It might only be a few pages long, but a term sheet plays a decisive role in shaping the deal-and your business’s future. Understanding term sheets, what they contain (and what’s excluded) can help you make smarter decisions, avoid costly mistakes, and negotiate better terms.

In this article, we explain what a term sheet is, walk through the key clauses, highlight common traps, and share tips to help founders handle the negotiation process with confidence.

What is a Term Sheet?

A startup term sheet is a short agreement that outlines the basic terms and conditions of an investment offer. It determines the key terms of the proposed investment, such as the amount of capital being invested, the company’s valuation, the type of shares being issued, and investor rights, such as board seats or veto rights. It’s usually the first formal step once an investor has indicated they’re serious about coming on board.

Although it’s usually not legally enforceable (except for a few specific clauses), a signed term sheet serves as a blueprint for the legally binding documents that follow. Investors and lawyers generally treat matters covered in it as closed to negotiation once completed, so entrepreneurs should never sign one without understanding the key terms and conditions to include.

You might sometimes see people using a different name for this type of document – for example: heads of agreement (HOA), memorandum of understanding (MOU), letter of offer (LOA), letter of intent (LOI) or non-binding indicative offer (NBIO). All of these documents are just variations of the same concept.

Why Term Sheets Matter for Startup Founders

Startups looking for cash injections must have properly drafted term sheets for the following reasons:

• It locks in the key commercial terms of the deal, thus framing the negotiation and future relationship with your investors.
• Determines how much equity you’re giving up – and on what terms;
• Can affect your ability to raise further funding down the line;
• Impacts your control over the business; and
• It may affect your exit options through potentially restrictive terms.
• Entrepreneurs often sign term sheets too quickly, without fully understanding the long-term implications. Don’t rush. Take the time to understand the details.

Key Clauses to Understand & Include in a Startup Term Sheet

Here are the main sections of a typical early-stage term sheet, especially in Australian startup funding rounds.

1.  Valuation and Investment Amount

This section spells out how much the investor is putting in, what they’re getting in return, and how the valuation is determined (to assess share prices). 

The company’s valuation can be either:

• Pre-money valuation – the company’s value before the investment is added.
• Post-money valuation – the company’s value after the investment is included.

Why it matters: The investment amount and valuation are important for obvious reasons – they specify how much cash the company receives and how much equity is given up in return. They are the key commercial terms of the deal.

Whether the valuation is pre- or post-money determines who bears the dilution if the company raises additional funds (besides the investor signing the term sheet) as part of this round. A pre-money valuation means that additional funds will result in the investor diluting their stake. A post-money valuation means the investor is protected against dilution, and the founders/existing shareholders will bear all dilution if further funds are raised in this round.

Trap: avoid agreeing on a post-money valuation – all it does is create headaches for you in case circumstances change. Insist on a pre-money valuation. 

2. Type of Shares or Instruments

Investors might be offered:

• Ordinary shares
• Preference shares (which come with extra rights, such as liquidation preferences, anti-dilution, conversion rights, dividend preferences and more), or
• Convertible securities like notes or SAFEs.

Each has different implications for voting rights, dividends, and what happens if the company is sold or wound up. Most Australian Series A (and later) rounds use preference shares with some customised rights.

UX Law Tip: Do not volunteer preference shares unless the investor specifically demands them. Many investors, even veteran angels, will agree to ordinary shares on many occasions. It will be a tougher sell with institutional investors, though, who usually demand preference shares.

3. Capitalisation Table (Cap Table)

This sets out who owns what, before and after the investment, and considers dilution and vesting (for instance, you may have issued some options to an employee that will vest and ‘convert’ into shares down the line). It should include:

• Founders and current members,
• New investors,
• Any employee share option pool (ESOP).

4. Board Structure

While investors might not want to run your business, they typically wish to oversight and some veto power over key decisions. But too much investor control can undermine founder leadership and flexibility. Remember that the board of directors runs the company, and board control is extremely important. Your goal should be for the founder group to maintain a majority on the board for as long as possible. Some broad guidelines for board structures are below:

• Try to avoid giving away any investor board seats in earlier rounds, such as Pre-Seed and Seed.
• try to restrict investor board seats to only investors who hold over 10% or even 15% of equity.
• set up good mechanisms to resolve deadlocks – such as a casting vote to the chairman (who should be a founder) or an independent director (more common in more advanced startups)

Remember that an advisory board is not the same as the board of directors. 

UX Law Tip: Remember, board voting is usually simply 1 vote for each director. Founders who hold large equity chunks (especially sole founders) may need to specifically mention that their appointed director has extra votes, to ensure they maintain board control.

5. Decision Making

Some term sheets aim to set out the company’s decision-making framework. Generally, the company’s decisions require a simple majority vote of the board. Still, specific significant actions may require elevated approvals – for example, shareholder approval, a supermajority board approval, or the agreement of specific directors (such as a founder director or investor director). Investors will often push for many decisions to require their consent, whereas founders will typically want to limit investor veto powers over most matters. In general, these special approvals should be limited to genuinely significant issues so that day-to-day operations remain under normal board control. Examples of common problems that require investor approval include:

• related party transactions
• payment of dividends
• materially changing the nature of the business
• capital expenditure or borrowing above an agreed threshold
• founder salaries, and employee remuneration, above an agreed threshold
• selling or shutting down the business

UX Law Tip: Keep special approvals to a minimum and avoid shareholder-level approvals where possible, as they can be slow and procedurally cumbersome to obtain. Avoid giving investors a blanket veto right over new capital raises or share classes.

5. Liquidation Preferences

Many investors will insist on receiving preference shares with a liquidation preference. A liquidation preference protects an investor by ensuring they receive a minimum return in the event of a sale or the company’s closure.

The most common form is a 1x non-participating liquidation preference, which gives the investor the greater of:

1. Their original investment amount, or
2. What they would receive based on their equity percentage in the company.

This protects them where the exit price is lower than what they originally invested – they get to take out what they originally invested, even though it is higher than what their equity would otherwise entitle them to.

By contrast, a participating liquidation preference lets the investor take both:

1. Their original investment back, plus
2. What they would receive based on their equity percentage in the company.

This “double dip” means participating preferences can substantially reduce what founders receive on exit. 

UX Law Tip: Non-participating preferences are far more balanced. Participating preferences heavily favour investors – push back unless the investment size or stage genuinely justifies it. Be aware of how this impacts your cap table – it will mean the investor’s investment must be deducted from the purchase price before the balance is divided according to everyone’s equity percentage.

6. Anti-Dilution Protection

If the company raises money in the future at a lower valuation (a “down round”), anti-dilution provisions protect earlier investors from losing too much value.

There are two main types:

• Full ratchet: The investor’s conversion price is adjusted as if they had invested at the new, lower price (this is the most aggressive form and is relatively rare in Australia)
• Weighted average: The adjustment is more moderate, taking into account both the new share price and the number of shares being issued

Anti-dilution protection is typically achieved in practice by issuing additional shares to the protected investor so that their effective ownership or conversion price is adjusted to reflect the down round. For example, under a weighted average provision, the formula recalculates the investor’s conversion price based on the ratio of old shares to new shares and the price of the new shares. In effect, the investor receives additional shares at no extra cost, partially offsetting the dilution from the lower-priced round.

For Example:

An investor buys 1,000 shares at $10/share. Later, the company raises a down round at $ 5 per share.

• Full ratchet: The investor’s conversion price is reset to $5 per share, effectively doubling their shares to 2,000 without additional investment. This maximally protects the investor but can heavily dilute founders.
• Weighted average: The conversion price is adjusted proportionally based on the number of new shares and the lower price. Using a simple formula, the latest conversion price becomes $7.50/share, and the investor receives extra shares, partially offsetting dilution.

7. Information and Reporting Rights

Investors usually want regular updates – monthly or quarterly financials, annual budgets, and the right to inspect books or ask questions.

Common investor requests include:

• Quarterly financial statements
• Annual business plans and budgets
• Right to inspect company records
• Ad hoc updates on material events

These rights are reasonable, but they should be balanced with your stage of growth and internal resources. Founders should avoid agreeing to overly frequent or burdensome reporting requirements – especially if the investor holds a small stake.

UX Law Tip: Founders should offer transparency, but not commit to overly burdensome admin obligations at an early stage (for instance, push back on monthly reports unless your business already operates this way internally). Include a provision requiring confidentiality for all investor-shared information. 

8. Founder Vesting or Clawback

Founder vesting is a mechanism to ensure key team members remain committed to the business post-investment. Even if you and the other founders already hold your shares, investors might ask for a vesting arrangement – meaning shares are “earned” over time (typically 3–4 years with a 12-month cliff).

If a founder leaves early, a portion of their shares may be “clawed back”, repurchased or transferred to someone else, usually for $1. This is designed to ensure key people stay on to build the business.

Vesting is more common at the earlier stages of a startup’s lifecycle. However, many investors in later rounds will seek to fully or partially reinstate vesting periods for founders to ensure they remain committed. Founders who have already invested significant time (or cash) in a business should negotiate shorter (or no) vesting periods.

UX Law Tip: If you are a sole founder, then vesting only operates against you. Do not volunteer it unless you need to police other founders. If you do include it, ensure the mechanism states that, if a founder exits, their unvested shares are distributed to the other founders.

9. Drag-Along and Tag-Along Rights

These clauses kick in during a full or partial sale of the company.

• Drag-along allows majority shareholders to force minority shareholders to sell their shares if an outside buyer is seeking to acquire the entire company. 
• Tag-along rights give minority shareholders the right to join a deal if the majority decide to sell their shares, ensuring they are not left behind in a partial sale. 

Both sets of rights are standard features for startups. The key is usually in the parameters that surround them. The primary parameter is the threshold which triggers the activation of the rights. For example, a threshold of 70% will mean shareholders holding 70% of the shares need to agree to sell before either of the rights is activated. 

Founders must keep these thresholds front of mind when negotiating with investors, as they typically seek to ensure they maintain sufficient ownership to meet the drag-along threshold even after future funding rounds dilute their stake. In practice, this means when drafting the term sheet, you should calculate thresholds based on fully diluted shares (including options, convertible notes, and other instruments) to ensure the intended parties retain control over drag or tag rights, regardless of future dilution.

