Understanding The Price Of Capital In Shareholder Agreements And Funding Terms: What Every Australian Startup Needs To Know

Bringing on investors is exciting, but it also sets the tone for your startup’s ownership structure, founder control and long-term growth. A big part of getting it right is understanding the “price of capital” - the true cost your business pays to access funding.

In plain terms, this is about more than the cheque size. It’s about valuation, equity, investor rights and the fine print that shapes dilution and control over time. In Australia, these terms are usually set across a few documents during a raise, then reflected in your cap table and governance documents going forward.

In this guide, we’ll unpack how the price of capital is set in Australian deals, where those terms actually live (and where they don’t), which clauses move the needle most, and a step-by-step way to approach your next round with confidence.

What Is The “Price Of Capital”?

When founders talk about the price of capital, they’re talking about the real trade-off between the money coming in and what you give up now and later.

It’s not only a percentage on a cap table. The price of capital includes the financial and legal features that come with an investment - the class of shares an investor receives, liquidation preferences, anti-dilution protections, board or veto rights, and how future rounds will work.

Put simply, the price of capital answers questions like:

• How much ownership are you exchanging for the investment?
• What rights or protections are attached to that ownership?
• How do those rights affect founder control, dilution and exits over time?

Two deals that look similar on headline valuation can have very different costs once you factor in these levers. That’s why it pays to look beyond the percentage and understand how each term plays out in practice.

How Is The Price Of Capital Set In Australia?

There’s no fixed “market price” for startup capital. It’s negotiated between founders and investors, then documented. A few drivers tend to shape the outcome:

• Valuation: A higher valuation means the same investment buys fewer shares. Early-stage companies usually accept more dilution than later-stage businesses to reflect higher risk.
• Funding instrument: Equity rounds, convertible notes and other instruments (like SAFEs) allocate risk and reward differently, which changes the true cost to you.
• Investor preferences: Some investors want a larger allocation or stronger downside protection, which can come via preference shares, anti-dilution or board rights.
• Competition for the round: Multiple interested investors generally gives you more room to negotiate valuation and terms.

It’s also important to factor in Australia’s fundraising rules. Most private raises rely on exemptions in section 708 of the Corporations Act (for example, small-scale “20 investors in 12 months” offers or offers to sophisticated/professional investors). If you don’t fall within an exemption, you may need disclosure (such as a prospectus) - which most startups avoid. You can read more about the key section 708 exemptions and why they matter when planning a round.

A quick note on instruments: SAFEs are sometimes used in Australia but they’re not a legislated product and terms vary. Many local investors prefer convertible notes or straightforward equity because they’re familiar and provide clearer protections under Australian law. Whichever route you choose, make sure the document is adapted appropriately for the Australian context.

Where Do The Terms Live? Term Sheets, Subscription Documents And Your Shareholders Agreement

One of the most common misconceptions we see is that “all the funding terms go into the Shareholders Agreement.” In practice, different documents do different jobs - and getting this split right helps you stay organised and compliant.

Term Sheet (Heads Of Terms)

This is the non-binding summary of the deal you and the investor agree in principle: valuation, amount invested, high-level rights and any conditions. It sets expectations and speeds up drafting. A clear term sheet means fewer surprises later.

Subscription Or Note Documents

The binding funding terms live in the transaction documents that actually issue the securities:

• Share Subscription Agreement + Share Terms: Used for equity rounds to set out price per share, number of shares, completion mechanics and any special rights for the class being issued (often documented in a share terms schedule or the constitution).
• Convertible Note: Used for debt that converts into equity later, typically with a discount, valuation cap and clear conversion triggers. The note instrument is where these mechanics are set. See how a Convertible Note works in practice.
• SAFE: If used, the SAFE agreement holds the conversion mechanics. Ensure it’s adapted to Australian law and aligns with your governance documents.

Shareholders Agreement And Company Constitution

Your Shareholders Agreement sits alongside the transaction documents. It governs the ongoing relationship between shareholders: decision-making, board composition, information rights, veto matters, transfer restrictions, pre-emptive rights and exit mechanics (tag/drag). It’s also where you’ll often see vesting for founders, good leaver/bad leaver rules and dispute resolution.

Your Company Constitution should be consistent with both the Shareholders Agreement and the share terms issued in the round, especially where you’re creating or amending preference share rights. If new investors join later, it’s common to have them sign a Deed of Accession to the Shareholders Agreement.

Think of it this way: the subscription or note documents get the money in; the Shareholders Agreement and Constitution set the rules for life after the round.

The Clauses That Change Your Real Cost Of Capital

Beyond headline dilution, these terms tend to move your price of capital the most.

Valuation (Pre-Money vs Post-Money)

Make sure everyone is aligned on whether the valuation is pre-money or post-money. A mismatch here can shift percentage ownership materially once the round closes.

