Capital Raising

Guide for Startups

with thanks to our partners

Stone & Chalk’s Capital Raising
Guide for Startups

Stone & Chalk exists to identify, nurture, there are also opportunities. Strong startups will
survive. Businesses that were already vulnerable
connect and propel those who are
might not.
seeking to solve the world’s most pressing
VC investors are ultimately driven by what’s next, so
business and social challenges. In this
despite COVID-19 and the subsequent slow-down,
sense our founders, partners, investors they’re playing a big part in the recovery by looking
and mentors are shaping the future, to the companies of tomorrow. As Tempus Partners’
together. Founded in fintech in 2015, Stone Alister Coleman says “we understand that there is a
& Chalk is a not‑for‑profit organisation high degree of economic uncertainty, but we believe
in the catalytic power of technology and we are
with a proven track record in developing
investing for the next decade and beyond, not just
successful growth and support frameworks the next few months...great ideas and great founders
for emerging tech sectors. We bring do not stop in down times, they thrive.”
together founders, investors, industry and Angel investors are investing, albeit at a slowed rate
government stakeholders, and mentors and with smaller cheques – all the more reason to
into one powerful community which drives get your pitch in shape and get in early. Expectations
are high, competition is fierce, and you may need
growth, advocacy, and commercialisation.
to approach double the number of investors to get
As startups grow, gain recognition, and results. But persist.
commercialise, capital raising becomes a critical
Right now, leadership counts. Empathy counts.
component of success. The funding landscape is
Cash and contingency is crucial. The health of your
constantly changing and investment options are
staff and balance sheet has never mattered more.
diversifying. Venture capital (VC) still dominates
Address the short-term now, but don’t forget to look
startup funding, but other methods like crowdfunding
long. Investors still want to know what your long-term
are gaining traction. Deciding what will work for your
plan is and how you’ll be part of the solution.
startup will depend on a balance between your
business objectives and vision, your financial needs, Revisit risk and model worst case scenarios. Extend
and external and market pressures. your runway to two years by tightening the belt
where you can, making (if sometimes difficult)
The last few years have demonstrated the kind of
decisions quickly. Focus on your core proposition,
volatility we can’t exactly plan for, but for which
refine and revise your product, and consider service
we can and should prepare. We might not have
opportunities that might arise. Investors are attracted
expected 2020 to kick off with a global pandemic, but
to optimism and action. So how will you adapt?
risk assessment and strategic mitigation are tools
to not just avert big economic crises, but to build Most importantly, stay connected. There has never
resilience and a better, more responsive startup – been a more important time for new ventures to
whatever the next challenge. be part of a community where you can exchange
ideas, learn from each other, and turn to high calibre
The impact of COVID-19 is ongoing and multi-faceted,
mentors for advice. Get involved in our events and
and a collective effort is necessary for us to deal with
engage with the ecosystem.
the continued impacts. And there will be another side.
In fact, right now, while many might face problems, Good luck and get ready to raise.

2
About Stone & Chalk

Stone & Chalk is the home for emerging tech innovation, where together we ideate.
innovate. impact.

Whether you’re a startup or a scaleup, at Stone & Chalk, you’ll be fully supported to build
and commercialise your ideas.

$1B+ Capital raised by residents

and aulmni since joining stone & Chalk

230+
Startups and
1,100+Legendary
35
Corporate and
scaleups are making residents call Government partners
success happen Stone & Chalk collaborating with
home Stone & Chalk
innovators

150+
Startups exporting
147
Startups have
11
Locations and
to Asia, North graduated and 4 Innovation Hubs
America & Europe become Alumni

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Contents

Funding stages  5 Issuing equity  22

Pre-seed  5 Term sheet  23
Seed  5 Shareholders agreement  23
Series A  6 Share subscription agreement  24
Series B  6 Intellectual property assignment agreement  24
Beyond B  6 Types of shares  26

Capital  8 Valuations  28
Bootstrapping  9 How do I value my start-up?  29
Equity-based fundraising  10 Valuation methodology  30
Family and friends  11
Angel investment  11 Get ready  34

Venture Capital  12 Stone & Chalk has developed a best practice 12-
page slide outline which includes  36
Corporate Venture Capital  13
Venture Capital compared  14
Australian government initiatives  37
What do VCs look for?  15
Early stage innovation company (ESIC)  38
Debt-based fundraising  16
Early stage venture capital limited partnership
Venture debt  17 (ESVCLP)  38
Convertible notes  17
Simple agreement for future equity  18 Online resources  39

Revenue-based funding  18 Glossary  40

Crowdfunding  18 Seed and post-seed funding  40

Equity crowdfunding  19 Series A funding and beyond  40

Investor-led crowdfunding  20 Other funding sources  40

Initial Public Offer  21

Discalimer: this is a general guide only, written for an Australian audience. All dollar amounts are in AUD and
provided as examples only. It does not constitute and should not be relied upon as professional, financial or
legal advice. While every effort has been made to ensure the information in this guide is correct at the time
of publication, Stone & Chalk takes no responsibility or liability (including, without limitation, for any direct or
indirect or consequential costs, loss or damage or loss of profits) arising from anything done or not done by any
party in reliance, whether wholly or partially, on any of the information contained herein. Any party that relies on
the information contained in this publication does so at its own risk.

4
Funding stages

When and why you raise capital will be unique to your startup. You may be looking to
stay liquid while you further work on your business model, you might need funds to
create or take a minimum viable product (MVP) to market, or you might be ready to
rapidly scale: ready for not just the money, but the experience, knowledge and contacts
that can come with investment. Whichever it is, it helps to have an understanding of the
common stages in startup funding.

Pre-seed
Pre-seed is the earliest stage of equity funding, when
founders are still working independently or with a
small team, and are yet to develop a prototype or Typical Raise:
proof-of-concept. Pre-seed funding often comes
up to

$150K
from family and friends, occasionally from an
incubator or accelerator program or perhaps an
angel investor.

