Your Ultimate Start-up Funding Guide

Start-ups today are launching and growing at a pace never seen before. Australia boasts of having a strong eco-system and has one of the highest start-up rates in the world (5.8%).

From the initial ideation stage to the eventual IPO, start-ups need regular funding to take off and keep going. As a founder, you should know what funding options you have and how you should negotiate a valuation with the investors.

This is a comprehensive guide to funding stages that will help you understand the financial consideration and strike the right balance between retaining ownership and securing capital.

Start-up Funding

It’s typical for start-ups to require external funding and cannot only sustain themselves by bootstrapping. Prior to seeking external funds, you must have an understanding of the start-up funding rounds so you have a better idea of growing your business.

Each round of external funding leads to the dilution of your equity as new co-owners are brought on board. Investors get a share of the equity in exchange for funds.

Valuation before funding rounds, the legal documents required and eligibility for equity are all regulated areas and founders will need to enlist a legal expert to help them draft documents and advise you through the process.

Bootstrapping

While bootstrapping is not exactly a start-up funding round, it is the first step for your business. Bootstrapping refers to investing your own money into the business to start working. The first stage is the ideation where you only have an idea. Without any created value, seeking external funding can be hard.

You can also add in people who share your vision and can serve as co-founders. Together with your funds, you can start the business. At this point, it is preferable to keep your overheads minimum and focus on expanding a client base so you can develop a growth trajectory. At this stage, you will have complete ownership of the business.

Family and Friends

Since you cannot go to the public with shares, private companies can take off by inviting family and friends to invest in their business. You can offer equity in exchange for funds. There are two main benefits of this approach: these individuals are less likely to ask for detailed financial projections and statements and since they already know you, it can be easier to get investment. The only downside is that you will be mixing your personal and professional lives which may lead to trouble later.

Angel Investors and Venture Capitalists

This is also called the seed round. At this point, you open up for angel investors and venture capitalists to invest in your business. Angel investors should be accredited investors. They invest relatively small amounts as they spend their own money. They are also more likely to offer on-ground support and advice.

Venture capitalists secure investment for their funds from investors and then use these to invest in start-ups. The main disadvantage for venture capitalists is that you will have to give up a significant amount of equity in return for funds. This means less control and ownership over your business. However, VCs are often very involved in companies and can lead your venture to success.

Often the first venture capital round is called Series A. Start-ups seeking Series A funding often have some employees with low salaries but with some share of the equity. Depending on the growth of the start-up, the business can have more rounds, series B, C, D, etc.

There are also seed firms that can offer to fund. Contrary to VCs, these firms invest relatively small amounts and do so exclusively in the earlier stages.

Accelerator Funding

Start-ups also have the option of accelerator or incubator funding. While this is a less common approach, it does offer some equity finance, alongside mentorship, networking opportunities and working spaces.

Accelerators allow companies to build and develop their business models and meet with potential investors. Incubators run on the same concept as accelerators but are more focused on companies in the early growth stages.

Crowdfunding

Crowdfunding is increasingly becoming popular as a means of raising finance. Websites like Patreon, Kickstarter and Indiegogo have helped the approach flourish.

Crowdfunding is when a company or business chooses to raise finance from the general audience in return for equity. It is usually for a specific project or campaign. Hence, it is an option that start-ups can use alongside other modes of financing. Crowdfunding is easier, hassle-free, and relatively quicker.

Business Loans

Bank loans are one of the traditional options for raising finance. Start-ups opt for loans in earlier stages of development where they can use the funds for their working capital and can focus on growth without diluting their ownership in the business.

To secure a loan, you will need to offer collateral, a good credit score, a viable business plan and extensive accounting records of the business.

For loans, businesses have the option to approach traditional banks or explore new avenues such as Fintech borrowing.

Revenue Loans

Revenue-based financing offers a percentage of the revenue in exchange for capital. In this scenario, a percentage of the gross profits is paid to the lender until the loan is repaid.

Business Grants

Business grants are another way of raising finance. These are usually very competitive but can be helpful if you manage to obtain one. The Entrepreneur’s Programme is one of the many examples of business grants.

Additionally, the government also offers incentives to businesses in certain industries such as research and development. Incentives can include tax rebates, tax benefits and allowances, subsidies, and low-interest loans.

Initial Public Offering (IPO)

An IPO allows the public to invest in the start-up by buying equity. IPOs allow for larger amounts of capital to be raised as compared to crowdfunding efforts. An investment bank can help you prepare for an IPO and act as an underwriter. An IPO also allows investors to have an easier exit opportunity (by selling their shares).