Share Class And Preferences

Many rounds issue preference shares with special rights (for example, liquidation preference, anti-dilution or enhanced information rights). Different share classes create different outcomes at exit and in down rounds. If you’re weighing options, it’s helpful to revisit how different classes of shares work in Australia.

Liquidation Preference

Often expressed as 1x non-participating (the investor gets their money back first, then participates pro rata) or participating (investor gets their preference and also participates in the remaining pool). The difference can materially affect founder and employee outcomes at smaller exits.

Anti-Dilution

Weighted-average formulas are common; full ratchet is more aggressive. Anti-dilution protects investors if you raise later at a lower price, but it also increases dilution for founders and employees in those scenarios. Check how the formula works and when it applies.

Board, Veto And Information Rights

Control rights can be as impactful as equity. Consider how board seats, observer rights, consent matters (like issuing new shares, changing the Constitution, major spending, acquisitions or winding up) and reporting obligations will affect speed of decision-making.

Conversion Mechanics (Notes/SAFEs)

Conversion discounts, valuation caps, most-favoured-nation clauses, qualifying round thresholds and long-stop dates all change your real cost. With notes, also check interest (cash or PIK), maturity and security. With SAFEs, make sure definitions and Australian law references are adapted properly.

Employee Equity And The Option Pool

If you’re expanding your option pool before or at the round, clarify whether it’s pre- or post-money. A pre-money pool expansion effectively shifts more dilution to founders. Formalising an Employee Share Option Plan (ESOP) early helps you hire and retain talent, and investors will usually ask how equity for the team is structured.

Step-By-Step: Navigating A Funding Round (With Future Rounds In Mind)

1) Get Round-Ready

• Clean cap table and clear founder vesting (so you’re not negotiating around legacy issues).
• Decide your preferred instrument (equity, note or SAFE) and guardrails for valuation, control and key rights.
• Align governance: ensure your Shareholders Agreement and Constitution are up to date for a raise.

2) Secure A Term Sheet

• Use a concise term sheet to capture valuation (pre/post-money), round size, share class, board/veto rights, information rights, ESOP pool sizing and any investor protections.
• Keep it high-level but specific on the points that matter; it guides all drafting.

3) Draft The Right Transaction Documents

• For equity: a subscription agreement, share terms and any disclosure or investor qualification certificates.
• For notes: a convertible note instrument with conversion mechanics, interest, maturity and qualifying round triggers.
• For SAFEs: ensure Australian law-friendly drafting and alignment with your governance documents.

At this stage, many founders also speak with a lawyer about the fundraising framework and investor eligibility under section 708, especially if offers may extend beyond sophisticated investors.

4) Close, Issue And Update Records

• Complete the investment, issue securities, collect any required investor representations and update ASIC and your registers.
• Amend your Constitution or share terms if new classes or preferences were created.
• Have new investors accede to your Shareholders Agreement (usually via a Deed of Accession).

5) Plan For The Next Round

• Model dilution: understand how today’s terms will compound if you do a bridge or down round.
• Keep your ESOP and hiring plan aligned with your runway and growth milestones.
• Document everything neatly - it speeds up diligence for the next raise or a potential exit.

What About Debt?

Some startups use venture debt or revenue-based financing. In these cases, the “price of capital” shows up as interest, fees, covenants and (sometimes) warrants or options. Even if it’s not equity, check how security interests, financial covenants and default triggers could affect your freedom to operate and your next round.

Avoid These Common Pitfalls

• Focusing only on dilution and missing how preferences and control rights change outcomes at exit.
• Agreeing to evergreen or full-ratchet anti-dilution without appreciating the downside in tough markets.
• Leaving founder vesting undocumented, which can create major issues if a founder departs.
• Letting your Constitution and Shareholders Agreement fall out of sync with the terms actually issued.
• Using imported SAFE or note templates without adapting them properly for Australian law.

If you’re weighing trade-offs or the deal feels complex, it’s worth getting tailored capital raising support. Sprintlaw offers practical guidance for founders through capital raising for startups, from structuring to document drafting.

Key Takeaways

• The price of capital is the total cost of taking investment - dilution plus the rights and protections attached to that investment.
• Funding terms usually live in a subscription agreement, convertible note or SAFE; your Shareholders Agreement and Company Constitution govern life after the round.
• Clauses that move your real cost most include share class preferences, liquidation preference, anti-dilution, board/veto rights and conversion mechanics.
• Most private raises rely on section 708 exemptions; plan your investor list and documents with those rules in mind.
• Option pools, ESOP design and whether the pool is sized pre- or post-money also change founder outcomes.
• SAFEs are sometimes used in Australia, but many investors prefer equity or convertible notes; whichever you choose, ensure the document is adapted for Australian law.

If you’d like a consultation about setting the right funding terms or preparing your Shareholders Agreement, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.