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If you’re a startup planning to grow, you may be thinking about taking on investors and raising capital to help finance your growth plans. So what legal things do you need to know as a startup preparing for a capital raise in 2025?
When preparing to raise capital and attract potential investors, it’s helpful to think about your legal considerations in two broad categories:
- Getting your company structure prepared for investment
- Preparing your legal documents for investment
In this article, we’ll explore each of these aspects in detail and provide updated guidance relevant to the evolving investment landscape in 2025.
Company Structure
Your Company Structure is significant for several reasons – it can help protect you from liability, ensure your business’s intellectual property is safeguarded, and make your venture more attractive for investment. Additionally, if you’re currently operating as a sole trader and looking to transition into a more robust structure, our Operating as a Sole Trader guide offers useful insights.
There are three company structures commonly used for investment in 2025: the single company structure, the dual company structure, and the ‘hybrid’ trust/company structure. These models have evolved with regulatory updates and investor expectations over recent years.
Single Company Structure
A single company structure is the simplest to set up. It involves having one proprietary limited company that receives funds from investors in exchange for shares. In this arrangement, the company that takes on the investment is also the owner of all the business’s intellectual property, engages with customers, and employs staff.
While this structure is straightforward and often incurs lower administration costs, it is generally less appealing to investors compared to a dual company structure because it does not offer as much liability or intellectual property protection.
Under a single company structure, if the company becomes liable for an issue with an employee or a customer, all of the company’s assets – including intellectual property and cash – could be at risk.
Dual Company Structure
A Dual Company Structure is more attractive to investors in 2025 as it offers additional protection for their investment. In this model, the business is divided into a holding company (HoldCo) and an operating company (OpCo).
Under this structure, the holding company owns 100% of the shares in the operating company. Founders and investors hold their shares in the holding company, while the operating company deals with day-to-day business risks and contractual obligations. This separation means that if the operating company is subject to a lawsuit or incurs debts, the key assets – such as intellectual property and cash – held by the holding company remain largely protected. For further reading on protecting core assets, see our article on holding company liability.
The primary downside is the increased complexity and cost associated with setting up and maintaining two companies, compared to a single company structure.
Hybrid Trust & Dual Company Structure
A third option is the hybrid trust and dual company structure. If you’re not too familiar with trusts, it’s worthwhile reading about how a trust works. This hybrid structure is similar to a dual company setup, except that instead of founders holding their shares in the holding company directly, they hold them via a trust.
This arrangement offers two key advantages. Firstly, it provides enhanced asset protection – if an investor attempts to make a claim, they may only be able to target the trust’s assets rather than the founder’s personal assets. Secondly, there can be tax advantages associated with holding shares through a trust, especially when profits are distributed or shares are sold. However, trust-based structures are complex and require expert legal and tax advice, as detailed in our business structure guide.
What Structure Is Right For My Business?
The best structure for your startup depends on your specific circumstances and business model. It remains most common for companies raising equity investment to adopt a dual company structure because of its enhanced protection and risk management features. If you’re considering alternative funding methods, such as convertible notes, or planning to transition from a sole trader model, it’s important to review your options with updated legal guidance.
| Example Angel Ventures wants to invest $2 million in a software company, Pear Technologies, which has developed a cutting-edge SaaS tool based on advanced machine learning technology. Pear Technologies plans to use the funds to further develop its technology and expand market reach in 2025. Initially, Pear Technologies operated under a single company structure – Pear Tech Pty Ltd. However, Angel Ventures is concerned that the key assets, including proprietary technology, could be exposed to undue risk if the business encounters operational issues. Consequently, Angel Ventures requires Pear Technologies to restructure into a dual company structure prior to investment. Pear Technologies achieves this by renaming Pear Tech Pty Ltd to Pear Tech Operations Pty Ltd, and establishing a new parent company, Pear Tech Holdings Pty Ltd, owned by the founders. All critical assets, including intellectual property, are transferred to Pear Tech Holdings Pty Ltd, allowing Angel Ventures to invest in the holdings company with greater confidence in asset protection. |
What Documents Do I Need?
Once you have organised your company structure and ensured you’re investor-ready, the next step is to prepare and understand the legal documentation required for the capital raise. In 2025, investors expect clear, concise and up-to-date legal agreements.
Term Sheet
The first document typically prepared as part of a capital raise is a Term Sheet. The Term Sheet outlines the general terms of the investment and summarises the subsequent legal documents required to finalise the deal, such as the investment agreement (commonly a Subscription Agreement), the Shareholders Agreement, and in some cases, the establishment of an Employee Share Scheme or Employee Share Option Plan.
Generally non-binding, the Term Sheet serves as a negotiation tool that sets the stage for drafting the final, legally binding documents.
Subscription Agreement
The Subscription Agreement is a legally binding contract that details the investment amount, the number of shares issued and other key terms such as warranties, which are promises made by both parties regarding their financial and legal position.
Key elements often included in the Subscription Agreement are:
- The investment amount
- The corresponding number of shares allocated
- Warranties from both the company and the investor regarding their current financial health and legal standing
Shareholders Agreement
The Shareholders Agreement is usually executed alongside the Subscription Agreement. If the company already has an existing Shareholders Agreement, the new investor may ‘accede’ to it; otherwise, a new agreement is drafted. This document governs the management and control of the company, outlining provisions for:
- Voting rights: Determining what actions require investor approval
- Transfer or sale of shares: Establishing when and how shareholders can transfer their shares
- Anti-dilution protections: Addressing the impact of future share issuance
- Drag along/tag along clauses: Defining what happens if the majority decide to sell the company
Employee Shares Schemes
It’s becoming increasingly common for companies to introduce Employee Share Schemes to retain key staff by aligning their interests with the company’s success. In some instances, rather than receiving actual shares, employees might be offered an ‘option’ to purchase shares later, known as an Employee Share Option Plan (ESOP). For clarity on the distinction between various plans, refer to our article on the differences between ESS and ESOP.
Investors often insist that an employee share scheme be in place before finalising their investment, ensuring the company retains its talent – a critical factor in the competitive climate of 2025.
As an alternative financing route, some startups may also consider using instruments like convertible notes to bridge funding rounds while minimising dilution. It’s important to review your financing options carefully with expert advice.
Next Steps
There’s a lot to consider when planning your capital raise. In today’s dynamic investment environment, ensuring that your legal documents and company structure are up-to-date is crucial. Regular legal reviews are recommended, as regulatory and tax requirements can evolve even within a single year – staying informed and updated will help secure your business’s long-term success.
If you would like a consultation on your options going forward, please reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligation chat. Additionally, you may find our Legal Requirements for Starting a Business guide useful for understanding how to align your business strategy with current legal obligations in 2025.
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