Seed
As a startup works through the problem solving phase
and identifies potential market fit for their proposed
product, seed capital might be sought to fund Typical Raise:

$150K –
further development. Seed funding can come from
angel investors or VC funds focused on early‑stage
investments. While determined by the team, traction,

$1M
value proposition and commercial model, a seed
round should raise roughly 12–18 months of operating
runway. Seed funding is a key milestone for startups,
but also the last stage for many, as those that don’t
gain traction before their seed money runs out will
most likely fold or pivot.

5
Funding stages

Series A
Series A funding rounds are undertaken after a
startup has obtained some product traction and
user base, and has demonstrated potential for Typical Raise:

$1M – $5M
exponential growth through revenue, KPIs, or other
metrics. The money raised in this round often comes
from angel investors or VC funds and can be used
to scale internationally, improve and optimise
product, add to operational capability, and increase
customer acquisition.

Series B
Series B funding rounds focus on scaling the startup.
Capital is used to increase market share, grow the
team and continue expansion. Series B funding often Typical Raise:

$5M –
comes from VC funds and often from the same
investors who led the previous round. It may also
attract investments from later-stage VC funds.

$20M
Beyond B
Further funding rounds are designed to continue
scaling the company, whether by developing new
products, making acquisitions, increasing market
share, expanding internationally, or preparing the
company for exit. Funding rounds Beyond B generally
come from large VC funds, private equity firms,
hedge funds and investment funds.

6
“A long-term mentor once
taught me early on in my
career that it’s not what you
know, it’s not who you know, but
who knows you.”

TAREK AYOUB,
CEO, CHEQ

7
Capital

Money.
How to get it.
Where to get it.
Who to get it from.

8
Capital

Bootstrapping
Startups that ‘bootstrap’ start lean and grow without the help of external

32%
capital. Bootstrapping relies on a founder’s personal finances and the
reinvestment of revenue back into business operations. Common in
the early stages for most startups, some choose this option ongoing as
founders retain 100% ownership and control, and can focus on rapid idea
of founders have not
generation and building the business without the pressure of meeting
the milestones and demands of investors. raised external funding
However, without external capital, startups can’t scale as quickly which
might jeopardise their market position. In the innovation space, the
‘first in’ can leverage a bigger market share before competitors enter

64%
the market. It can also be difficult to grow, develop, iterate and expand
unless the founder is independently able to fund marketing and
acquisition activities.

of founders use
Advantages Disadvantages
personal finances to
• Ability to execute quickly • Lack of external support
• Develop a lean mindset • Fewer opportunities
fund their business
• Easy to pivot for mentorship
2018 Startup Muster Survey
• Maintain central ownership • Limited access to networks

• Founder able to spend more • Personal financial risk

time on business rather than • May limit ability to drive
fundraising activities exponential growth

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Capital

Equity-based
fundraising
When startups raise equity
funding, they issue new shares to
A simple example equity investment equation for startups
investors in exchange for capital
injections. Negotiation in an equity If all investors stay in and gain equity on investment, as external
round centres on the company’s investment goes up the founders’ share goes down (diluting
valuation and the rights and ownership and sometimes control). But as the valuation of the
entitlements of the investor. company will increase (with any luck) over time, ultimately the
Valuation determines how many value of your stake will also increase.
shares the investor will receive in
exchange for the capital invested
and therefore the investor’s Co-founder
Co-founder 20.4%
percentage shareholding after Co-founder 25.5%
Co-founder 34%
the raise. 40%
Co-founder
50%
Founder
20.4%
Founder
25.5%

F&F – 5.1%

Founder 11 – 5.1%
34%
F&F – 6.375% A1
Founder 9%
40% 11 – 6.375%

A1 EVC
11.25% 20%
Founder F&F – 8.5%
50%

11 – 8.5%
F&F – 10% EVC
25% LVC
A1
20%
15%
11 – 10%

Idea Pre-seed Seed Series A Series B

Founders Family and Angel Early VC Late VC
friends 10% investment investment investment
15% 25% 20%
Incubator
investment
10%

$50K $10M

E.g. If your share as a founder goes down from 50% to 20.4%

but the valuation increases from $50K to $10M, your financial
stake goes up from $25K to $2.04M

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Capital

Family and friends

Friends and family can be an important source of early, seed-stage capital to help get an idea off the ground.
They’re a good, fast source of funds as they don’t necessarily require the formality of due diligence involved
in commercial loans or investments. The associated risk gives the category its moniker, the 3Fs, with ‘fools’
added to ‘family and friends’ to indicate the potentially foolish nature of early investments. All parties need to
be aware of the risks so that should your great idea fail, your relationships aren’t ruined. It’s important founders
still apply a formal approach to confirm expectations and accountabilities. Before seeking funding, founders
should know what kind of deal they want – whether equity or debt, what amount, interest rate or return – and
it should be clearly included in your business plan. Startups should provide family and friend investors with
at least a professional business plan as well as a SWOT (strengths, weaknesses, opportunities and threats)
analysis. Holding multiple meetings to explain the business proposition and negotiating terms gives potential
investors time to think it over. We recommend following formal protocol and using clearly defined term sheets
and investor agreements.

Angel investment
Angel investors provide capital to startups in exchange for an equity
stake during seed funding rounds. Angel investors might be professional
investors, business executives, or high net worth individuals looking for Typical Raise:

$25K –
investments with a possibility for a high rate of return. They might be a
successful entrepreneur with skills and experience in the same sector or
field as your startup. As a result, in addition to financial investment, angel

$100K
investors can offer intellectual and network capital, providing startups
with expertise, mentorship, and growth opportunities.