UX Law Tip: Some investors will add additional parameters around drag-along, for example, that drag-along rights are triggered only if the sale price is at least 3x (or some other multiple) of the valuation the investor invested. It is best to try to avoid those parameters where possible.

10.  Exclusivity Provisions (No-Shopping)

Exclusivity provisions prevent the startup from talking to other investors for a set period (usually while the interested investor conducts due diligence and the parties negotiate the long-form document). As a founder, you want to put a reasonable window without locking yourself into a too-long period. It would be prudent to consider your current runway and burn rate, and factor in the possibility that the deal could collapse and that you may need to return to the market.

11.  Confidentiality

Confidentiality, naturally, is another legally binding provision that is essential to be included to protect founders. A well-drafted confidentiality provision will provide mutual protection for both parties, continue beyond execution, and may even outline the circumstances under which confidentiality is breached. 

12.  Costs

Typically, each party cover their own costs of the agreement, and this should be drafted into the term sheet so there can be no claims for expenses by either party. Some venture capital firms (particularly overseas ones) require founders to pay for the firm’s legal fees. 

UX Law Tip: If a VC firm insists on the payment of legal fees, you should at least try to negotiate a reasonable cap on those fees, and no payment if the VC voluntarily withdraws. 

Common Traps for Founders

Trap 1: Misunderstanding Dilution

Founders often underestimate how much equity they’re giving up, especially when factoring in ESOPs and multiple rounds of financing. Use a detailed cap table and run scenarios for future rounds and exit values to avoid giving away too much equity.

Example: Let’s say you raise $1 million at a $4 million pre-money valuation with a 10% ESOP carved out post-money. You might think you’re giving up 20%, but after adjusting for the ESOP, your actual dilution is closer to 27%.

UX Law Tip: Build a detailed cap table model that includes future funding rounds, ESOP expansions, and different exit scenarios. Tools like Cake Equity or Carta are helpful, or work with your accountant or lawyer to simulate cap table outcomes. We can also provide you with cap table tools. 

Trap 2: Agreeing to Overly Investor-Favourable Terms

Some term sheets include investor-friendly provisions such as high liquidation multiples, veto rights over basic decisions, or significant board control, even for modest investments. These can hinder the business later. These can reduce founder flexibility, deter future investors, or lock the company into an unfavourable governance structure.

Remember that most of the templates available online were prepared for investors, not founders (even if they claim to be founder-friendly). You can usually get much better terms than those in the online documents.

UX Law Tip: Know what you can get away with! Do not volunteer preferential rights, as many investors will accept ordinary shares. Push back on terms that are excessive or “off-market” for your stage, and ensure you have a clear understanding of the rights you are giving investors. Do not accept terms as ‘market’ simply because they exist in a document you downloaded online.

Trap 3: Not Planning for Future Rounds

Some founders structure their first raise without thinking about future ones. Terms that are too generous to early investors – such as full anti-dilution or aggressive preferences – can make later rounds unappealing to new investors.

Example: A seed investor with a complete anti-dilution clause might get a massive repricing in a down round, heavily diluting founders and demotivating future funders. 

UX Law Tip: Negotiate terms that leave room for follow-on investment and are seen as fair by later-stage investors. Make sure your early round doesn’t block your Series A. 

Trap 4: Rushing Into a Deal and Signing Without Proper Advice

A common mistake is signing the first term sheet an investor offers out of excitement or urgency. But the wrong terms, even in a non-binding document, can set your company on a difficult path.

UX Law Tip: Always take the time to review with a trusted legal and financial advisor. A well-negotiated term sheet builds trust, sets the tone for your investor relationship, and protects your business. The legal fees you may pay for peace of mind pale in comparison to the worst-case scenario horror stories of investors muscling into your business and tearing things apart. 

Negotiation Tips for Founders

1. Do Your Homework

Understand what’s “market standard” for deals at your stage in Australia. Speak to people in your network and ask them what they managed to negotiate. Speak to lawyers, and read this guide carefully!

2. Get Legal Help Early

Even though most of a term sheet is non-binding, once signed, it heavily influences your Shareholders’ Agreement and other final documents. A startup-focused lawyer can help you spot red flags and negotiate better outcomes. 

3. Know Your Bottom Lines

Before you negotiate, get clear on what matters most to you:

• Minimum acceptable valuation
• Your role and board representation
• How much control are you comfortable sharing
• The amount of dilution to your equity stake you can accept

Knowing this upfront prevents rushed or emotional decisions. 

4. Negotiate With Confidence

Investors expect founders to negotiate agreements. Even first-time founders can respectfully challenge terms. Please don’t feel pressure to agree on the spot; most VCs prefer thoughtful partners who understand their own boundaries. Be firm on key issues but open to compromise where it makes sense. 

5. Build a Cap Table Model

This is your most powerful tool in any negotiation. A well-built cap table lets you:

• Model ownership at each round
• Visualise different exit waterfalls
• Show how terms like liquidation preferences affect outcomes

It helps you argue from data, not guesswork. Use tools like Cake Equity, Carta, or a good spreadsheet model to test different funding and exit scenarios. This helps you see the real-world impact of preferences and dilution. 

Special Considerations in Australia

Raising capital in Australia comes with its own regulatory nuances. Make sure your term sheet and final documents account for:

• ASIC compliance: Unless you’re willing to issue a prospectus (hint: you’re not), your capital raise needs to qualify under one of the disclosure exemptions in the Corporations Act 2001 (most commonly, you will be relying on the 20/12 rule or the sophisticated investors exemption).
• FIRB approval: If your investor is a foreign person, you may need approval from the Foreign Investment Review Board before the investment is completed.
• Tax and ESOP: If you’re offering equity to employees, make sure your ESOP complies with Australian tax rules, especially after the 2022 ESS reforms.

 Final Thoughts 

Term sheets may seem short and informal, but they’re one of the most important documents a startup founder will sign. They shape your company’s ownership, control, and future funding options. Take the time to understand them, get good advice, and negotiate terms that support your long-term success.

If you have any questions about term sheets or capital raises or need any advice on business matters, get in touch (Schedule free consultation) with our experienced lawyers. Reach out to us today for practical, founder-friendly legal advice.

The post Term Sheets Explained: Key Clauses, Common Traps, and Negotiation Tips for Startups appeared first on UX Law.

Warranties are essentially legal promises – guarantees given by the seller to the buyer about key business elements. Whilst they are unsurprisingly an indispensable requirement for the buyer, the disclosure of warranties serves an important function in allocating risk between parties. This guide will explore the nature of warranties in mergers and acquisitions, common types of warranties and their potential limitations, and the importance of proper drafting to protect the interests of both parties to the transaction.

What Are Warranties in Merger and Acquisition Transactions?

Warranties are legally binding, contractual statements of fact, given to the buyer about the finances, condition, operations and affairs of the business being sold (the target business). These assurances are designed to ensure transparency in the deal and give the buyer a clear understanding of what they are purchasing. If a warranty is found to be untrue or misleading, the buyer has legal rights under contract law to claim compensation.

Why Are Warranties Necessary?

If you are the buyer, the importance of warranties is clear. Buying a target company without a legally enforceable promise from the seller about its actual operations is dangerous and downright silly. But warranties serve multiple purposes in corporate restructuring and acquisition transactions, and can provide protection for the seller as well.

Risk Allocation: By providing warranties, the seller assumes responsibility for specific elements of the business. They represent to the buyer that the content of the warranties is true and therefore assume the risk in the event they are breached. Without them, the buyer would be on the hook for everything, so they provide essential assurances against unknown liabilities. Likewise, for the seller, the warranties provide a clear scope of their obligations under the deal.

Due Diligence: Before entering the transaction, both parties must complete thorough due diligence. The seller wants to ensure the buyer is ready and able to purchase, while the buyer wants to confirm that the target is as it appears. Warranties, therefore, provide a crucial complement to due diligence. Buyers rely on warranties to confirm the accuracy of information uncovered during this process, as well as to “fill in the gaps” of what might be missing or could not be ascertained throughout the due diligence process.

Transparency and Disclosure: Because of the way warranties operate, the seller is motivated and, in many respects, required to communicate known issues and relevant factors to the buyer to avoid potential responsibility for breaches down the line. Therefore they also promote full and frank disclosure of all material elements.

Common Seller Warranties in Mergers and Acquisitions 

The specific warranties that are included or excluded in a merger or acquisition will naturally vary depending on the nature and size of the target business, bargaining power of the parties and the transaction itself, but there are some common provisions found across most transactions.

Title and Authority

Title warranties are crucial in mergers & acquisitions as they confirm that the seller possesses the legal and beneficial interest in the shares or assets being transferred. These warranties ensure they have the right to sell the business without any third-party claims or interests over the shares or their assets, thereby safeguarding the buyer’s interests and providing clarity and security in the transaction.

When saying that the seller has the authority to enter into a transaction, this means that there are no legal or regulatory issues preventing the sale. For example, the seller usually warrants that it has obtained requisite consent from shareholders, the sale is in accordance with the company’s constitution, and there are no relevant laws which may prohibit the business being sold.

These are fundamental warranties, because if they are breached, the entire transaction may be jeopardised.

Solvency, Finances and Accounts

In most cases, a seller is expected to warrant that the business being sold is solvent at the time of the sale—that is, it is able to pay its debts as they fall due and its liabilities do not exceed its assets (and that there is no outside controller appointed, such as administrator, liquidator, or receiver). These warranties are critical because they protect the buyer from inheriting a business that is financially distressed or on the verge of insolvency, which could significantly undermine the value of the acquisition and expose the buyer to unexpected issues.

The seller is usually required to provide its last set of annual accounts (audited, if available), as well as the management accounts for a few months leading up to completion, in order to give an accurate overview of the business’ working capital. Accounts warranties assure the buyer that the seller has prepared all relevant accounts in accordance with accounting standards, and any applicable laws, and that the accounts give a fair, accurate and reasonable view of the actual financial position of the business being acquired (including divulging all liabilities).

