

Secondary Sale The sale of shares in a company by a shareholder to an investor that

occurs as part of a capital raise.

Secured Debt A loan made to a company which is secured against a particular asset
(specific security) or all assets of the business (general security). If the
debt is not repaid, the lender has a right to the security up to the value
of the amount owed.

Security Collateral for a loan which represents an interest in an asset

or company.

Seed Round Usually the first major financing round for a startup. A seed round
is generally smaller scale and made up of friends and family and
angel investors.

Series A Round An early round of startup financing, a Series A round occurs after the
seed round and is usually larger in scale. Generally, angel investors,
micro-VCs or institutional VCs invest in this round.

Series B Round The next round of startup financing following the Series A. Generally,
occurs when the startup has moved beyond the development phase
and is ready to substantially expand. Often it will involve existing
investors injecting more into the business.

Series C Round (and Subsequent venture rounds are used to scale the company, make
beyond) acquisitions, maximise market share, grow internationally and prepare
the company for an acquisition or public listing.

Sophisticated Someone who makes large scale investments (over $500,000),

Investor has net assets of at least $2.5 million, or a gross income of at least
$250,000 for each of the last two financial years.

Subsidiary A company which is controlled by another (parent or holding) company.

Sweat Equity The term used to describe equity provided to someone in return
for services to the company (and often instead of payment).

Term Sheet A document summarising the key terms of an investment. Used to

facilitate negotiation and often the basis of a shareholders agreement
and/or subscription agreement.

Trustee An individual or company which has been given the power to administer
a trust for the purpose specified in the trust deed. They are the legal
owner of the trust assets and they are legally obligated to act in the
best interests of the trust.

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Unsecured Debt A loan made to a company which is not secured against any asset.

Valuation The value ascribed to a company through financial modelling or

more commonly via agreement between a startup and its investors.

Venture Capital Financing provided to a startup by a VC fund in return for equity.

Usually occurs after a startup has raised seed capital but is still
generally early stage.

Vesting A restriction period on shares (usually founder shares) which

prevents the shareholder leaving the company with his or her
shares before they have vested. Any unvested shares will be
forfeited, generally at a discount to fair market value.

Warranties Assurances made by a company and its founders about the company.

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ABOUT LEGALVISION
LegalVision is a market disruptor in the commercial legal
services industry. Our innovative business model and
custom-built technology assist our lawyers to provide
efficient, high-quality and cost-effective legal services.
LegalVision is a leader in delivering legal services in
Australia and has assisted more than 100,000
businesses and startups.

We encourage readers to draw on the insights in this Startup

Manual wherever useful. If you would like any further
information, please call us on 1300 544 755.
 62

ABOUT THE AUTHORS

Lachlan McKnight
Lachlan is the CEO of LegalVision, an innovative and
tech-driven law firm. LegalVision is disrupting Australia’s
legal industry and transforming the way in which Australian
businesses access legal services. Lachlan previously worked
as a corporate lawyer and investment banker in London,
Paris, Amsterdam and Hong Kong.

Jill McKnight
Jill is a Practice Group Leader at LegalVision. Jill started
her legal career in London and has since worked in Paris,
Amsterdam, Hong Kong and Sydney. Jill specialises in
startups, including convertible loans and SAFEs, venture
debt shareholders agreements, issuing equity and employee
share schemes.
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