Angel investors fill the gap between small-scale 3F funding and VC

funding. They’re more willing to take risks than institutional investors
and provide capital for early stage startups. However, they may
for 5–15% equity
require higher equity stakes in return, which represents ownership
dilution for founders. Issuing convertible notes and SAFEs (simple
agreement for future equity) is also becoming increasingly popular for
angel investment.

As individual, unregulated operators, angel investors can be hard to find,

unlike VC funds which are openly advertised and easy to research online.
However as Angels are less restricted, they can write cheques quickly and
without lengthy compliance and investment committee protocols.

Angel investors sometimes form a syndicate to share due diligence

and risk across their investments. Syndicates allow individuals to pool
funds for smaller investments and share skills and subject matter
expertise between their member base. Sometimes called investor-led
crowdfunding, there’s more on this in the crowdfunding section.

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Capital

Venture Capital
Typically the first institutional investment in a The best way to approach a VC fund is through a
startup comes from a VC fund. VC funds manage warm introduction by someone engaged with the
investments from their investors, called limited startup ecosystem. VC funds like to build relationships
partners (LPs). A VC fund makes investment decisions with startups well before they’re looking to raise.
for its LPs, most aiming to make a 3x return. Therefore it’s usually recommended that you begin
approaching VCs about 12 months before you
The focus of a VC fund may be specific to an industry,
anticipate actually needing money. This can be as
lifecycle stage, or location. For example, a VC fund
simple as an email with a summary of the problem
might only invest in Australian fintech startups, or
you’re solving and a promise to stay in touch. This
fintech scale-ups for international expansion. It’s
allows VC funds to interrogate the growth potential
therefore important to research the VC’s investment
and veracity of the startup over time, and better
focus to ensure it aligns with your pitch.
assess its chances of success.

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Capital

Corporate Venture Capital

While most venture capital comes from an Founded in 2011, Telstra Ventures was the earliest of
institutional venture capital firm making investments the current crop of venture funds, both corporate and
on behalf of individuals and groups invested in the institutional. Australia’s big banks began investing
fund as limited partners, a substantial amount of in corporate venture early in this current cycle with
venture capital in Australia comes from corporate Reinventure and IAG Firemark Ventures kicking
venture capital funds. off in 2014, NAB Ventures at the end of 2015, and
ANZi in 2018.
CVCs can provide startups with funding along with
the opportunity to gain strategic leverage from an
established industry player.

CVCs can either be set up internally drawing

investment capital directly from the balance sheet,
or as a fund managed by an independent manager.
CVCs often look for synergistic investment benefits
for the corporation they represent. CVCs invest
throughout the venture cycle, although some funds
have a specific preferred stage range. By investing
in startups, CVCs benefit from fresh market insights,
disruptive technologies and emerging products
and services.

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Capital

Venture Capital compared

It’s worth noting that not all funds fall neatly into this table, it’s simply to provide a general overview.

Differences Institutional VCs Independent CVCs Balance Sheet CVCs

Examples Carthona Capital, Reinventure, Telstra Ventures NAB Ventures, ANZi,

Rampersand, Right Click, Macquarie Direct Investment
Tempus Partners, AirTree,
SquarePeg

Objectives Prioritise a high Prioritise a high financial Balance financial returns

financial return return but look for some and strategic objectives of
strategic relevance the corporation
to corporation

Strategic Offer expertise in building Combine company Offer in-depth industry

leverage companies and driving building expertise with knowledge and access to
financial results industry knowledge and existing customer base
access to corporate assets,
distribution etc

Follow-on Typically reserve capital Typically reserve capital Can be subject to their
investment for follow-ons into each for follow-ons into each balance sheet and the
investment over the life of investment over the life of strategic direction of the
a fund a fund company; changes in
economic conditions or
leadership may jeopardise
future commitments

Exit options Prioritise strong financial Prioritise strong financial Prioritise investment as
return on exit whether return. Seek to engage the an acquisition target, an
through an IPO or trade sale, corporation as a potential OEM (original equipment
liquidating their sale within acquirer where relevant manufacturer) partner,
a specified time frame, but always as part of a a channel for additional
potentially via a secondary contested sale process product sales, or
market if need be product integration

Source of Third-party limited partners Committed fund from the Often funded by the
capital corporation often alongside company’s balance
a commitment from the sheet alone
manager and sometimes
third party funders

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Capital

What do VCs look for?

Is there a market need for the product? Is there an acute problem to be solved with
evidence of its existence? Is the problem acute, recurring, recent and emotional? Is
Market it a big enough problem to build a global business around? What is the size of the
market and growth potential? Is it large enough to create a ‘10x business’ and deliver
high returns?

How is the product different? Is the company solving a problem in a unique way?
Product Can it defend against competitors entering the space? Does the company have IP its
competitors don’t have? Is the product resistant to economic cycles, protected from
obsolescence and mitigated against downside risk?

What are the skills and experiences of the founding team? Have you run a startup
previously? What experience and insight do you have in entrepreneurship and the
Capabilities founder journey? Is it an A team or B team? Investors generally prefer an A team with
a B idea rather than a B team with an A idea because an A team will iterate and find
the A idea.

What are the growth metrics? Monthly revenue, user acquisition, units sold,
Growth
downloads, referrals?

What is the profit margin/cash-burn rate? What is the annual recurring revenue?
Financials Do you have reference investments?

Chances of cash-out?
Exit Are there opportunities for exiting?
Who are the potential buyouts?

Since 2017 Australian startups have surpassed an annual $1 billion in VC raised.