Assets

In corporate transactions, buyers typically require warranties confirming that the target business owns or validly uses all assets necessary to operate its business. This includes assurances of good and marketable title, that assets are in good working order, and free from undisclosed third-party interests. Buyers also seek confirmation that the assets are sufficient to continue running the business as currently conducted. These cover both tangible assets—like equipment, inventory, vehicles, and property—and intangible assets such as IP, licences, domain names, and goodwill. Depending on the business, additional warranties may address specific asset types like data, tech infrastructure, or customer databases.

Contracts

Contract warranties typically require disclosure of all material contracts to which the target company is a party and to warrant that those contracts are valid, binding, in full force and effect, and not in default. The buyer relies on these warranties to assess the commercial obligations and revenue streams of the business, as well as any concerns of termination, breach, or liability. They may cover customer and supplier agreements, leases, distribution arrangements, and joint ventures, and often exclude contracts that are immaterial in value or strategic importance. A breach of this warranty could expose the seller to claims if, for example, a key contract had been terminated, was non-transferable, or contained a change of control clause that had not been flagged.

External Debts

These relate to the financial obligations of the target company, such as loans, credit facilities, promissory notes, and other forms of borrowing or third-party debt. These warranties usually require the seller to confirm that all such debts are accurately divulged, that the target is in compliance with the terms of its financing arrangements, and that there are no undisclosed guarantees, security interests, or defaults. Buyers rely on these warranties to understand the financial exposure of the business and to ensure there are no surprise obligations that could affect valuation or post-completion operations.

Litigation and Disputes

The seller usually warrants that the business is not party to any litigation or legal proceedings, formal dispute resolution processes (such as mediation and arbitration), disputes with former employees, or any governmental, police or other investigations.

Compliance

These warranties confirm that the business complies with all relevant laws and regulations of the relevant jurisdiction in which it operates, as well as in accordance with any special laws or rules relating to the industry of that business or any licences and authorisations the business is subject to. These include, but are not limited to, employment, health and safety, environmental protection, disclosure to reporting bodies, tax, counterterrorism and anti-money laundering. Non-compliance may lead to regulatory fines or legal actions against the buyer down the line, so it is essential that the warranties protect their interests in this regard.

Key Warranty Limitations in Merger & Acquisition Agreements

Warranties will be drafted with certain qualifications or limitations in place to reasonably protect the seller’s position. These will be considered below:

Time Limitations

Warranties typically include a set timeframe during which the buyer can bring a claim for a breach. General warranties (such as those relating to employees and assets) usually survive for 12-24 months post-completion of the transaction under most circumstances. Some warranties will last much longer. For instance, if any are given in relation to the tax status of the business, these will typically last 5-7 years (in line with standard periods under taxation laws).

Sometimes, certain liabilities may be indefinite. These can be for fundamental warranties, such as title and authority as described above.

Where a time limitation exists, the buyer will be unable to bring a claim once the relevant warranty period expires.

Liability Cap

A liability cap limits the vendor’s maximum exposure for breach of warranties, giving them certainty over the extent of their exposure post-completion. It is usually expressed as a percentage of the purchase price—commonly 50% to 100%, depending on the type (with a lower cap for general warranties and a higher or even uncapped liability for fundamental warranties such as title, ownership of shares, or capacity). The cap does not typically apply to claims that result from fraud or wilful misconduct, which are often excluded from all limitations.

Liability Minimums (Also known as “De Minimis” and “Basket”)

To avoid the disclosing party being exposed to minor or trivial warranty claims, agreements often include minimum thresholds before liability arises—commonly referred to as de minimis and basket provisions. The de minimis sets a threshold for individual claims, meaning no single claim below this value can be brought. The basket (also called an aggregate threshold) sets a cumulative minimum—where the discloser is not liable for warranty breaches until total claims exceed a set amount, usually a percentage of the purchase price.

Baskets can be structured as “tipping” (once the threshold is exceeded, the seller is liable for the full amount of all claims) or “deductible” (the seller is liable only for the excess over the basket threshold). These provisions are intended to strike a balance between protecting the buyer from material losses and shielding the selling party from nuisance-level claims.

Materiality Qualifications

A common qualification on warranties in transaction documents is materiality, which limits the liability of the seller only to those that reach the threshold of material or significant breaches.

For instance, the seller may include a warranty to the effect of: “There are no material claims pending against the Company.” Inclusion of the word “material” protects the seller against claims brought by the buyer for minuscule or insignificant financial claims. Of course, the buyer will naturally seek to have such wording struck out – so both parties should expect much negotiation on this issue. The exact threshold of what constitutes “material” is also a subject of debate, and sometimes parties will insert a specific threshold (e.g., $150,000) to achieve clarity.

Knowledge Qualifications

Another common qualification seen in warranties is that the seller will only be liable for breaches that it was actually aware of.

For example, A seller has given a warranty that no customers have raised a complaint with their products in the last two years. Unbeknownst to them, a customer has recently raised a complaint with their account manager. It just hasn’t filtered through to the business owner yet. If the warranty is not qualified by knowledge, then the seller will be liable for a breach. But if it is qualified by knowledge, the seller will not be liable.

Knowledge qualifications are more common for larger businesses where the sellers are no longer in a position to know every little detail of the company. They are also more common for more minor or operational matters as opposed to the fundamental warranties (such as title and authority warranties, warranties about external debt or accounting etc).

For instance, it would not make sense to qualify a warranty that the seller owns its shares in the business – the buyer will expect absolute clarity on this issue, without any qualification.

Disclosure

Crucially, the seller can limit their liability under the warranties by disclosing all known exceptions to the warranties. Disclosure is affected formally – usually through a specific disclosure letter with references to which warranties a disclosure relates to, and sometimes with more general disclosures (which may include the entire contents of the virtual data room used during buyer examination, as well as public registers).

Contracts often require a matter to be “Fairly Disclosed” in order to actually exempt the seller from responsibility. “Fairly disclosed” generally means that a matter has been clearly and adequately communicated to the buyer in a way that allows them to understand the nature and scope of the issue. This forces the seller to make a proper disclosure, as opposed to burying a vague reference to the issue in some remote corner of the data room.

The seller must prepare accurate and thorough disclosures, which the buyer must review with a keen eye to be aware of all relevant red flags associated with the business. The buyer must also understand that, once finalised, they cannot bring action for any issues notified to them in advance.

Warranties in M&A Key Takeaways

Warranties are an indispensable and highly negotiated aspect of the corporate acquisition process. They serve a dual purpose: providing a safety net for buyers and offering a structured risk allocation framework with potential limits through disclosure for sellers.

Given the complexity of these provisions, seeking legal advice from experienced merger and acquisition lawyers is crucial. They can assist in drafting warranties that accurately reflect the target company’s status, the transaction size, and align with commercial realities, thereby protecting your interests long after the deal closes.

Whether you are considering buying or selling a business, the team at UX Law are highly experienced and accredited for their diligence, thoroughness and commercial flexibility in M&A transactions. We have successfully navigated complex national and international transactions, acting for both buyer and seller, whether it is a single company or a large group, and have a wealth of experience in navigating the complex regulatory and legal provisions relating to warranties and disclosure. If you have any questions about mergers & acquisitions or need any advice on business matters, get in touch with our experienced lawyers.

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A “seed round” is an early-stage fundraising round in which startups seek initial external funding to support product development, market entry, and team expansion. Typically, seed rounds are smaller than later funding rounds (think Series A, B, and C) but larger than the pre-seed stage (where a startup is usually at the idea or concept stage). These rounds typically raise between $100,000 and $2 million, though this can vary widely by industry and business needs. Seed funding usually comes from angel investors, early-stage venture capital funds, or even friends and family who believe in your vision.

Seed rounds are typically raised by startups that have progressed beyond the “idea stage,” possessing at least an early version of their product or service, initial traction, and a scaling plan, and are seeking seed capital to grow the business. If you’re a founder with a minimum viable product (MVP) and initial customer feedback, or you have participated in an accelerator program and received positive indications from investors, now might be the perfect time to explore your first funding round to propel your venture forward. 

Step 1. Incorporate Your Startup

This might seem a bit obvious to some, but the first step in a seed round, and any area of startup funding, is always to ensure your business is formally structured as a company. Investors expect to invest in a business entity, not an individual or unincorporated venture, minimising investor risk. Incorporation also provides additional clarity around ownership, authority and limited liability protection. Some key incorporation points:

• In Australia, this means registering a proprietary limited company (Pty Ltd) with ASIC. You can do this by engaging a professional, such as a law firm or an accountant, or by utilising one of the numerous online services that offer this option.
• You can either engage a law firm to prepare a company constitution that’s tailored to your needs (for instance, you may have different share classes with different rights attached) or you can adopt the template/standard Replaceable Rules under the Corporations Act 2001 (Cth). 
• Appoint all directors and ensure you have a registered office and company address.
• Obtain an Australian Business Number (ABN) and consider registering for GST if your turnover exceeds the relevant threshold.
  

Step 2. Create and Maintain an Accurate Capitalisation Table

A clear and accurate capitalisation table (cap table) is a foundational document for any startup trying to raise capital and be investor-ready. It outlines the company’s ownership structure and is one of the first documents that prospective investors (whether individuals or venture capital funds) will scrutinise when considering a seed investment.

A well-structured cap table will do the following.

• List all issued shares, detailing the type (e.g. ordinary, preference), number, issue price, and to whom they were issued — including founders, early hires, angel investors, and advisors.
• Reflect any convertible instruments, such as SAFE notes, convertible notes, or warrants, including the terms under which they convert, any valuation caps, discounts, or triggers.
• Include an option pool, both the current allocation and any proposed increase (especially relevant as many seed investors will require a pre-money expanded pool).
• Model post-money ownership scenarios, showing the dilution impact of new investment rounds, conversion of SAFEs/notes, and complete option pool utilisation.

Importantly, your cap table should be

• Kept up to date: Any changes in equity (e.g. new shares issued, options granted, SAFEs executed) must be reflected promptly.
• Dynamic and scenario-based: Utilise a spreadsheet or cap table management software (e.g., Cake, Carta, Pulley) that enables scenario modelling, including proposed raise amounts and investor ownership targets.
• Tied to legal documents: Each entry in your cap table must be backed by legally executed documents (e.g. share subscription agreements, board approvals, option deeds).

