How Startups Can Capitalise From An Early Stage Venture Capital Limited Partnership

In Short:

• ESVCLPs provide tax benefits for investors funding eligible startups.
• Startups must meet specific eligibility criteria to access ESVCLP funds.
• Use AusIndustry resources to identify suitable ESVCLP investors.

Tips for Businesses:

To secure ESVCLP funding, verify your startup meets eligibility criteria, including Australian residency and asset limits. Target investors through the AusIndustry ESVCLP directory, focusing on those aligned with your industry, as specialized investors are more likely to support relevant ventures.

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Table of Contents

• What is an Early Stage Venture Capital Limited Partnership (ESVCLP)?
• How Might This Special Type of Partnership Benefit My Startup?
• How Can I Make My Startup “Attractive” to ESVCLPs?
• Where Can I Find ESVCLPs That Might Invest in My Startup?
• Key Takeaways

Do you wish there was an Airtasker to raise capital for your startup? Even if you have a great business idea, it can be challenging to raise capital. It’s tough convincing others to part with their hard earned cash, so it helps to have as many options for finding investors as possible. One option for funding could be an Early Stage Venture Capital Limited Partnership (ESVCLP). It all depends on whether the ESVCLP suits your situation. This article takes a look at what an ESVCLP is, how it might benefit your startup and where to find it.

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What is an Early Stage Venture Capital Limited Partnership (ESVCLP)?

The Early Stage Venture Capital Limited Partnership (ESVCLP) scheme was created to encourage investment in startups. It is a type of partnership formed between an investor and a startup. This partnership receives special tax concessions from the government. These tax concessions are available if the ESVCLP invests in an eligible startup.

How Might This Special Type of Partnership Benefit My Startup?

If your startup fits within Commonwealth government eligibility requirements, an ESVCLP will receive a tax benefit by investing in you. The fund gets ‘flow-through tax treatment’, so the fund won’t get taxed, and the fund will pass the tax bill onto investors. The investors will then receive tax exemptions on their share of returns. If you meet the eligibility requirements, your startup becomes an attractive investment vehicle for savvy investors.

How Can I Make My Startup “Attractive” to ESVCLPs?

Both the ESVCLP and the startup need to be involved in the relationship for it to be mutually financially rewarding. We’ll go through what your startup needs to do and the requirements for the ESVCLP to be able to access the tax benefits.

Startups 

Your startup must satisfy the requirements set down by the Income Tax Assessment Act 1997 (Cth) (ITAA) in order for an ESVCLP to invest in your startup and access tax benefits.

Your startup must:

• Have assets of less than $50m;
• Be located in Australia and have 50% of assets in Australia as well as 50% of staff;
• Be either a unit trust or a company;
• Have a registered auditor by the end of the first 12 months investment;
• Not have the predominant activity of property development, land ownership, finance, insurance, construction or making investments directed at deriving passive income; and
• Not invest the funds in another entity (but there are some exceptions).

The majority of these requirements are quite easy to fulfil. The purpose is to encourage investment in startups rather than in larger businesses, which is why the limits on holding assets is $50 million.

ESVCLP

ESVCLPs must fulfil many requirements to become registered with AusIndustry and the Australian Taxation Office. As a startup,all you will need to know is whether they are registered or not.

It is important to know the limits in the type of investments an ESVCLP can make. An ESVCLP’s investment in a startup must be ‘at risk’. The startup must issue new shares, and the investment must be for 12 months or more.

An investment is considered ‘at risk’ if the investor had no arrangement as to the maintenance value of the investment or the maintenance of any earnings that they might make from owning the investment. An ESVCLP can buy existing shares in the business, but only if it already held shares in the business.

Where Can I Find ESVCLPs That Might Invest in My Startup?

Luckily, AusIndustry has developed a quick guide to finding your perfect ESVCLP. You can find a downloadable ‘List of Early Stage Venture Capital Limited Partnerships’ on AusIndustry’s website.

The list specifies which kinds of startups an ESVCLP focuses their efforts. For example, AirTree Ventures Partnership LP invests in internet and software businesses, with the aim of ‘maximising growth in capital by providing selected companies with patient capital and management support’.

It may be worthwhile considering this list of registered ESVCLPs and focussing your efforts on the most suitable investors to increase your chances of receiving funding.

Key Takeaways

AusIndustry’s Early Stage Venture Capital Limited Partnership program aims to encourage investment in early stage startups. Registered ESVCLPs can obtain many tax benefits by investing in startups that meet certain requirements set out in the Income Tax Assessment Act 1997 (Cth).

If you need more information about ESVCLPs, we’re more than happy to help. If you have found an ESVCLP that fits the bill and is likely to invest, we can assist you with the full suite of investment documents. Contact LegalVision’s startup lawyers today on 1300 544 755 for advice, or fill out the form on this page.