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Capital

Debt-based fundraising
When to raise debt
Whereas equity-based fundraising exchanges capital for a stake in
A company’s
the company with which an investor recoups investment, debt-based
creditworthiness is the
fundraising follows a classic borrow/return model, where money lent
highest immediately after
now is repaid to the lender later at a predetermined rate.
raising a new round of
Most debt funders require an established cash flow or the use of fixed equity. If startups are raising
property as collateral. Valiant Finance offers a simple tool for qualifying a combination of equity
your ability to access debt across more than 80 lenders in the market. and debt, they should
Note though, the majority of startups, especially those in the early consider engaging with
stages, will not have the option to raise a debt round because they aren’t a lender once they have
attractive borrowers. a few equity term sheet
Raising debt at Series A stage is however becoming increasingly agreements so that the
common in Australia through specialist venture debt funds which look debt financing syncs with
for startups with consistent and clear cash flows and a clear investment equity fundraising. However,
plan which can lead to profitability in the medium term. if raising debt is the sole
financing option, the best
time to engage with lenders
Advantages Disadvantages
is during periods of sufficient
• Existing shareholders’ stake • Repayment can be a huge liquidity and operating
isn’t diluted and ownership burden on a startup yet to runway to increase
is maintained generate profit bargaining leverage.
• It can be cheaper to raise debt • Too much debt can also
than to raise bridging funding impact profitability and
between major rounds valuation, impacting future
• Debt raises generally move equity raises
faster than equity • Debt raises require the
• Business debt can create more company to be a lot more
tax deductions confident with regards to
future cash-flow

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Capital

Venture debt Convertible notes

Venture debt is a flexible form of financing for Convertible notes are a hybrid of equity and debt,
high growth businesses. Cheaper and less dilutive usually used during seed rounds or as bridge
than equity finance, venture debt can be used financing between rounds. Startups borrow money
in conjunction with an equity financing round or from investors and the loan will either be repaid, or it
between rounds to extend runway to reach your next converts to equity in the startup on a predetermined
business milestone. Unlike a loan from a bank, venture trigger event, eg. raising a priced round or a
debt, like that offered by One Ventures, Partners for liquidity event.
Growth and Investec, provides credit that’s covenant
Convertible notes delay the need to value the startup,
light, flexible with limited restrictions and is well suited
so a deal can be done quickly and with lower legal
to technology businesses. The lender may be able
fees. It’s a particularly attractive source of funding
to reduce admin going forward and offer further
for seed-stage startups with little upon which to
assistance through taking a board observer role.
base valuations. Some convertible notes come
Venture debt providers would however take security with a valuation cap (a maximum price at which it
over company assets and rank senior to equity, and will convert into equity). They can also be useful for
as such be paid out first at a liquidation event. raising a bridging round.

Venture debt represents good value to existing As it can be difficult for investors to determine
shareholders as their stake won’t be diluted, whether the terms of a note are fair or the risks are
improving their overall returns. All in all, with venture worth the return, and wary of foregoing shareholder
debt, you’re up for the cost of the loan, which includes rights (like voting rights, control rights, pro-rata rights,
interest during the life of the loan, plus a small piece and liquidation preferences), a startup might offer
of the exit proceeds via a warrant for having helped higher discounts for converting loans to equity, eg.
you on your way. around 20–25%.

Example: if in the next round the company raises

money at $1.00 per share, and you had previously
invested $100,000 on a convertible note with a 20%
conversion discount, you would receive shares
at $0.80/share, instead of $1.00. That would mean
receiving 125,000 shares, rather than the 100,000
shares your $100,000 would buy if you had waited to
participate in the round directly.

Be aware though that if future equity rounds are not

completed, a convertible note remains debt and
requires redemption, which can increase the risk
of bankruptcy.

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Capital

Simple agreement Revenue-based Crowdfunding

for future equity funding Crowdfunding is capital raised
The Simple Agreement for Future Ecommerce businesses or through the presale of products,
Equity (SAFE) is a relatively new startups with a high level of experiences and/ or donations
way of raising capital. Introduced recurring revenue could look at of money from the public. The
by Y Combinator in the United revenue-based financing from most common way this occurs is
States, SAFE is becoming new entrants into the Australian online, through social media and
increasingly popular in other market like Lighter Capital and other crowdfunding platforms.
countries including Australia. SAFE Clearbanc. Both US- based, Crowdfunding campaigns have
is similar to a convertible note Lighter Capital has soft‑launched two key components: raising
without the debt component. An locally with Innovation Bay’s capital and promoting your
investor makes a cash payment Ian Gardiner as business product or service. There are
(not a loan) to a company and development manager. four models of crowdfunding:
in return receives a contractual reward‑based, equity- based,
Using data-driven risk assessment charitable, and debt-based.
right to receive equity when a
tools, a revenue-based model
predetermined trigger event Reward-based crowdfunding
plugs directly into your revenue
occurs – usually a priced round platforms are a popular way for
stream to map funding to your
and a liquidation event. The startups to pitch an early‑stage
real-time revenue. This way,
number of shares investors idea and to validate a new
projections are used to structure
receive is linked to the up-front product or service. Examples of
the loan, and in the case of Lighter
cash payment and the share reward‑based crowdfunding
Capital, a percentage of cash
price of the priced round or platforms include Pozible,
receipts directly contribute to
liquidation event. ReadyFundGo, Kickstarter
repayment to mitigate risk.
SAFEs don’t come with a fixed term, and Indiegogo.
eliminating the need to keep track
of individual financing deadlines,
and as there’s no interest payable,
the complexity of converting
interest into equity doesn’t apply.
Unlike other debt instruments,
they don’t have to be repaid and
aren’t regulated, making them an
attractive option for startups.