Why this matters: Inaccurate or incomplete cap tables raise red flags. Investors want to know precisely who owns what, how much they’ll be diluted, and whether there are any hidden liabilities (e.g. convertible notes stacking). A messy cap table suggests a lack of financial discipline or potential future disputes. It is also essential that your cap table is in order so you are ready for the next round or funding stage, such as a Series A, should your startup pursue it in the future. Engaging a lawyer early to help prepare a strong capital at the seed stage will save your business valuable time and money in the future.

Step 3. Secure Intellectual Property (IP) Ownership

In most startups, intellectual property is often the most valuable and sometimes the only asset. Investors are backing your ability to commercialise your product, brand, or technology, and that means that before funding, they want confidence that your company, not individuals, owns the IP. Whether it’s your brand, product design, or proprietary technology, ensuring your company owns all IP is critical.

To secure and maintain IP ownership:

Execute IP Assignment Deeds

Any founders, employees, or contractors who have created (or will create) IP must assign all rights to the company before beginning fundraising. Employment agreements or consultancy agreements should include IP assignment clauses. Still, it is best practice to execute a separate IP Assignment Deed, especially for work done before the company was incorporated or before contracts were signed, to avoid future ownership disputes.

Register key IP rights.

• Trademarks: Register business names, logos, and product names with IP Australia. Investors don’t expect you to have completed the process by the seed round, but they will want to see that applications are filed.
• Patents: If your business relies on innovative technologies, software, or processes, consult a patent attorney early. Even a provisional patent application can demonstrate to investors that you’re serious about protecting your innovation.
• Domain names and social media handles: These form part of your brand IP. Ensure they are registered in the company’s name, not a founder’s.
• Review open-source use: If your tech stack includes open-source code, ensure any use complies with licensing terms and does not inadvertently expose your proprietary code to public licensing requirements (especially under restrictive licences like the GPL).
• Non-Disclosure Agreements (NDAs): While less valuable once you’re publicly fundraising, NDAs should be used during early-stage technical discussions with contractors, developers, or collaborators to protect sensitive IP in development.

For a more detailed analysis of protecting intellectual property for startups and small businesses, see our dos and don’ts of intellectual property here.

Step 4. Implement a Shareholders Agreement

Early-stage companies often encounter difficulties not because the business fails, but because the relationship between founders breaks down. A Shareholders Agreement sets the groundwork for governance, equity, and decision-making from the start, ideally before investors come on board and provide financing.

Shareholders’ agreements should include provisions relating to:

• Roles, responsibilities, and expectations: Clearly define who is responsible for what — including the CEO, CTO, COO, etc. This avoids misunderstandings about leadership, operational control, and strategic direction. Formalising these responsibilities now prevents awkward, damaging disputes later.
• Equity vesting: One of the most important protective mechanisms. Even if shares are issued upfront, vesting provisions ensure that founders “earn” their equity over time (typically 3–4 years, sometimes with a 12-month cliff). This protects the company (and future investors) if a founder walks away early. Of course, if you are a sole founder, you probably wouldn’t want to impose this on yourself unless an investor forces you to!
• Exit provisions: Spell out what happens if a shareholder wants to leave or needs to be removed. Will the company or other shareholders have the right to buy back their shares? At what price? These “shareholder departure” clauses avoid messy, drawn-out negotiations later.
• Dispute resolution: Agree on a process for resolving deadlocks — e.g. mediation, arbitration, or third-party tie-breaker. Founders are often close friends or colleagues, but disputes are common among them. Having a mechanism in place keeps the business running smoothly.
• Decision-making and reserved matters: Clarify which decisions can be made by individual founders (e.g., day-to-day operations) and which require unanimous or majority consent from all founders (e.g., selling the business, hiring key personnel, changing the company’s structure).

Importance: Investors want to see that the founding team is aligned and that internal disputes won’t derail the company before the fundraising process begins. A Founders’ Agreement indicates alignment, but also protection, for the company in the event of disputes.

Step 5. Review Key Contracts and Employment Agreements

As part of the seed round due diligence, investors will want to understand the backbone of your business operations. They’ll be looking to confirm that your relationships with founders, staff, suppliers, contractors, and customers are well-documented, enforceable and protect the company’s interests.

Ensure you have:

Employment Agreements

• All full-time and part-time employees should have written employment contracts.
• These must include clear job descriptions, salary or equity entitlements, confidentiality obligations, and, most importantly, IP assignment clauses that ensure anything they create belongs to the company.

Consider also including non-solicitation clauses, especially for senior staff, to prevent talent poaching in the event of someone leaving.

Contractor Agreements

• Independent contractors and freelancers should not be treated the same as employees — use tailored agreements that define their scope of work, deliverables, fees, and, importantly, IP ownership.
• If you’ve relied on offshore developers or agencies, confirm they’ve assigned any code or assets they’ve created.

Customer and Supplier Contracts

• Review all key contracts to ensure there are no unfavourable clauses (e.g. exclusivity, aggressive termination rights, automatic renewals, or hidden liabilities).
• For SaaS or tech startups, investors will want to see evidence of product-market fit — even simple customer agreements, service terms, or pilots can help show commercial traction.
• Confidentiality Agreements (NDAs)
• While not always necessary for fundraising, it’s good hygiene to use NDAs when disclosing sensitive information to strategic partners, early hires, or potential acquirers.
• NDAs signal that your company takes IP protection and data security seriously — both are big investor priorities.

Investors want to see that your business has solid foundations with the right agreements in place before providing funding, so be as thorough as possible! 

Step 6. Check Compliance and Regulatory Obligations

Having a compelling product or strong traction is not enough — sophisticated investors (such as venture capitalists) want to know that your business is legally compliant and operationally sound. Failing to comply with legal and regulatory obligations can expose your company to fines, reputational damage, or future deal blockages. To that end, review your compliance and regulatory requirements thoroughly (including industry-specific regulations), consider:

The Corporations Act 2001 contains many corporate governance and reporting requirements, as well as rules governing how to raise capital.

Industry-specific regulations (e.g., fintech and medtech, where you operate a SaaS platform) may fall under the Privacy Act, GDPR, and other privacy laws.

Employment law compliance – including the Fair Work Act 2009 (Cth).

Step 7. Prepare a Data Room

Once you begin engaging with investors, especially institutional ones or venture capitalists, they will request access to a data room. In this secure online repository, they can review your startup’s key documentation as part of their due diligence process.

An adequate data room should be well-organised and easy to navigate:

• Use clear folder structures (e.g. Corporate, Financial, IP, Employment, Commercial Agreements).
• Use descriptive, consistent file names (e.g. “Shareholders Agreement – Executed.pdf” instead of “Doc123.pdf”).
• Data rooms may be divided based on categories of documents, for instance:
• Corporate documents (shareholders’ agreement, constitution, ASIC registration and incorporation documents);
• Capitalisation/fundraising (current and historical cap tables and member registers, SAFE/convertible note documents;
• Intellectual property (any TM applications/certificates/registrations, IP assignment deeds, software license agreements); is your company receiving or using any other company’s IP?);
• Commercial and operational (customer and supplier agreements, stock lists depending on your industry);
• Privacy and security (Privacy policy, terms of use, any NDAs if relevant);
• Employment (employment contracts for key staff, contractors and ESOPs if relevant)
• Financial (profit and loss statements, balance sheets, bank account statements and historical cash flow – any other documentation the investor might reasonably request).
• Tax

Security and data protection are essential for a data room. One way this can be protected is by asking the investors to give you a list of all interested parties and their emails, and you can limit access by password-protecting the data room or only allowing ‘invited participants’ to access.

Step 8. Draft a Term Sheet with Investors

Once you’re in serious conversations with investors for the seed round, a term sheet becomes a crucial tool for aligning expectations and setting the investment framework. Although usually non-binding (except for select provisions, such as exclusivity and confidentiality), it serves as the commercial “handshake” before lawyers are brought in to draft the full, legally binding documents.

A well-drafted term sheet should cover:

• Investment amount and round valuation (whether it is a pre- or post-valuation);
• Key investor rights (information rights, pre-emptive rights, tag/drag along rights, consent rights);
• Board representation (where an investor requires being appointed as a director);
• Share rights (where investors ask for preference shares with special rights, such as liquidation preferences or conversion rights);
• Deal timeline;
• Conditions for investment; and
• Protections against dilution, if any.

Step 9. Prepare for Due Diligence Before Funding

Investors will conduct thorough due diligence before committing to financing. Be prepared to answer questions about every aspect of your business. Consider the following:

• Be transparent—highlight both strengths and potential risks honestly;
• Address documentation gaps or compliance issues proactively.

Demonstrating a strong governance framework and transparent operations can instil confidence in investors.

Step 10. Finalise Investment Documents and Close the Seed Round

After successful due diligence and agreement on the term sheet, the final stage is to formalise the seed fund through binding documents, update your corporate records, and issue the shares.

Key documents include:

Subscription Agreement – setting out the terms of the investment, including subscription price, number of shares to be issued, price per share (based on the company’s valuation), conditions precedent (e.g. IP assignments, corporate resolutions), and completion mechanics.

Shareholders Agreement (or Deed of Accession) – the new investor(s) should be added to the existing shareholders agreement via a deed of accession.

‘Housekeeping’ company-secretarial documents, such as:

• ASIC Form 484 (lodged with ASIC for an issue of new shares and directors, if applicable);
• Board resolutions approving the transaction;
• Updated share register; and
• Share certificates for each investor.
  

Conclusion

Raising a seed round is one of the most exciting and vital milestones in a startup’s journey. However, it’s not just about pitching the vision — it’s about demonstrating to investors that you have the legal, operational, and structural foundations to turn it into a thriving business. If done properly, this will be the first priced round of many for your startup, with Series A, B, and C to hopefully follow.

By working through the steps in this article, you’re doing more than just ticking boxes — you’re sending a strong message that your startup is investor-ready, risk-aware, and built to scale for the next round of funding.