Key Takeaways

  • Equity funding methods allow start-ups to raise capital in exchange for partial ownership of the business. The capital allows the business to run operations and grow.
  • Seed rounds are used to build the business (series A) and fuel the growth of the company (series B and onwards). Seed funding requires investors to believe that your idea is worth their investment.
  • Apart from traditional methods such as IPO, bank loans and business grants, businesses can resort to alternative options like Fintech borrowing, crowdfunding, accelerator funding, etc.

Start-ups have several options available to them. What option they choose depends on the growth stage of the business, their future direction, and their goals for the start-up.

Regardless of what option is chosen, there are several regulatory and legal obligations to be met. Start-ups must meet these diligently to successfully secure funding and pave the way for their success.

Consulting with a legal expert can help protect your business interests and achieve the best outcome for your endeavours. At Lazarus Legal, our start-up experts have helped multiple start-ups to launch and take off successfully and grow. If you have any concerns you wish to discuss, you can connect with our start-up experts today.

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Mark Lazarus

Mark Lazarus, the visionary behind the business and the fresh blood of the Lazarus Legal team, Mark (or Laz as he is often known) owes much of his success to his past experiences. And he’s made it his personal goal to bring that wisdom and formula to the firm.

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Your Ultimate Start-up Funding Guide

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Barry Lazarus

CEO & Notary Public

barry@lazaruslegal.com.au 

We’d be lying if we told you that this bloke isn’t the big honcho of our team, but his name is a dead give-away. The founder of Lazarus Legal, Barry is an old school, tough as nails lawyer. They don’t forge litigators like this anymore.

With decades of experience in both Australia and South Africa, his wisdom is as renowned as his name. Back in the days when Schwarzenegger and Van Damme were kicking ass on VHS, Barry was kicking ass in the courtroom. And after all these years, he still has a reputation for refusing to back down.Barry is definitely the badass you’d want in a fight – in court or otherwise. But really, he’s a big softie. Just don’t let him know you know that (although he probably won’t read this anyway – navigating the Internet is not his strong point).

Aside from putting other lawyers in their place, taking long walks on the beach and spending time with his family, Barry enjoys seeing others succeed. Not only is Barry a staunch and unmoving litigator, he has sharp business and commercial acumen having started up ventures from scratch and growing them into full-blown franchises – from real estate to creating ice cream, to making pasta. With his experience on both sides of the commercial and legal equation, you want this guy to be on your side, whether you’re the next Zuckerberg realising your genius, or the next Zuckerberg taking on your opponents in court.

When Barry is not busy lawyering about, he is a part-time lawn bowler and a wannabe comedian, but never took both as a day job, because let’s face it, he’s a lot better at his day job.

If someone ever threatens you to lawyer up…relax, call Barry and he’ll handle the rest. 

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Mark Lazarus Director

Mark Lazarus

Director

mark@lazaruslegal.com.au 

The visionary behind the business and the fresh blood of the Lazarus Legal team, Mark (or Laz as he is often known) owes much of his success to his past stories and experiences. And he’s made it his personal goal to bring that wisdom and formula to the firm.

He’s a bit of jet setter, splitting his time between Australia and the UK, maximising every hour of his professional life. He thrives on this adrenalin. It allowed him to work in private practice in Sydney, act for a host of famous celebrities in London, do a two year stint as a NSW barrister (and not the pretentious coffee type in the Melbourne laneways) and more recently did a gig as the Legal Director covering Europe, the Middle East and Africa for one of the world’s coolest fast-moving consumer good brands!  

As an Aussie and UK lawyer and former barrister, Mark not only has the gift of the gab but he’ll walk the walk to prove it too. He likes to think he’s a bit like Harvey Specter or Michael Corleone, the main difference is you can actually retain him as your lawyer and consigliere. He’ll tell you how it really is and will take on any challenge head on. Although litigation and court advocacy comes naturally to him, commercial and IP is what gets his blood pumping! 

When Mark is not out there doing his thing, you will probably catch him chilling at home with his family, on the sidelines of the soccer (football) pitch cheering on his two boys, crawling through mud obstacles, or training hard at the gym. Passion and commitment is what drives Mark to succeed, along with his burning desire to disrupt the legal profession by finding new ways to change the game.

He has sights on the future. So if you’re breaking new ground, ahead of the times, and on the verge of something big, but you need someone who’s got your back and who can give you straight up advice, this is the guy you will want on speed dial.

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