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Capital

Equity crowdfunding
Equity Crowdfunding is a newly regulated way for Although this financing option is growing rapidly
everyday investors, people new to investing, or overseas, locally its adoption was held back due to
mums and dads and millennials, to invest in startups regulatory restrictions so it’s not mainstream just
and early stage companies. Unlike other models of yet. Equity crowdfunding is open to companies with
crowdfunding, equity crowdfunding gives investors an annual takeover or gross assets of $25 million
an equity stake in the company. or less. The amount they can raise is also capped
at $5 million annually. Retail investors (also known
There are over 10 licensed equity crowdfunding
as Mum and Dad investors) are limited to investing
platforms in Australia and each operates slightly
$10k and there is no limit for wholesale and
differently so it’s worth looking into which would
sophisticated investors.
be the best one for your company and comparing
the fees on the raise amount. Examples of equity One concern with equity crowdfunding is the impact
crowdfunding platforms include Birchal, OnMarket, of a large number of small investors on your share
Equitise and VentureCrowd. registry for future raises and handling requests
for information.
Equity crowdfunding’s main advantages over
conventional equity-based investment lies in speed Like all equity-based fundraising options, startups
of acquisition and the value created from having a should try to avoid overvaluing the company and
large community of advocates. raising more than necessary. It’s important to hit
milestones to avoid down rounds, where later
It has proven to be a viable option for all early stages
investors pay less for the company’s stocks than
of equity-based fundraising – pre-seed to series
previous investors, indicating an initial over-valuation
A. Investors get ordinary shares in the company as
or bigger viability issues.
opposed to preferred shares typically issued to VC’s
or angel investors.

With public visibility for the capital raise, the ability

to generate significant funding provides social
proof and early validation for the product or service.
Similarly, a failure to raise your required amount
can impact future capital rounds as it may suggest
insufficient interest.

19
Capital

Investor-led crowdfunding
The investor-led model of crowdfunding is an in turn aids completed raise rounds. Founders
attractive option as startups and founders do not may also benefit from investor expertise to further
incur fees. Instead, investors in a syndicate pay a fee accelerate growth.
on top of their initial investment so as not to impinge
Examples include: Jelix Ventures, Eleanor Ventures
on limited early stage funds.
and Scale.
Conducting commercial due diligence and risk
analysis of investment opportunities better protects
investors. Increasing confidence in the investment

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Capital

Initial Public Offer

Reverse takeover
Going public’ with an initial public offering (IPO), is a company’s first
A possibly risky and
sale of shares to the public at large. The Australian Securities Exchange
roundabout way to list,
(ASX) considers a capital raising range of $10-20 million to be a good
a reverse takeover can
entry‑level raise.
lower the barrier to ASX
and public access. An RTO
Advantages Disadvantages uses an existing company
• Raise a large amount of capital • Dilution and some loss of (a possibly defunct or
from the open market for a control for owners sleeping listing) as a shell
company’s current operations, • Shareholders gain ability to company. Eg. neobank
refinancing, and expansion form majority and remove Douugh recently staged
• Create a market for the a founder if unhappy a takeover of telco Ziptel,
company’s shares: creating with performance buying a majority of its
liquidity in the shares shares to essentially
• Increased regulations and
rebrand and reinvent itself
• Raise the profile of the corporate governance
from the inside out (all
company with media, including reporting auditable
while gaining access to
customers, suppliers accounting information on a
public investment).
and investors regular basis and having a
• Provide an exit-strategy for board of directors
early investors • Total cost of going public
• Ability to raise capital efficiently eg. listing fee, underwriting,
and quickly post-listing, eg. via and prospectus preparations
a placement (~2 days) tends to be 5–9% of funds the
company is looking to raise
• Risk of public failure to
raise required funds if the
public disagrees with IPO
price, eg. WeWork’s 2019
postponed IPO

Requirements for listing on the ASX – Click here

IPO Process and listing on the ASX – Click here

21
Issuing equity

When you issue equity in return for a financial investment, you essentially hand over
partial ownership of your startup to the investor. This ownership can be big and influential
or relatively small and have minimal impact. But issuing equity is the start of the
founders’ dilution of ownership and control. So, you need to think carefully about why
and how you’ll issue equity and make sure you’re aware of the terms and conditions
that come with it.

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Issuing equity

Term sheet
What to consider
A term sheet is an important
Round terms: how much is the investment and how big is
document that outlines the
the round
specific terms and conditions
of a raise between an investor Valuation: the startup valuation both before and after the
and founder. The term sheet investment (pre- money and post-money)
is often prepared by the VC or
Board seat: will the investor/fund gain a board seat
other investor and presented to a
startup’s founders. It’s generally Voting rights: on incorporation amendments and
non-binding and details what the board appointments
company is giving and receiving Employee share option plan (ESOP): what portion of the company
in return, it’s like a blueprint of the is set aside for employee share options
relationship between the investor
Liquidation preferences: order of proceeds/distribution
and the founder. Term sheets can
on liquidation
vary depending on what type of
funding round you are embarking Anti-dilution rights: whether new shares can be released
on, how much is at stake and in future
who’s involved. Access templates
Pro-rata and right of first refusal: what entitlements will existing
to use as a guide from the
shareholders have to invest in future rounds on a pro- rata basis
Australian Investment Council.
or to purchase any shares sold to a third party at a price agreed
to by the third party

Shareholders agreement
A shareholders agreement is a crucial record for agreement sets out the relationship between the
founders to have in place from day one, which keeps company’s shareholders as well as the division of
track of investment and other ownership interests power between shareholders and directors. It covers
in your startup. So, once a new term sheet is agreed matters such as issuing new shares, selling existing
and signed, the next step is revisiting your existing shares, how board and shareholder meetings should
shareholders agreement, drafting and negotiating be conducted, how decisions should be made and
the operative, binding, deal documents and updating how disputes should be resolved.
the status of shareholders’ stakes. A shareholders

23
Issuing equity

Share subscription agreement Intellectual property

A share subscription agreement formalises the terms assignment agreement
of the investment with a specific investor. It details Intellectual property (IP) is critical to your startup’s
how many shares the startup is issuing, conditions value. Founders may have personally owned their
the shares are subject to, the price for the shares and IP in the early stages. When assigning IP over, do so
when the startup will issue those shares. It will also in the same company or legal structure in which
include warranties for the investor’s benefit. your investor is investing. An IP assignment grants
A share subscription agreement is necessary ownership in intellectual property from one person
when an investor requests one, otherwise it’s or company to another. It’s common in employment
not in the company’s interest to make the offer. agreements to ensure that intellectual property
Alternatively, a share subscription letter, a shorter created by employees is owned by the company.
document outlining key terms and conditions They can also be used to assign pre-existing
but not the company’s warranty, may be suitable intellectual property to a new company.
and the investor can conduct their own due
diligence. Share letters are often used in seed/angel
investment rounds.

