Capital Raise Lawyers

What is a Cap Raise?

A technology industry capital raise is when startup founders go to investors and ask them for capital to fund their next stage of growth.

Tech startup funding typically occurs in five stages, or rounds, labeled Seed, then Series A through to Series D. These naming conventions aren’t set in stone and nothing stops startups from using unconventional labels, but they generally provide the market with an indication of the startup’s stage of development and growth.

We’re not sure if a company conducting a Series E is still a ‘startup’ as some are raising half a billion dollars at that stage. But that’s for others to judge!

The first round, the ‘Seed Round’, or even ‘Pre Seed’ round, typically involves funds sourced from the founders’ close connections and is sometimes also known as a ‘friends and family round’. Seed funding for startups will often go through multiple rounds over the years until they reach a stage where they attract tech Venture Capital firms and begin their ‘Series A’ round.

Most startup funding rounds will typically involve convertible securities issued through Convertible Notes or Preference Shares, but early stage startups can also make use of ‘SAFE Notes’ (aka simple agreements for future equity). Whether which funding instrument is better will largely depend on the specific circumstance of the business, like whether the potential investor is friendly, the history of your business, and more.

How big is it?

Precise country-specific industry data for capital raises that’s publicly available can be difficult to come by because many transactions occur amongst unlisted companies for undisclosed amounts. But there are some indicators we can point to in order to give a sense of scale.

According to the KPMG Venture Pulse 2020/21 report, Venture Capital funding continued to increase between 1 July 2020 and 1 July 2021, to a record US$2.5 billion (A$3.6 billion), up from US$1.95 billion in the previous year. Square Peg, a prominent startup investor in Australia, invested a total of US$300 million alone in 2021.

Meanwhile in the US, the Venture Capitals inked 2021 into the record books with an astounding over US$238.7 billion spread across some 12,837 investments, according to Venture Capital database Pitchbook.

Examples of Cap Raises

• In September, Australian graphic design platform Canva secured a valuation of US$40 billion after a fresh capital injection of US$200 million in a round led by T. Rowe Price. New and existing investors participated in the round, including Franklin Templeton, Sequoia Capital Global Equities, Bessemer Venture Partners, Greenoaks Capital, Dragoneer Investments, Blackbird, Felicis and AirTree Ventures.
• In 2020, cloud and API-first platform Avarni conducted their cap raise through a SAFE note. Biztech Lawyers assisted with the negotiations, drafting relevant documents and reviewing the company’s existing documents.
• In July 2021, Employment Hero tripled its valuation to AUD$800 million after raising a AUD$140 million Series D funding round led by Insight Partners, a US-based Venture Capital and private equity firm.
• In December 2021, e-commerce marketing technology company Rokt, a Biztech Lawyers client, broke the record for the largest Venture Capital raising in Australian history. The company secured A$458 million and a A$2.75 billion valuation. The round was led by US investment management giant Tiger Global, with participation also from existing local shareholders Square Peg, AustralianSuper and Hostplus.

How we can help

Executing a successful capital raise comes down to nailing your due diligence process and your critical documents (term sheet, securityholders’ agreement and subscription agreement).

It starts with the term sheet, which is a document that sets out the general terms of the investment. The term sheet is likely to include high level commercial terms and could deal with contentious issues such as the startup’s valuation, the investment amount, the rights of the investors and key provisions in the securityholder’s agreement and subscription agreement. Getting this document right can help set the tone for the rest of the raise.

Once the term sheet is signed, which is often accompanied by strict confidentiality provisions, it’s time to move into due diligence. This is the tough part.

The company will want to confirm the investor is who they say they are and that they are a good fit for the company. Meanwhile, the investor will want to confirm corporate governance, structure, operations and material agreements. They’ll also investigate the company’s dealings to identify potential legal liability, financial insolvency, or any other red flags that may deem the investment too risky.

Making sure your house is in order before entering due diligence is the only way to ensure this process goes as smoothly as possible. Assets such as your corporate records, financial documents, Intellectual Property, material agreements and employment documentation will come under scrutiny.

Once due diligence is completed, attention turns to the securityholders’ agreement, which governs the obligations of the securityholders and will typically contain key features. This often includes voting rights, key decisions that require majority approval, powers to appoint directors, restraints of trade and dispute resolution mechanisms.

Finally, the subscription agreement is a promise from the investor to provide the company with an agreed amount of capital in return for the issue by the company of a certain number of securities.

You can check out our track record for more successful deals and transactions.

If you’re ready to inject capital to double your growth, we have an international team on hand to help you out whenever you need it. Contact us today!