At UX Law, we’ve helped countless startups and founders navigate their seed rounds and grow their businesses. Whether you’re preparing your cap table, reviewing your IP ownership, or negotiating investor terms, our experienced team is here to guide you through the process.

If your startup is preparing for a seed round, you have questions about seed rounds, or need advice on other business matters, get in touch with our experienced lawyers at UX Law today. (Schedule a free consultation) We’d love to help you lay the foundations that support your next stage of growth.

The post Preparing for a Seed Round: Legal Checklist for Founders appeared first on UX Law.

Understanding what legal documents you will need is essential for any type of business, whether you’re establishing a limited liability company or another legal entity. This article will outline 7 essential legal documents every Australian startup should have, explaining what they are and why they are vital for your company’s growth.

Introduction – Legal Documents for Startups

The Risks of Inadequate Legal Preparation

Many startups and small businesses launch without comprehensive legal documents, often due to the perceived upfront costs of legal services. This approach can create significant legal challenges that could have been avoided with proper preparation and planning. Downloading free legal templates might seem like a cost-effective solution, but it can create more risks than benefits. It’s like installing parts into your car that haven’t been safety tested, or which are intended for a different model car altogether, and can cause irreparable damage. When you start your business, ensuring solid legal documentation is in place is critical for mitigating risks and protecting your valuable business assets. Legal experts consistently emphasise that inadequate legal preparation can cost significantly more time and resources in the long run than investing in proper documentation from the beginning.

Why Custom Legal Documents Trump Templates for Startups

While ready-to-go templates may appear cost-effective initially, startups should invest in individually prepared legal documents tailored to their specific business needs and circumstances. Generic templates often fail to address the unique legal structure, business type, and operational requirements of your particular venture, potentially creating legal vulnerabilities rather than protection.

Each startup operates differently—whether you’re a tech company protecting trade secrets, a service-based business with complex contractor relationships, or a product company with specific intellectual property needs—and your legal documents must reflect these distinctions. Legal experts emphasise that templates cannot account for your specific industry regulations, the interests of both founders, your chosen business entity type, or the particular legal challenges your startup may face as it grows.

Furthermore, templates often contain outdated clauses, may not comply with current Australian law, or include provisions that are inappropriate for your business operations, potentially exposing you to unnecessary legal risks. Most importantly, most templates are written in favour of a specific party, and you may accidentally use a template that doesn’t favour you. Investing in professionally drafted, customised legal documents from qualified legal advisors ensures that your valuable business is properly protected, your legal and financial interests are safeguarded, and you have the solid foundation needed to attract investors and grow your business with confidence.

Understanding the Importance of Startup Legal Documents

Legal documents clearly define the terms and obligations of both your business and your clients. By establishing solid legal foundations early, you can safeguard against potential future legal issues and protect your startup company as it grows. These documents for your startup serve as the backbone of your business operations, helping to establish and maintain legal compliance. Demonstrating commitment to legality and professionalism through robust legal documents enhances your company’s reputation and attracts business and investment opportunities. Legal documents are a legal necessity for sustained growth, and legal advisors often recommend having these in place before you need to register your business or begin major operations.

Overview of the 7 Essential Legal Documents

As a startup company, having essential legal documents ready is crucial for a quick and legally compliant launch. These startup legal documents provide a framework for operations, protect intellectual property, including trade secrets, and govern relationships with founders, employees, and shareholders. This overview highlights the importance of each document from the 10 most important legal documents category, ensuring your startup has the necessary legal documents to grow its business successfully.

Shareholders’ Agreement

What it is

A shareholders’ agreement is a critical legal document that outlines the terms of the relationship between the startup founders (and investors, if applicable). This document serves as one of the key company formation and governing documents that define the terms among shareholders. It clarifies roles, responsibilities, equity distribution, decision-making processes, transfer of shares, what happens if a shareholder leaves the company, and what happens if the company needs to raise money. This agreement sets the foundation for a legally sound and harmonious business partnership among the startup founders and other shareholders, protecting the interests of all shareholders and establishing clear protocols for managing legal disputes.

Why your startup needs it

Your startup needs a shareholders’ agreement to prevent potential legal disputes down the line and to establish clear business operations protocols. For example, if a founder leaves the company, the agreement outlines how their equity and company shares are to be handled, thereby avoiding potential conflicts. It also establishes a clear process for decision-making and board resolution procedures, ensuring that the company can move forward efficiently. Having a solid agreement in place is a crucial legal necessity that helps manage legal complexities as your business expands.

Key Australian Considerations

In Australia, a shareholders’ agreement should be drafted with consideration for Australian company law and the specific legal structure of your business. Governance processes, such as director appointments, board meetings, shareholder meetings, and other mechanics, should be compliant with the Corporations Act 2001. The agreement should clearly outline how intellectual property created by the founders will be owned and managed by the company, including protection of trade secrets (otherwise, founders may be deemed to personally own the IP). Non-competes and other restraints should align with Court-accepted principles to ensure they are actually enforceable. The agreement should also comply with Australian contract law and ensure that all clauses are enforceable under Australian jurisdiction. Consulting with legal advisors or legal experts familiar with Australian startup law is advisable to ensure compliance and proper legal and financial protection.

Privacy Policy & Terms of Service (or Terms And Conditions)

What it is

A Privacy Policy and Terms of Service (or Terms of Use) are essential legal documents that are typically required by law for most businesses operating online. They both serve to protect parties involved in a service, but do so in different ways. It is crucial for SaaS companies and startups offering digital services. Specifically, these documents cover areas such as:

• A business’s collection, use, and protection of personal information are outlined in its Privacy Policy. This privacy policy is a legal document that must comply with data protection laws, such as the Australian Privacy Principles, and international regulations, including the General Data Protection Regulation, where applicable.
• The rules and guidelines that users must agree to to use a website, app, or service are detailed in the Terms of Service, which define the terms of engagement between your business and its users. It also helps clearly define what the business will not accept liability for, and what warranties are given to customers.

Why your startup needs it

Your startup needs a Privacy Policy to comply with data protection laws and maintain user trust as part of your business operations.  App stores typically do not list an app unless a compliant privacy policy is in place. ToS protect your business from legal claims by setting clear rules for user behaviour and defining key terms of service. They also help protect against users misusing or copying your product. Having these documents is essential for building a legally compliant and trustworthy brand that can effectively grow your business.

Key Australian Considerations

In Australia, Privacy Policies must comply with the Australian Privacy Principles (APPs) under the Privacy Act 1988. These principles govern how businesses handle personal information, including collection, use, storage, and disclosure. Terms of Service should also adhere to the Australian Consumer Law, ensuring fair and transparent terms for users. For businesses operating internationally, consideration of data protection laws, such as the General Data Protection Regulation, may also be necessary. Seeking legal advice ensures compliance with Australian-specific regulations and helps establish and maintain legal compliance.

Employment & Contractor Agreements

What it is

An employment agreement is a legally binding document outlining the terms and conditions of employment, essential for managing legal relationships with your workforce. Similar agreements exist for other working relationships, for example:

An independent contractor agreement defines the working arrangement between a startup and a contractor, clearly establishing the nature of the business relationship. The employment agreement outlines the responsibilities, compensation, and legal obligations of permanent staff. 

These agreements are important as they set the stage for a smooth relationship between the business and its staff, helping to avoid legal challenges and establish clear business operations protocols.

Why your startup needs it

Your startup needs employment agreements to clarify the rights and obligations of both the company and its staff, which becomes increasingly important as your business grows. For example, outlining leave entitlements, termination conditions, and confidentiality clauses is vital for protecting your valuable business information. Contractor agreements are equally important for clearly defining project scope, payment terms, and intellectual property ownership, thereby avoiding potential legal disputes. These startup legal documents help reduce future legal issues and enable you to manage legal and financial obligations effectively.

Key Australian Considerations

In Australia, employment agreements must comply with the Fair Work Act 2009, which sets minimum standards for employment conditions regardless of your business type. Contractor agreements should be carefully drafted to avoid the misclassification of employees, which can result in significant penalties and legal challenges. The legal structure of these relationships must be clearly defined to ensure compliance. Seeking legal advice from legal experts or an Australian startup lawyer is essential to ensure compliance with Australian legal requirements and best practices for managing legal relationships.

Non-Disclosure Agreement (NDA)

What it is

A Non-Disclosure Agreement (NDA), also referred to as a confidentiality agreement, is a legal document that safeguards confidential business information and trade secrets. It is an agreement that outlines the terms under which sensitive information can be shared with another party while ensuring it remains legally protected. The non-disclosure agreement prevents sensitive information, such as intellectual property and trade secrets, from being freely accessible, which is crucial for maintaining a competitive advantage in business operations.

Why your startup needs it

Your startup needs a Non-Disclosure Agreement to protect valuable intellectual property, trade secrets, and sensitive business information. For example, when discussing a new product with potential investors or partners, an NDA ensures that your ideas are legally protected and helps establish and maintain legal protection of your valuable business assets. It prevents the unauthorised use or disclosure of confidential business information, safeguarding your competitive advantage. Having a non-disclosure agreement in place provides a legal remedy and demonstrates professional business operations to potential partners and investors.

Key Australian Considerations For The Confidentiality Agreements

In Australia, NDAs are enforceable contracts, but they must be carefully drafted to ensure they are not overly broad or unreasonable under Australian law. The agreement should clearly define the terms that constitute confidential information and the scope of the restrictions, including the protection of trade secrets. Australian courts will consider the specific circumstances when enforcing an NDA, making proper drafting essential. Consulting with legal advisors or an Australian startup lawyer is crucial for drafting an enforceable non-disclosure agreement that effectively protects your valuable business information.

Intellectual Property (IP) Assignment Deed

What it is

An Intellectual Property (IP) Assignment Deed is a legal document that transfers the ownership of intellectual property rights from one party to another. This type of agreement outlines the key terms for transferring intellectual property, such as patents, trademarks, copyrights, and trade secrets, ensuring clear ownership. This legal document is crucial for startups offering technology services and collaborating with developers and designers, as it helps establish and maintain legal ownership of all assets created.