If raising from a VC, it’s more likely they will insist

on having a share subscription agreement. Once
parties have signed share subscription agreements,
the investor and company will pass a resolution
approving the issuance of shares, the investor will pay
the subscription money, companies will issue share
certificates and notify ASIC of its shareholdings.

24
Issuing equity

Case study
While the investment pitch is generally the responsibility of co-founders,
Hyper Anna’s Financial Controller Connor Tam is quick to recognise
the accumulated hard work from the whole team in building out the
Startup name:
pitch and making the startup a fundraising success. Everyone from
Hyper Anna
the sales team, customer retention, account management, product
and finance all played their part, collating and contributing the results
Founded:
and unique attributes that heralded Hyper Anna’s strengths and
2016 high‑growth viability.

Choosing to bootstrap for eight months gave the team the time to
Founder/Cofounder:
identify their product’s unique values and to focus on how to deliver
Natalie Ngyen/
that value to their customers. Without any experience in raising capital,
Sam Zheng
they were also fastidious in their research and sought help from
experienced advisors. They weren’t concerned with being secretive
Raised: about their idea, and were confident it was their execution and
$17M+ application of the idea that made the startup attractive to customers
and consequently, investors.
Investors:
Hyper Anna focussed their efforts on using different mediums to connect
IAG, Seqoia, Reinventure,
to different people and with their target audience in mind, and wanting
Airtree the product to speak for itself, their resulting pitch was 70% product
demo, 30% verbal and documentation. ‘With an intuitive product’ Connor
says, ‘we tend to let it speak for itself.’

Accepting that COVID-19 will impact the economy, but how and how
much is unknown, Hyper Anna have used the time to reflect rather than
compromise, gaining profound insight about how we can collectively
and individually face a global situation like this. Connor concludes that
‘this is a testing time for all teams and companies, but we believe that
the future is a bright one.’

25
Issuing equity

Types of shares
Generally, early investors like angels and friends and family invest in ordinary shares, whereas VCs usually
invest in preferred shares with a 1x liquidation preference. But there are other terms founders should be familiar
with, and wary of. Non-standard terms might include participating preferred shares, capped and convertible
options. Always read the fine print and avoid overly-complicated agreements where possible.

Ordinary Preferred shares Participating Capped

shares Preferred shares provide additional rights to preference If dealing with
As the most basic ordinary shares, giving preferred shareholders shares participating
type of shares, seniority and therefore a greater claim on a preferred shares,
Participating shares
ordinary shares company’s assets. Preferred shareholders have a founder should
entitle investors to a
tend to be issued voting rights, and are paid dividends before ensure a cap
specified payment
to founders, early ordinary shareholders. If they have liquidation is added to the
upon liquidation
investors and preferences, they will be paid out first in the event term sheet. If
as well as a share
employees. Ordinary of liquidation. there’s a cap,
in any remaining
shareholders have then participating
liquidation proceeds
a share in the preferred
on an as-converted
company, generally shareholders will
to ordinary shares
have voting stop sharing in the
(pro-rata) basis.
rights, and can Liquidation preference Non-participating
proceeds once they
benefit from future Liquidation preference dictates the order of reach the capped
preference shares
company profits. payout in the event of liquidation. It determines amount. They start
is preferred for
who gets their money first and how much they participating again
founders, with a
get so it’s important that founders understand once the common
conversion ratio of
any liquidation terms proposed and the risks shareholders have
1-to-1.
and results if triggered. Liquidation preference is received the same
only relevant when a company is sold through amount per share
a merger or acquisition, or when assets are as the preferred
sold during a bankruptcy process. In general, shareholders.
preferred shareholders get their money back first,
before anything is paid to ordinary shareholders. Convertible
When a company goes through an IPO, preferred Convertible
shares are converted into ordinary shares, and preference shares
the division becomes irrelevant. are fixed- income
securities that
guarantee pre-
defined interest on
investments. An
Liquidation preference multiple investor can convert
The multiple determines how much money these securities
should be paid to the investor with preferred into shares after a
shares before ordinary shareholders. For certain point in time,
example, a multiple of two means that the which the investor
investors get their investment back, times 2, will do once this
before the remaining proceeds are divided option becomes
among the ordinary shareholders. A lower financially viable
multiple is better for founders and other based on the
early investors. conversion rate.

26
Issuing equity

VC terms usually include a Seniority structures

1x liquidation preference Standard seniority executes payouts for the
Eg. if the VC invests $500k for 50% at a $1m latest round of investments first and first round
valuation, but the company subsequently sells investments last. This is the most used seniority
at only $600k the VC will get $500k and the structure, since earlier stage investors often
founder (and other ordinary shareholders) the rely on later stage investors for the startup
remaining $100k. But if the company sells for to survive.
$10m the VC will get $5m and the founder $5m.
Pari passu (equal footing) seniority provides
all preferred shareholders with the same
seniority, with proceeds divided pro-rata to
their committed capital, not pro‑rata to their
stake in the business. Any decisions start with
investors with the highest conversion point,
as the outcome for one investor depends on
the decisions of other investors to convert or
exercise liquidation preference.

Pari passu is almost exclusively used for

unicorns with prominent founders, as they
attract significant funding options and
later stage investors have no claim to
demand seniority.

27
Valuations

Determining the value of your startup is a daunting task, but it’s an important step on the
path to capital raising. The valuation will not only help determine how much you might
subsequently raise, but how much the startup is subsequently worth. This post‑money
value indicates an investors’ potential return and ultimately helps establish a price on exit
or share price in any future IPO.

