Investor Funding and Capital - Preparing your company for the investment

Investor Funding and Capital - Preparing your company for the investment

As a startup founder or business owner, you may be deciding whether to raise capital. If you have already decided that raising capital is best for your business, then you may be wondering how to approach investors and what your next steps are. If this is the case, it is important to understand the process and how to undertake, and close, your capital raise.

Preparing your company for the investment

Structuring your business

First, if your business is not structured as a company, it is important that you register it as one. An investor will almost always want to invest in a business with a company structure, particularly to limit its liability in connection with that business (i.e. the amount of money it could potentially lose). As a shareholder in a limited liability company, the investor will have an ownership stake in the business, but its liability will be limited to any amounts paid (or owing) on its shares.

You may also consider setting up a dual-company structure. In a dual-company structure, there are two companies. One is known as a holding company and the other (which will be a wholly-owned subsidiary of the holding company) is an operating company. The holding company owns all the business’ assets (including any monies received from investors), but will not trade. The operating company will trade and will enter into all business contracts (for example with employees, suppliers, and customers), taking on all the operational risks as a result. Since the operating company is the entity subject to risk, the business’ valuable assets (which are owned by the holding entity) should be protected. Importantly, the founders and investors will own shares in the holding company. This will give them an ownership stake in the valuable assets of the business, and will also enable them to profit from any operating revenue brought in by the operating company.

Prior to raising capital, you should also consider how you hold your shares in your company. The general options are that you may hold your shares personally, or through a trust. Holding your shares through a trust is beneficial for tax planning reasons. It can also help you ensure that your shares are protected. For example, if you were ever sued personally as a director of the business, your personal assets (including any shares you own) could be at risk. 

Intellectual Property Ownership

Intellectual property is highly valuable to most businesses, so investors will want to understand who owns your business’ intellectual property. Given that your company is separate from you as an individual, if you have created or developed any intellectual property in your personal capacity, you will want to ensure that this is owned by your company. If you are operating through a dual company structure, you should ensure that your holding company owns all of the valuable intellectual property, but that the operating company is able to use it.  

To ensure that the correct entity owns the intellectual property, consider whether you need a founder’s intellectual property assignment deed. This will transfer the ownership of all intellectual property that you have created to the appropriate company. In addition, where you have a dual-company structure, you will likely need to implement an intellectual property assignment/licence deed between the two companies. Under this deed, the holding company will grant the operating company a licence to use its intellectual property and the operating company will also automatically assign any intellectual property created by, or on behalf of, it up to the holding company. 

Cap Table

A cap table (short for capitalisation table) is a document that sets out the ownership structure of your company. Your cap table should include all of your shareholders and anyone else who holds securities that may convert into shares (eg options, convertible notes, SAFEs) in your company. It should show how many shares or securities they own. This allows you to demonstrate and understand how much of the company each person owns, including how much they would own in the future if all securities were converted into shares. By modeling your cap table for your investor’s potential investment, they can understand how much of the company they will own following their investment. You should update your cap table whenever a transaction occurs that affects the company’s ownership.

When and How to Raise

Should you raise? 

Before you actually take any steps toward raising capital from external investors, it is important to consider whether it is appropriate for your particular circumstances. Investors will be taking a risk by investing in your company and so will expect a return as a result. By taking on external investment, you become answerable to those investors. While your primary obligation as a company director is to act in the best interests of the company, it is likely that you will need to consider your investors when it comes to decision-making. 

How to approach investors

Once you have decided that you are going to raise capital, you will need to begin discussions with investors. Many early-stage businesses will first seek to raise capital from friends and family or angel investors. Angel investors are high net-worth individuals who are willing to invest in the early stages of a business’ lifecycle, in exchange for the possibility of a great return on their investment. There are also a few venture capital firms who are open to investing in very early-stage start-ups. Do your homework and determine who will be a good investor for you (i.e. do they invest in early-stage startups? How involved will they want to be in the business? Do they invest in and have knowledge of your industry?). Speak to the founders of other startups that they have invested in to see what their experience has been.  It is really important that your investor is a good fit as once they have invested, you will be stuck with them!  

You will want to prepare a pitch deck to bring to your potential investors when discussing their possible investment in your company. A pitch deck is typically a Powerpoint presentation (or similar) which provides an overview of your business and the investment opportunity.

It is never too early to connect with potential investors. That way, when you are ready to start discussions about a potential investment, you will hopefully have a strong relationship with them and they will be willing to listen.

Raising Capital

Equity vs Con Note vs SAFE

One key detail to decide with your investor is what form their investment into your business will take. Typically, there are three ways in which an investor may invest: 

  1.  by a straight equity investment; 
  2.  by a convertible note; or 
  3.  by way of a simple agreement for future equity (SAFE). 