Why your startup needs it

Your startup needs an IP Assignment Deed to secure ownership of all intellectual property created for your business, including any trade secrets developed during the course of work. For example, if you hire a developer to create software, this agreement ensures that the intellectual property rights are transferred to your company, protecting your valuable business assets. This is essential for attracting investment and protecting your company’s assets as your business grows. This agreement ensures the security of your business information and provides legal and financial protection for your most valuable assets. Investors usually ask to see that these arrangements were put in place when evaluating startups for investment.

Key Australian Considerations

In Australia, IP Assignment Deeds must comply with Australian intellectual property law, including the Copyright Act 1968 and the Patents Act 1990. It’s crucial to clearly define the terms of the intellectual property being assigned and ensure the agreement is properly executed in accordance with the legal structure’s requirements. The agreement should address all forms of intellectual property, including trade secrets and proprietary information. Seeking advice from legal experts or an Australian startup lawyer is essential to ensure the transfer of ownership is legally sound and enforceable under Australian law.

Capitalisation Table (Cap Table)

What it is

A Capitalisation Table, often called a Cap Table, is a spreadsheet or legal document that summarises the ownership structure of a startup company. It outlines who owns what percentage of the company’s equity, including ordinary shares, preference shares, options, and notes, providing a clear picture of a company’s ownership distribution. The cap table is a crucial business tool for managing your startup’s financial and legal information, serving as one of the important documents for your startup’s legal and financial transparency.

Why your startup needs it

Your startup needs a Cap Table to manage equity distribution and attract potential investors, particularly as your business grows and requires additional funding. It helps founders track who owns what percentage of the company, which is vital when raising funds or making strategic decisions. For example, when seeking investment, investors will want to review your Cap Table to understand the company’s ownership structure and the history of share transfers. Investors demand legal transparency, and a well-maintained Cap Table demonstrates professional business operations, helping to establish and maintain clarity around ownership structures.

Key Australian Considerations

In Australia, Cap Tables should accurately reflect the company’s share register and comply with Australian company law and the legal structure requirements for your business type. It’s important to keep the Cap Table up-to-date as the company issues new company shares or grants options to employees, ensuring accuracy in all share transfer transactions. Maintaining an accurate Cap Table is essential for legal compliance and attracting future investment, as it provides the legal and financial transparency that investors and legal experts expect. You must seek legal advice from qualified legal advisors to ensure it’s accurate and complies with all legally required documentation standards.

Employee Share Option Plan (ESOP)

What it is

An Employee Share Option Plan (ESOP) is a scheme commonly used by Australian startups to reward, retain, and incentivise employees by granting them the right to acquire shares in the company at a future date. It is typically established through a suite of legal documents, including the Plan Rules (which set out the terms of the company’s share plan), a director’s resolution approving the Plan, individual Grant Agreements, and Option Certificates. ESOPs are a valuable way for early-stage startups to motivate employees to remain committed and loyal, rewarding them for the startup’s eventual success with more than just a salary.

Why your startup needs it

ESOPs are a key tool for startups for several reasons. Importantly, they align the interests of employees with those of the startup. When employees own a stake in the company, they are more likely to be motivated and committed to its success, resulting in increased productivity and lower turnover rates. Offering potential employees equity in the company is also a key way for startups to attract top-level talent in competitive and ruthless job markets. Overall, ESOPs can serve as a powerful tool to reward and motivate employees without requiring significant upfront cash outlay from the startup.

Key Australian Considerations

In Australia, startups need to consider several legal and tax-related regulations when establishing an ESOP. One key consideration for startups is ensuring that all requirements under the Income Tax Assessment Act for establishing an ESOP are complied with. There are base eligibility requirements (eg, the company must be less than 10 years old, it must have an annual turnover of less than $50 million, and its ‘net tangible assets’ must not exceed $50 million) as well as various documentary requirements (for example, there must be a prohibition against employees transferring their interests within the first 3 years, among other things). ESOPs are a powerful tool for cash-strapped startups, but they can be highly complex and require precise drafting to comply with the Corporations Act and ATO regulations. Therefore, it is crucial for any startup to consult a qualified lawyer before implementing these plans.

Conclusion

Summarising the Importance of Legal Documents

In summary, having robust legal documents is paramount for any Australian startup, whether you’re operating as a limited liability company or another legal entity. These legal documents protect your startup, prevent legal disputes, ensure compliance with Australian law, and help establish and maintain legal protection for your valuable business. These documents are crucial for startups of all sizes, regardless of business type. They will cover everything you need to get up and running quickly and legally, providing the foundation for sustainable business operations and protecting trade secrets, as well as other valuable business assets.

Next Steps for Startup Founders

To ensure your startup is legally sound and properly positioned for growth, the next step is to consult with experienced legal advisors or an Australian startup lawyer. They can provide tailored legal advice, draft necessary agreements, help you navigate the complexities of Australian law, and ensure you have all the legal documents you will need for your specific business type. Don’t rely on free legal templates alone; professional legal advice is an investment in your company’s future and will help you avoid legal challenges while saving time and resources in the long run.

Prioritising your startup’s legal health is not an expense, but a strategic investment in its long-term success. Managing legal compliance effectively from the outset helps protect your business, attract investment, and establish a resilient foundation by establishing these essential legal documents. Start today and safeguard your startup’s future by seeking professional legal advice and implementing solid legal solutions that will support your business as it grows and evolves.

At UX Law, we specialise in supporting startups and small businesses with their legal needs. We provide startups and entrepreneurs with practical legal solutions to protect and empower their businesses, helping them establish and maintain legal compliance while focusing on growing their valuable businesses. Reach out for a free consultation to learn more about how we can help you get your business up and running with all the necessary legal protections in place.

The post 7 Legal Documents Every Australian Startup Should Have (and Why) appeared first on UX Law.

The Changing State of Digital Identity in Australia

Adoption

In recent years, the adoption of digital identity solutions in Australia has accelerated. The transition from traditional, manual identity verification methods to automated, digital alternatives is well underway. This shift is driven by the need for more robust, secure and user-friendly identity verification processes.  Austrac reporting entities see the value in automated verification processes, as they both reduce user drop-off during onboarding and, at the same time, identify more fraudulent applications. 

AI

Technology is moving fast. The adoption of AI by both fraudsters and service providers is having two interconnected consequences. Manual verification and database-only checks are vulnerable to deepfake selfies and identity document images, especially when combined with real but stolen data. This is pushing a drive to reliance on automated solutions that can detect these deepfakes. And at the same time, service providers are using AI to train ever more robust identity solutions. 

A consequence of service providers’ use of AI is that sectors or companies that do not quickly adapt to new technologies (the Super sector, for example) find themselves even more of a target for fraudsters as other sectors tighten their defences. 

The DVS

One of the foundational elements of Australia’s digital identity infrastructure is the Document Verification Service (DVS), which allows organisations to verify identity documents against government records in real time. Recognising some limitations and inconsistencies in the DVS framework, the government has recently revamped its agreements with companies conducting the checks (known as ‘Business Users’ in DVS jargon) and with suppliers plugged into the DVS framework (known as ‘Gateway Services Providers’). These changes aim to enhance the reliability, security, and scalability of digital identity verification across sectors. 

A key change to the DVS agreements is an uplift in the consent requirements from consumers before a DVS check can be made. Much greater clarity and transparency are required before consumers are asked to consent to a DVS check of their data. 

It will be interesting to see whether this causes a shift in consumer behaviour, given the lack of trust in the government in certain circles of society. If consumers do not consent to either a biometric or DVS check, what is the fallback identity verification method? 

Regulatory Shifts Driving Change

One of the most significant catalysts for the expansion of digital identity use in Australia is the recent amendment of the Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) laws. These changes have greatly expanded the number of reporting entities, bringing a broader range of industries under the compliance umbrella, including estate agents, accountants and lawyers. 

As a result, the demand for reliable digital identity solutions has surged, prompting innovation and investment in the sector. We are seeing UX Law clients introducing innovative solutions to the market, including end-to-end AML platforms, reusable identity solutions and mechanisms for sharing verified identities between different reporting entities in the same transaction.

The Australian government has also commissioned a report into the current state of online age assurance techniques. The report is expected to cover over 40 different solutions from identity service providers and some solutions put forward by the large platforms, including Google, Meta and Snap. This report will be the first of its kind globally. The scale of this project and the investment made by the government in it underscore the importance placed on developing robust and inclusive identity verification methods, particularly for age-restricted services. The outcomes of this ambitious effort could shape the future standards for digital identity verification in Australia and globally.

Contradictory Regulatory Signals

However, the regulatory landscape is not uniformly progressive. While some agencies and the Commonwealth Government support the use of advanced digital verification methods, including biometrics, others are taking a more cautious approach. For example, the Australian Communications and Media Authority (ACMA) is currently conducting consultations proposing a reduced role for biometric technologies in identity verification. This conservative stance appears to contrast with ACMA’s simultaneous acceptance of biometrics in passkeys and identity wallets, reflecting a broader tension in policy direction.

Legislative Developments on the Horizon

The government has already signalled that we can expect laws preventing under-16s from using social media to be in force by the end of this year. Following the social media laws, it is reasonable to expect Australia to follow many US states, the UK and many European countries in requiring adult content (porn) sites to verify the age of their customers. 

Both laws will be further significant drivers in the widespread adoption of digital identity in Australia. 

The Future of Digital Identity: Trends and Possibilities

The DVS service, used by the majority of regulated entities to assist in verifying identity, is being expanded by the introduction of ‘FVS’ – a facial verification service. This will allow reporting entities to verify the consumer’s face against the government database, and the government will conduct the check using biometric verification. FVS is expected to help reduce fraud because merely possessing stolen data as a fraudster will not get you past an FVS check. 

One of the most pressing questions in the digital identity space is when government-issued digital IDs will be widely adopted by the private sector. The Commonwealth government’s myID has been used by millions of Australians to pay their taxes, and the state digital driver’s licences have also seen similar download levels. The recently passed Identity Verification Services Acts give governments the ability to allow the use of their solutions in both the private and public sectors.

Another promising trend is the development of reusable digital identity solutions. Projects like ConnectID and Yoti are pioneering efforts to create identities that can be used across multiple services and platforms. These solutions aim to reduce the burden on individuals who currently must verify their identity separately for each new service. In parallel, sector-specific approaches are emerging, such as verified data sharing among brokers and home loan providers. These models have the potential to enhance efficiency and reduce friction in high-stakes transactions.