28
Valuations

How do I value
my startup? Factors to consider in valuation:
Unfortunately, there’s no definitive How ‘hot’ is the industry/sector?
answer. Many factors influence a How much investment money is in the market?
startup’s pre-money valuation. If a
What’s the status of the supply and demand of capital?
startup is generating sustainable
revenues, the method used for What’s the valuation of a comparable startup in the same/similar
valuation will look a lot like the sector What’s the comparative size of similar exits locally and
established models (revenue internationally?
and earnings multiples) used to
Can current competition with other startups and investors help
value mature companies. Ideally
create FOMO (fear of missing out)?
the business can demonstrate
increasing revenue streams, How long is the remaining business operating runway and how
reducing the financial risk of failure desperate is the founder for money?
and increasing the prospect of What kind of traction is there? Is the customer base growing and
a big exit. revenue stream increasing?
Without years of financial data to How good is the team, is it an A team?
refer to, startups and prospective
Do they have significant industry knowledge?
investors have to rely on creative
and subjective determinants. It Does the company have unique IP? Eg. proprietary tech,
might be easiest to tackle the algorithm, etc.
issue of valuation by investigating
what an investor looks for when
valuing an early stage startup.
Factors that are not usually considered
in valuation:
How much the founder thinks the business will be worth in
the future

How much time, money or effort the founder(s) have put into the
business already

‘Interest’ from potential customers, without signed purchase

orders or written commitment

29
Valuations

Valuation methodology
Valuing an early stage startup is particularly difficult, but investors have subject matter expertise that provides
a mental picture of the average size and price for a particular stage/round relative to other startups and deals
in the marketplace at any given time. They have their finger on the pulse of the industry, but might broadly
apply the following thinking to sense check a valuation.

This approach values startups by their stage of development and growth. The
1. Stage and further down the pathway, the lower the startup’s risk and therefore the higher
Berkus its value.
approach
For example:
Early stage business concept:
$250k–$500k

Lean experiments and MVP built:

$500k–$1m

Product launched/revenue stream/management team in place:

$1.5m–$2m

30
Valuations

This approach works on the basic assumption that the amount of money
2. Raise startups need to raise and the equity they’re prepared to give up determines the
restricted valuation range. Going outside of this range starts to impact the commercials of
approach the investment.

For example:
A startup wants to raise $500k to give it a 12-month runway to grow and achieve
its set milestones and gain traction. Any amount lower than $500k would only
constrict the business, increasing the risk of failure and loss of investment. Giving
investors 50% would leave founders with too little equity and incentive for hard
work. A standard equity sale ranges between 12–25% per round. With the raise
amount set at $500k, the post-money valuation would range from $4.16m (at 12%)
and $2m (at 25%). Typically ventures raise sufficient funds for 9-12 months runway
in their seed round, 12-18 months in their Series A and 18-24 months in Series B
and beyond.

Some incubators have navigated the challenge of valuing early stage

3. Incubator’s companies by simply applying a standard valuation of $1m or $1.5m for all
approach companies in their program, with their investment of $50k to $150k representing a
5% to 10% stake.

The venture capital method calculates value based on a process whereby

investors, say, looking to exit within 3 to 7 years, first estimate an expected exit
4. VC approach price for the investment. Then, calculating back to the post-money valuation
today, they take into account the time and the risk made by the investors to
determine an expected return on investment.

31
Valuations

Case study
For over five years, Tarek read up on founders and fundraising,
and the accumulated knowledge has definitely helped. As has
the amazing group of mentors who have guided him in his career.
Startup name:
Which is to say, his wasn’t an overnight success, but a methodical,
CHEQ
evidence‑backed approach.

Founded: Founders wear many hats and as neither had raised capital previously,
2019 Tarek took on the task of pitch preparation and investor relations while
Dean concentrated on the technology strategy and ensuring investors
understood how the technology would be developed. Without a product,
Founder/Cofounder:
the idea had to be solid, the plan to launch and scale watertight, and
Tarek Ayoub (CEO) and
they had to focus on the experience and ability of the founding team to
Dean Mao (CTO)
execute it.

Raised: The complexity of the product and licenses required just to develop the
$2M+ app meant Tarek had to dive in early and raise capital at idea stage, so
their plan was vital to win buy-in. They approached potential vendors
to exercise their theory and test the plan before approaching investors.
Investors:
Starting with connections, they approached the market, always asking
VFS Group
for referrals to additional VCs and brokers.

Within a month they had a fund to lead the first round, closing a $2m
terms sheet pre-product. As Tarek points out – this might sound fast,
but it stemmed from relationships he’d nurtured over years and years.
‘I made a list of everyone in my life I thought might be interested and
ranked them. Warm or cold I began outreach systematically, tracking
every email open, following up with phone calls.’

When it came to pitching and promoting, Tarek didn’t hold back on

details. He’s a firm believer in the power of a founder. In fact, he says,
‘overprotecting an idea may come across as a lack of confidence
or understanding of what it really takes to build a company.’ So be
outspoken and, in addition to your idea, trust that it’s your know-how and
passion for it, that makes the package the attraction.

After all, VCs are investing in founders first and then the idea. ‘Failing to
understand this concept is part of the reason why most founders fail to
raise money. They concentrate on the idea more than making investors
understand that no one else can pull this off except them.’ But be smart
about it, IP he did hold close to his chest was the nitty gritty of their
algorithm – what they shared instead that spoke volumes, was what the
algorithm aims to achieve.

