Capital raising: what founders agree to before they've read the term sheet
A capital raising is a sale. You are selling shares, and attached to those shares are information rights, consent rights, a say over who else can buy in, and a set of promises that what you have told the investor about your company is true. The money is the easy part. The rights you hand over with it are what you live with for the next five years.
A founder forwarded me a term sheet at 9pm on a Sunday with the note "it's non-binding, can you have a quick look". Three clauses in it were binding, one of them for 60 days. And the valuation he had been celebrating all weekend was worth about 18% less to him than he thought, because of where the option pool sat.
That is the usual shape of these things. By the time a lawyer reads the document, the founder has already replied "looks good".
Most founders approach a cap raise as a fundraising exercise and treat the paperwork as the tail end of it. The paperwork is the transaction. Here is what to sort out before you send that reply. For the ground covered before a term sheet lands, see our earlier guide to raising capital in Australia.
Debt, equity, and the awkward middle
Debt is borrowed money. You repay it with interest, the lender usually wants security over company assets and often a personal guarantee, and they have no say in how you run the business unless you breach a covenant. Nobody is diluted.
Equity is different. The investor buys in, takes the risk with you, and gets no repayment, only whatever their shares are eventually worth. In exchange they want protections: a preference on exit, veto rights over certain decisions, sometimes a board seat.
Most early stage capital raising in Australia sits in the middle, and most equity fundraising at seed level never gets priced at all. A SAFE or a convertible note is money now, shares later, on terms set by a future priced round. That deferral is the attraction and also the risk, because the conversion mechanics are where the real dilution hides. We see companies with three SAFEs at different caps and discounts, none of them modelled against each other, and the founders only discover what they have agreed to when a Seed investor asks for a pro forma cap table.
Model the conversion before you sign the next instrument. Not after.
Who you are legally allowed to offer shares to
This is the part founders skip, and it is the part with an offence attached.
Offering shares in Australia normally requires a disclosure document. Section 708 of the Corporations Act 2001 (Cth) sets out the exemptions that let a private company raise capital without one, and two of them cover most raises.
The 20/12 rule
The small scale offering exemption, known as the 20/12 rule, lets you issue to no more than 20 investors and raise no more than $2 million in any rolling 12 month period. It applies only to personal offers, and you cannot advertise them. A LinkedIn post announcing that you are raising can put you outside it.
The sophisticated investor certificate, and the six month trap
The other is the sophisticated investor exemption in section 708(8). Here is the trap. The accountant's certificate confirming net assets of $2.5 million or gross income of $250,000 for each of the last two financial years must be dated no more than six months before the offer is made. Not two years. Two years is the wholesale client rule for financial products under Chapter 7, and the two get confused constantly, including by people who should know better. A certificate from 2024 sitting in a data room does not exempt an offer you make today.
Those thresholds have not moved since 2001, so far more people qualify than founders assume. Eligibility is rarely the problem. The paperwork proving it is.
Success fees and AFS licensing
If you pay someone a success fee for capital raising services, check whether they need an AFS licence before you sign the mandate, not after the money lands.
The term sheet clauses that decide how much you actually keep
A term sheet is short, mostly non-binding, and sets the anchor for everything that follows. Argue about it now, because renegotiating a settled point during due diligence costs you credibility.
Where the option pool sits
The option pool is the most common and least noticed. If the pool is created pre-money, existing shareholders fund it alone and the investor gets their percentage after the dilution. A 15% pool on a $5 million pre-money valuation is roughly $750,000 of dilution that lands entirely on you. It is a valuation reduction dressed as a housekeeping item. What goes into the pool, and on what terms, is a separate exercise again: see our guide to employee share schemes for founders.
What the liquidation preference does on exit
Liquidation preference decides who gets paid first on a sale and how much. A 1x non-participating preference is standard in Australia. Anything participating, or any multiple above 1x, means that in a modest exit the founders can end up with very little from a sale that looked like a good result.
Founder vesting, and the leaver terms
Investors usually want your existing shares put back on a vesting schedule, which is reasonable and negotiable. What the schedule says about good leaver and bad leaver treatment, and what happens on a change of control, is worth more attention than the headline period.
Exclusivity and the other binding clauses
Check the binding clauses. Exclusivity, or a no shop, stops you talking to other investors for a fixed window. Sixty days of exclusivity with a fast burn rate and no other process running is real leverage handed over for nothing.
Capital raising when the business is in trouble
Capital raising for turnaround is a different exercise legally. If solvency is genuinely in question, your director duties change shape and the safe harbour provisions in section 588GA only protect you if you are actually developing a course of action reasonably likely to produce a better outcome than administration. Bringing new money in from investors who have not been told the real position is where directors get personally exposed. Get advice early in that scenario, not when the fundraise is already underway. Our guide to what actually creates personal liability for a startup director sets out where those risks sit.
Before you reply to the investor
Clean the cap table. Confirm every existing shareholder, SAFE, note and option is documented and consistent with ASIC's register. Model the round including conversions and the pool. Read the binding clauses. Then negotiate the term sheet, because the shareholders agreement will follow it closely and the time to move a term is while everyone still calls the document non-binding.
Common questions
What does it mean to raise capital?
Raising capital means selling a stake in your company rather than borrowing against it. The investor pays for shares and takes the risk with you, and the money arrives with rights attached: information rights, consent rights, a say over who else comes onto the register, and promises from you that what you have told the investor is true. Those rights, not the cash, are the part you live with afterwards.
Is a term sheet binding?
Mostly not, but not entirely. A term sheet is generally non-binding on the commercial terms and binding on a small number of others, and exclusivity or a no shop is one of them. That clause can stop you talking to any other investor for a fixed window, so read it before you reply rather than after.
Who counts as a sophisticated investor in Australia?
Section 708(8) of the Corporations Act allows an offer of shares without a disclosure document to a person who an accountant certifies has net assets of at least $2.5 million, or gross income of at least $250,000 for each of the last two financial years. The certificate must be dated no more than six months before the offer is made. Those thresholds have not moved since 2001, so more people qualify than founders assume.
Can I advertise that I am raising capital?
Not while you are relying on the small scale offering exemption. The 20/12 rule applies to personal offers only, and advertising them can put you outside it. A LinkedIn post announcing that you are raising is enough to create the problem.
Send it before you reply
We do capital raising work for founders most weeks, from a first SAFE through to a priced round with existing instruments converting into it. If you have a term sheet in your inbox now, send it to us before you reply to it. An hour on the term sheet is worth a week on the long form documents.
If you would rather talk it through first, book a fifteen minute call and we will tell you whether it needs us.
Phillip Kilazoglou
Zed Law