Conclusion

Regulated sectors that require identity verification have adopted digital identity solutions with gusto across Australia. They understand the advantages of preventing fraud, enhancing user journeys, and making compliance easier. As more entities are required by regulations to verify identity or age, we can expect further adoption of digital identity in Australia. 

UX Law is working with the leading service providers of digital identity and AML solutions in Australia. Let us know how we can help advise your business. Contact us if you have a question about this article.

The post The current state of Digital Identity in Australia, and trends to look out for appeared first on UX Law.

UX Law is pleased to confirm its role in successfully advising IDVerse™ (formerly known as OCR Labs), a provider of AI-powered document authentication and fraud detection solutions, on its acquisition by LexisNexis^® Risk Solutions.

The acquisition, completed on 18 February 2025, brings IDVerse into the Business Services group of LexisNexis Risk Solutions. LexisNexis Risk Solutions, part of RELX, harnesses the power of data, sophisticated analytics platforms and technology solutions to provide insights that help businesses across multiple industries and governmental entities reduce risk and improve decisions to benefit people around the globe.

UX Law provided comprehensive legal counsel to IDVerse’s shareholders throughout the transaction process on a wide range of issues, including contract negotiations, due diligence, regulatory approvals, transaction documents and all necessary completion matters.

John Myers, CEO of IDVerse, commented on the deal, “Our shareholders are extremely pleased with the outcome of the transaction, and the team at UX Law served as a trusted advisor by providing outstanding legal support throughout the acquisition process. Their expertise, strategic guidance, and attention to detail were invaluable throughout the transaction. We couldn’t have asked for better support navigating this important milestone.”

This successful transaction underscores UX Law’s commitment to delivering high-quality legal services in mergers and acquisitions, helping clients maximise value and achieve their business objectives. The firm has a strong track record of advising on transactions across numerous industries, and this deal further demonstrates its dedication to delivering the best results for clients.

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This blog will look at how companies could be fined for breaches of unfair contract laws, privacy laws, and bribery laws. We will also explain how to avoid those potential fines. 

Unfair Contract Terms

A recent change in the law that introduced potential penalties for Australian companies is the expansion of the Unfair Contract Terms regime. 

The law, in essence, says that if your standard T&Cs are unfair and are used as the contract with a company with fewer than 100 staff, a court can remove any unfair terms from the contract. Further, courts have the power to fine you for including unfair terms if they choose to do so. Courts have wide discretion to determine the fine, but it can be up to $50 million. 

Given that the vast majority of companies in Australia have under 100 staff, it is extremely likely that you will contract with at least one ‘small’ company, and the Unfair Contract Terms regime will therefore apply to you.

The ACCC, the regulator tasked with enforcing the Unfair Contract Terms law, states that enforcement is one of its priorities for 2025. 

So what is an ‘unfair’ contract term? There is no definitive answer given, but typical examples are: (i) automatic renewal terms; (ii) one-sided indemnities; (iii) exclusion and limitation of all liability; and (iv) unilateral rights to amend the contract. It is any term of the contract that a court considers one-sided in the circumstances. If there are compelling commercial reasons or context that justify excluding a certain head of liability, then it may be arguable that it is not unfair. It is the blanket removal of one party’s legal responsibility that the courts and the ACCC will be particularly hard on.  

Companies should urgently assess their T&Cs and evaluate their fairness in light of this new law. 

Privacy breaches

In late 2024, the Commonwealth Privacy Act was amended. There were some substantive changes to the law in the 2024 amendments, but from the perspective of companies, the most important are the new powers and resources granted to the OAIC (the regulator). 

OAIC now has extended powers to investigate (including by entering and searching company premises) and an increased scope to ask for fines. This includes a new set of fines for administrative breaches of the law.  These administrative fines attract penalties of up to $330,000, so they should not be considered ‘mere’ administrative breaches.  Breaches include not having a privacy policy, not giving users the right to opt out of marketing or failure to adequately communicate to a user how they can opt out of marketing. 

It is expected that these wider powers and greater fines will lead to OAIC bringing more enforcement actions against non-compliant businesses. Historically, OAIC has had a small team and has been quite reactive, focusing on companies that have experienced data breaches. Going forward, we can expect OAIC to be proactive by actively seeking out non-compliance. 

You should conduct an honest privacy compliance audit that encompasses your privacy policy, your actual data processing and storage, and your marketing activities. It will be worth the effort, not least because if OAIC does come knocking, you can point to real efforts to address your practices. 

Bribery

The act of making or receiving bribes has unsurprisingly been illegal in Australia for a long time. But from September 2024, companies can now be responsible for bribes made anywhere in the world by anyone ‘connected’ to it – which means its contractual partners, agents and even its suppliers. This has significantly widened the scope of the law.  And a company can be fined up to $31 million or 3 times its annual turnover. 

Under the law today, your company commits a criminal offence if your supplier or agent bribes someone in any part of the world and you do not have ‘adequate procedures’ in place to stop your supplier or agent doing this. 

This is a significant increase in your potential liability under the bribery legislation. Examples:

• If you have agents selling your business in any part of the world where facilitation payments are common, your company could be prosecuted here in Australia unless you take steps to prevent them. 
• If your supplier bribes someone abroad to obtain the materials you need, your company can be prosecuted in Australia. 

These are known as ‘strict liability’ offences because, unless you can meet the defence of ‘adequate procedures’, your company could be fined when the bribe is made or received, even if you had no knowledge of the bribe, still less an actual corporate intention to bribe anyone.

The only defence you have is to prove to the court that your company had ‘adequate procedures’ in place. You should put in place all of the following to build up a decent defence in case anyone connected to you commits or accepts bribery:

• You need to pull together a risk assessment that identifies the risk of bribery committed by you or on your behalf, and sets out how to mitigate it. 
• Your contracts with suppliers, agents, partners, and staff should all state that they must not commit or receive any bribery or make any facilitation payments. 
• You need a policy, approved by the board, that sets out your anti-bribery position and is communicated to your staff, contractors, agents, and suppliers.
• Your board and senior leadership are expected to set the tone against bribery.
• Staff and contractors, and potentially partners, should receive anti-bribery training as regularly as you think is sensible. 

Key takeaways

Recent updates to Australian law have significantly increased the risk and severity of fines for companies concerning unfair contract terms, privacy breaches, and bribery. To avoid penalties of up to $50 million for unfair contracts, companies must urgently review their standard terms, especially those used with businesses that have fewer than 100 staff.

Breaches of the amended Privacy Act, including failing to have a policy or to provide an opt-out for marketing, can now attract administrative fines of up to $330,000, requiring proactive privacy compliance audits. For anti-bribery, a company can be fined up to $31 million or three times its annual turnover if anyone “connected” to it, including suppliers or agents globally, commits a bribe, unless the company can prove it had “adequate procedures” in place to prevent it.

UX Law can help you

UX Law is working with the leading service providers of digital identity and AML solutions in Australia. Contact us to receive help and advice on your business. 

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As you start to form your team and become a proper company, there are some key documents you should get right at this early stage. There are some very common errors made right at the beginning of a company’s journey that can be expensive to fix later.

Let’s have a look at four of the key docs.

Shareholders’ Agreement

Between founders, and also with family and friend investors, you will need a ‘prenup’ agreement. And any investors you bring into your business will bring their own expectations for the legal protections they should have. These agreed terms between the business’s owners are set out in a shareholders’ agreement.

What is a shareholders’ agreement?

The Company Constitution or Articles contain much of the nuts and bolts of how your company will operate legally, but it is the Shareholders’ Agreement that normally governs your legal relationship with founders, business partners, and investors.

In the shareholders’ agreement you will sign up to a lot of rules, but particularly: (i) rules on operating the business (eg any restrictions on shareholders and if any shareholders have special rights on voting or appointments); (ii) rules on how shares can be issued that will impact your control over the business (eg how and on what conditions the company can issue new shares for future fund raises and perhaps restrictions on the sale of shares); and (iii) what rights each shareholder has during an exit event (eg being forced to sell shares at a certain price (drag) or the right to force others to sell (tag)).

What to look out for?

New business partners, including investors, will understandably want protection on their investment of time, energy and money. You need to understand what restrictions there might be on your ability to run the business in the direction you want in the future, and how easy it will be to raise capital if you are no longer getting along with your business partners.

It is hard for founders because at this early stage, the investor may hold the cards, but if you hamstring yourself early on, then you could have to spend a lot of founder time and energy extracting the business from the deal. 

Between the founders, you need a fair mechanism in place if a founder wants to leave or if a dispute cannot be resolved.

Contractor Agreement

Early on, it is likely you will use contractors rather than staff, especially for software design and development. Contractors offer flexible manpower, bring expertise you do not have and cannot afford full-time, and will often deliver projects for a fixed cost.

What is a contractor’s agreement?

Simply a written agreement with your contractor on what they will do and for how much.

What to look out for?

IP that your employees create is automatically owned by the company which employs them, which is great. But the opposite is true for contractors: the contractor will own the IP unless the contractor agreement includes a strong clause that transfers (assigns, in legal speak) the IP to your company.

The issue is sometimes not spotted until an investor is doing their due diligence and they ask the company to fix it. And at that point, the contractor may know their rights and value, and it could be expensive to fix. This is more common than you might think.

This is also true for the founders. If there is no employment agreement with the founders, they may be acting as contractors to the company, and the IP they generate will belong to the founders, not the company. If the founders fall out, then it can be very, very expensive for the company to fix.

It is definitely worth the time to get the IP in the right place early on with bulletproof contractor agreements.

Privacy Policy

It is pretty likely you’ll use a lot of personal data to power your business. Either as part of the main service or at the very least in your CRM.

What is a privacy policy?

The Privacy Policy is a notice, not a contract, that explains how you use personal data and the rights your customers have. It is usually in the footer of your website or app, and you may flag it to your customers during onboarding or sign-up.