32
Valuations

Case Study (continued)

His pitch was 50% verbal, 50% documented. Tarek Tarek accepts timing is critical. The success of giants
memorised the lot so he could keep the conversation such as AfterPay and Zip in developing an alternative
flowing. Now, at public events he has a pitch that’s credit product helped influence the market’s bullish
70% verbal and 30% documentation. His pitch ‘tells a appetite at the time. Then of course came COVID-19,
story’ describing the problem and presenting data to and instead of pursuing a new round geared to
demonstrate the size of the problem. Using a real-life exponential growth, the team decided to raise a
scenario to bring it to life, he then demonstrates how small bridging round to go into survival mode for
the product solves the problem – how it works, and 18 months.
how innovative it is compared with other products.
COVID-19 is definitely testing the fine line between
A Management Consultant for a big global firm in increasing exposure and decreasing risk, but the
a past life, Tarek was schooled in the importance of team remains flexible, compromises where they
reputation and relationship building, and it was his can, and strives each day to add value for users and
ongoing commitment to the task that drew mentors investors. The next 12 months will see $10m lent to
to him and fostered generosity. Being genuine and users, improvements to product and much more of
likeable has definitely helped as the mentors and that new phenomenon we’re all growing accustomed
investors you meet ultimately join you on a long-term to – virtual beer o’clock.
journey of ups and downs.

33
Get ready

It’s crucial that startups can articulate their value proposition concisely and convincingly.
Startups should have solid, succinct presentations at the ready to entice investors. There
are two main versions every founder needs: a pitch deck and an investor deck.

34
Get Ready

Pitch deck Investor deck

What you use when pitching on stage or to What you send (usually via email) ahead of
an audience time to get the meeting

Supports your in-person presentation Can be read by itself, with no additional

context or explaining needed
Very visual, tells a story, often slides have just
an image Introduces the problem and covers the key
value proposition
Focuses on problem, unique value proposition,
and differentiation from competition Focuses on the market opportunity and unfair
advantage of the startup
Introduces the market opportunity, team, and
future plans Focuses on the team and their relevant
qualifications
Tells your story and vision in simple
human terms Discusses go-to-market strategy in detail

Slides contain only very basic info, with Talks about your vision in mostly
images and graphics for support business terms

For an audience with no prior information For an audience with some (or more)
prior information

35
Get Ready

Stone & Chalk has developed a best practice

12-page slide outline which includes:
1. Cover/Intro
Name of your startup and your purpose in a sentence

2. Key insight story

How you discovered the need/problem and why you’re serving/solving it

3. Concise problem statement

What is it and how are existing players approaching/neglecting it (highlight the
resulting limitations)

4. Relevant market opportunity

The market, target customer, target market size

5. Competitors
Demonstrate the depth and extent of your homework in the competitor space and where
your company is positioned among it all

6. Your solution/USP
What is your unique selling proposition and why is your product a game changer?

7. Competitive advantage
What have you got that will be hard to replicate?

8. Your team
Expertise, shared history, resilience and startup experience

9. Traction
Timeline, milestones and customers

10. Business model

Financials and revenue streams

11. Financial status

Historical and projections linked to product roadmap

12. Raise
How much are you looking to raise and for how much equity?

36
Australian government
initiatives

Since 2015, the Australian federal government has made a commitment to

drive innovation, foster the commercialisation of research, and promote a
culture of entrepreneurship with tax incentives available for eligible investors of
early stage ventures.

37
Issuing equity

Early stage innovation company (ESIC)

If a startup is ESIC qualified, it allows their investors to access tax Take the
incentives. The easiest method for companies to ascertain whether they
100 point
test
qualify as an ESIC company is to carry out a self-assessment through
the early stage test and the 100 point test.

ESIC investment incentive:

20% carry-forward tax offset (capped at $200,000 per
investor/year) and a 10-year exemption on capital gains
tax for shares held in an ESIC company for at least
12 months (provided the shares don’t constitute more
than 30% interest in the startup)

Early stage venture capital limited

partnership (ESVCLP) Take the full list
The ESVCLP program aims to stimulate the early stage VC sector in of ESVCLPS
here
Australia by: helping fund managers attract pooled capital so they can
raise new VC funds of between $10m and $200m to invest in innovative
early stage businesses; offering tax benefits to fund managers and
investors; connecting investors with early stage businesses, and helping
Australian businesses grow by receiving financial support and guidance
from expert advisers.

Fund managers can apply to Innovation and Science Australia to

register a partnership as an ESVCLP

38
Online resources

Hall and Wilcox offer Stone & Chalk resident startups a free consultation and Allens Linklaters offers the
A-Suite of legal documents to get your company up and running without a significant outlay of time or money.

Airtree Ventures’ open source templates include seed stage, term sheet, seed financing documents and
employee option plan documents. And their list of active VC funds can be found here.

The Australian Investment Council has free term sheet and shareholders agreement templates you can use
as a guide.

Pankaj Singh’s list of 300+ global VC funds and their investment verticals.

39
Online resources

Glossary Series A funding and beyond

• Basic definitions of common terms used in • Airtree: AI, fintech, deeptech, SaaS, marketplaces
business and a more detailed list from the ASX
• Artesian: software and hardware startups in
agrifood, clean energy and medtech

• Grok Ventures: fast growing

Seed and post-seed funding technology‑enabled businesses
• Follow the Seed: B2B, B2C • IAG Firemark Ventures: everything insurance-
• Rampersand: tech startups related, AI, machine- learning, cybersecurity
• SeedSpace: fintech (including marketplace), • NAB Ventures: fintech (payments, wealth
B2B, B2C management, PFM, lending), proptech, data
• Tempus Partners: industry agnostic, analytics and AI, cybersecurity
globally scalable software and advance • Reinventure: fintech, data, AI, SaaS, agtech,
technology startups edtech, insuretech

• Right Click Capital: analytics, communications,

cyber, cryptocurrency, etc. Also do seed
and pre‑seed

• SquarePeg: broad thesis with multiple

fintech investments

Other funding sources

• Birchal: equity crowdfunding

• One Ventures: venture debt

• Lighter Capital: revenue-based funding

• Jelix: investor-led crowdfunding

40
stoneandchalk.com.au/founders