An equity investment involves the company issuing an investor with shares in exchange for cash. Once the shares are issued to your investor, they become a shareholder in your company and will have a number of rights as a result. By issuing shares to your investor, you are giving them a piece of your company. Your investor may be entitled to receive dividends (should you declare them) and will be entitled to a percentage of the sale proceeds upon an exit event.

Convertible Note

A convertible note is a loan made to the company by an investor that may convert into shares should an agreed trigger event occur. Typical trigger events are the next equity fundraising event and an exit event (i.e. an IPO, a share sale or a business sale). If a trigger event occurs, the investor’s loan will generally be converted into shares at a discount to the price paid by others in the equity raise or the exit event. This discount rewards them for taking on the risk of investing early in your company. 

In addition to a discount rate, a convertible note often contains a valuation cap. The valuation cap sets a maximum company valuation. So if the company raises funds at a value that is higher than the cap, the investor's note will convert into the number of shares that they would have been issued with if the company had only raised at the cap. This gives them more shares than they otherwise have received (and therefore providing more for their investment). If the company raises at a valuation that is lower than the valuation cap, then the investor's shares would just convert at that lower valuation.

The loan component of the convertible note will typically contain many of the same characteristics of a normal loan, including a maturity date and possibly interest. If a trigger event does not occur before the maturity date, then the company will generally have to repay the loan (and any interest) to the investor.


A SAFE (simple agreement for future equity) is similar to a convertible note, with a few key differences. The main difference is that the investor provides a cash payment to the company in exchange for a right to receive shares on certain trigger events, rather than a loan. This is beneficial for the company because it does not create a debt that the company will need to repay at maturity and interest is never payable. Similar to the convertible note, a SAFE will typically contain a discount and a valuation cap. 

Legal / Documents - requirements

Term Sheet 

A term sheet is a simple document (typically one or two pages) that sets out the key commercial terms of the investment. A term sheet helps ensure that both your business and your investor are aligned before you engage lawyers to prepare any longer-form documents. A term sheet makes the legal process much smoother (and cheaper!) as all the key terms will be set out clearly and succinctly and there is no need to start negotiating them at the documentation stage. 

What you need for each type of investment

After you have agreed on the key terms of the investment, you will need to prepare longer-form documents. These will set out those key terms and will also include the mechanics of the investment and each party’s legal obligations. The documents that you will need will depend on how you are raising capital:

Equity raise: If you are doing an equity raise, your investor will need to sign a subscription agreement. This will set out the mechanics of the investment (i.e. how much the investor is investing, how many shares the investor will receive, any conditions that have to be satisfied before the investment is made and how and when everything will happen). The investor should also accede to your shareholders agreement (or you may need to enter into a new shareholders agreement if you do not already have one or it requires amendments).

Preference shares: If you are issuing your investor with preference shares, you may also need to amend your business’ constitution to include the terms of those shares. You will then need to prepare the relevant documents to issue your investor with shares, including the relevant company approvals, a share certificate and an updated register of members. You will also need to notify ASIC within 28 days that you have issued shares to your investor.

Convertible Note / SAFE: Where you are raising capital through a convertible note or a SAFE, you will need to prepare either the convertible note document or the SAFE. You and your investor will then sign the applicable document.

There are also some general documents that you may need to have in place before your investor will invest, for example, intellectual property agreements and employment agreements. 

Process and Structure of the Round

How to undertake the round - what happens and when?

Once you have secured your investors and have negotiated and agreed on all the documents, you will then be ready to move to closing the round. Both your company and your investor will need to sign the relevant documents and then your investor will deposit their money into your business’ bank account. If you are issuing your investor with equity, you will need to issue them with its shares upon receipt of the investment money. Once the shares are issued, the raise is finalised.


If you are considering raising capital in order to get to the next stage of your business and to grow, it is important to take the necessary steps to do so properly. You should ensure that your company is well-structured and that you have all the relevant documents that your investors will want to see. Once you secure your investors, you will want the process to run as smoothly as possible by being prepared and understanding the next steps. In doing so, you will be equipped with the knowledge and tools to undertake a successful capital raising round and propel your business into its next stage.

This article is intended to convey general information only. Before you act, seek your own legal advice that addresses your specific needs, objectives, and circumstances.


Anthony Lieu

Lawyer at

As Head of Marketing and a lawyer at LegalVision, Anthony leads a team that brings together lawyers, digital marketers, developers and analysts who are tasked with breaking down barriers to accessible legal services by changing the way businesses engage lawyers.