What to look out for

The Privacy Policy will govern how you may use your customers’ personal data. Think of it as a transparent and open promise to your customers.  If, later on down the line, you want to use the data in ways not described in your privacy policy, you may find you cannot legally process it in the new way. But your privacy policy needs to be reasonably precise, so you cannot just say you can use the data for anything. This is a tricky area. 

There are also a fair few points that need to be covered in your Privacy Policy to comply with the Australian Privacy Act, the EU/UK GDPR and various US state laws. It will be an administrative pain to have to re-write and re-send your privacy policy to all customers if you (or even worse a regulator) spot your error later on.

As with contractor agreements and the Terms of Use/T&Cs, your future investors will carefully review your Privacy Policy during due diligence.  The Australian regulator is becoming increasingly aggressive in its enforcement, and the compliant processing of data is a key risk for investors. 

T&Cs or Terms of Use

You obviously want to do business on your own terms rather than on your clients’ terms. It will put you in a better legal position if a dispute ever arises, and, on a practical level, you can align all your processes (e.g., billing timing, notices you might need to send to customers, and the data security promises you might make in contracts).

What are the terms and conditions?

The legal contract under which your company will do business with its customers. In an ideal world, all customers will sign up to your T&Cs, but that is often not the reality. If you are lucky enough to sell to big banks, telcos or large government departments, then they will insist you contract on their own standard agreements.

A good rule of thumb for an average SaaS business is that 80% – 90% of contracts will be on your standard T&Cs, 10% – 15% will be on your T&Cs with some amendments, and then the largest 5% or so of clients will insist on their own T&Cs, and you will have to make them work for your business.

What to look out for

There is not much point in having your lawyers draft you fantastic T&Cs that protect you to the nth degree but are not balanced. A pragmatic and commercial approach is needed in your T&Cs. Yes, they should address the key risks to your business, but not to the point that the terms become overly one-sided.

This is because:

• You will waste far too much time and resources arguing over your T&Cs if your customers read them and simply cannot sign them. As a small business, you will be accepting many of the changes your prospects suggest anyway, so you may as well shorten the sales cycle by making your T&Cs fairer in the first place.
• Under Australian consumer law, unfair terms can be struck out as voidable by the court. And you could even be fined for unfair terms. This law also applies to any standard term document you send to a company of under 100 staff, which is the majority of your customer base.

Please let us know if you would like some help with these key documents so that your business is in the best possible place.

Peter Violaris

peter@uxlaw.com.au

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If you’re looking for the best legal structure for a startup in Australia, an incorporated company will be the most advantageous in almost all circumstances. So, what is company incorporation? Let’s look at common business structures in Australia, what incorporation means in legal terms, and the types of obligations that come with it. 

Choosing the right type of business structure

Before you can move ahead, it’s essential to understand the business and legal structures in Australia. 

Firstly, there are three main types of business structure (and one bonus option):

1. Sole trader/sole proprietorship
   This is the most straightforward option for small business owners planning to operate as a one-person team. Paperwork is minimal, tax filings can be added to your personal return, and all you really need is an ABN and an optional registered business name. However, your liability and asset protection is practically nil, and scaling to a company size is not feasible or wise.
   
2. Partnership
   A partnership looks a lot like a sole proprietorship with the addition of a partnership agreement and the benefits of splitting costs with a partner. Liability is low, and you automatically become responsible for your business partner’s actions, which is less than ideal. Again, this is not viable for a large-scale company – or a business with big aspirations.
   
3. Incorporated company
   Incorporating a company provides the highest asset and liability protection, brings significant tax benefits for accumulating income, and opens the door to further possibilities as you scale the startup, such as relatively easy investment, employee share schemes and others. Incorporation should be undertaken by a legal professional. Incorporating a company is not the same as registering a business.
   
4. Trust
   While a trust is not usually a business structure, it is possible to manage a company through a trust. There are various legal reasons this may be an attractive option in certain specific circumstances, but it’s complex enough that it should only be considered on the advice of a legal professional. Consider this a conversation for your lawyer. 

What incorporation means for your business

While it is possible to launch your startup without incorporating, it’s wiser to implement a robust company structure from the outset, so you’re able to dive into activities like raising capital as and when needed. 

Why is the incorporation of a business so important? An incorporated company is considered its own entity and therefore comes with significant advantages. A corporation (and remember, the word ‘corporation’ is used only for a business that has undergone incorporation) is owned by shareholders and governed by a board of directors. In many cases, the shareholders may be one or two co-founders who also serve as directors on the board and control the business. 

Incorporation offers corporate tax benefits and protections in the form of limited personal liability. Their personal assets are not at risk if legal issues are brought against the company (for example, debt recovery) – unless very exceptional circumstances apply. Shareholders (in this case, the co-founders) are liable only for the company’s debt up to the amount unpaid on their shares, and usually this amount is zero. 

How to incorporate a company?

It is possible to incorporate a company without a lawyer, but it’s strongly recommended against. There are many complexities and questions that need to be answered before you can start your ASIC application to register and incorporate your business. Your lawyer will walk you through core decisions such as:

• Choosing company officeholders
• Deciding on the share structure
• Using replaceable rules or a constitution
• Choosing a company name
• Choosing registered and business addresses

Your obligations as an incorporated company

Before you proceed with incorporation, you should be aware of the obligations that come with a company. There are annual filings required, with associated costs. You’ll also be required to file corporate taxes, keep financial records current, and lodge required reports to ASIC on a yearly basis (or every time you make a change to the Company, its officeholders or its shareholders). It’s recommended to speak with an accountant, tax specialist, and lawyer before proceeding with incorporation. 

At UX Law, we specialise in supporting startups with their legal needs. We provide startups and entrepreneurs with practical legal solutions to protect and empower their business. Reach out for a free consultation to learn more.

The post Why You Need to Incorporate Your Startup (and How to Do It) appeared first on UX Law.

Facilitating a company sale or acquisition is a significant undertaking with many legal considerations along the way, and being informed is the best place to begin. Let’s take a look at the basics: how to know when to sell, where to find a buyer, the legal steps in making the sale, and some tips on how to get the best possible deal for yourself and the company. 

How do I know when it’s time to sell?

The first step is deciding to sell, but this is also an emotionally charged decision. Before you choose how to exit your startup, you’ll need to determine if you’re ready and if the timing is right. 

If your company is struggling, this isn’t necessarily an indication that it’s time to sell. In fact, if you have the available resources, this can be the time to dig in and do the work for future success. All businesses have rough patches, and unless you’re essentially forced to sell, it’s better to focus on stabilising for continued growth. 

On the flip side, perhaps things are going incredibly well. If the company has become wildly successful, you may find yourself (or other founders) tempted to sell for a hefty profit. If the deal offered is truly unique, maybe it’s worth considering. Juggling priorities (such as more than one business) can also create the temptation to sell and refine your priorities in the process. These two scenarios are very personal, and there’s not necessarily a correct answer. 

The most common reason for selling a startup is when the founders have advanced the business as much as possible within their resources and skillsets. If there’s ample opportunity down the road, sometimes an acquisition can help the company continue its growth path. 

How do I find potential buyers?

Okay, let’s say you’ve decided to sell. What next? You’ll need to find a buyer. Generally, larger companies operating in the same (or a similar) space are the best bet for an acquisition. Your startup is likely an attractive option full of innovation and customers to leverage for further growth. 

Private equity acquisitions are also quite common for highly valued startups. These equity firms are known to buy out all owners and investors often while still offering an attractive profit plan to retain the current startup leadership. Along the same lines – and requiring less lofty valuations –  some investor groups are willing to make a similar transaction by buying out the existing founders and investors. If you’re looking to stay involved and your startup is a star, this may be an option. 

When thinking about how to sell your company, there are some new options on the table. You can, of course, go a more traditional route with a dedicated consultant or in-house team. There are also portals like Microacquire now available online, where you can essentially list your company on a marketplace and engage with interested buyers in a private space. It’s a quick way to get eyes on your company and is worth investigating as part of your sale planning.

How do I actually sell the company?

There’s a long process involved in selling a company, and it’s crucial to have a trusted legal team on your side, along with highly competent tax specialists and accountants. 

This list provides a general idea of how your company will progress through the acquisition process:

1. Solidify the company value: if you’re ready to sell, you already have this step complete. You know your company has value to offer via products, services, market share, intellectual property or other trade secrets.
   
2. Develop a list of potential buyers: as mentioned above, these may be companies working in the same industry, investment groups, or acquisition firms. Connect with your network and develop a list of contacts.
   
3. Buyer outreach and initial conversations: when engaging with potential buyers, beware how much information you’re offering. Keep things high level until there’s an NDA in place for further discussions.
   
4. Confidential deep dives: once you’ve secured genuine interest, it’s time to bring out the NDA so you can sit down and get into the details. Here is when you’ll start to share the true value your startup can offer – everything from the financials to the product manufacturing process.
   
5. First offer and negotiations: when entering this stage, try to stick with standard negotiating principles. Don’t state your preferred price lest you undercut your own sale. Don’t share financials that indicate you’re desperate to sell within a particular timeframe. Essentially, don’t give away your own leverage.
   
6. Sharing the deal internally: once you have a verbal offer, you’ll need to wrap in your team. We recommend engaging HR for advice on how to proceed and to mitigate any staffing risks that may arise from this announcement.
   
7. Terms sheets, negotiations, and due diligence: your legal team should have been involved in this process from day 1, but here is where things will start to get busy for them. You’ll be heavily involved in many legal negotiations, and extensive documentation is going to be required.
   
8. Reaching the final agreement: similar to step 7, this is where you need your legal team in good shape. In many cases, extensive revisions and negotiations on both sides will be required, and it’s only once every detail has been ironed out that you can sign the deal.
   
9. Closing the deal: Congratulations, you’ve sold your company! Now it’s time to mop up the mess. Supplier contracts, payroll systems, outstanding accounts payable and receivable, tax payments…there’s a long list of final tasks for you and your lawyers. 

Conclusion

While there’s no set of rules for deciding when to sell or exit your startup, there is a well-defined process your lawyers or legal team will move through to ensure an organized and successful sale. 
At UX Law, we provide startups and entrepreneurs with practical legal solutions to protect and empower their business. Book a free consultation to explore how we can help your startup.

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