In an earlier article, we looked at how to finance your business through loans, grants and convertible notes. We now continue to look at other available methods including equity finance and the commonly heard phrase, crowdfunding. What exactly do they involve and what their advantages? 

Equity Finance

Issuing shares in your company is a well-established method to finance your business without going into debt. You can issue different types of shares. For example, ordinary shares or preference shares.

You need to follow the exemptions that enable companies to issue shares without a disclosure document. As a small business, you can only issue shares to the following:

  • Up to 20 investors raising up to $2 million in 12 months (personal offers), or
  • Sophisticated or professional investors, or
  • People associated with your business including senior management.

You may ask why you would issue shares to finance your business? Well, there are no ongoing payments, so a higher percentage of revenue can be spent on the business. For example, to invest in marketing or hire more staff.

You also share your business’ risk with your investors. This means, however, that you also share the business’ value and ownership with your shareholders. Shareholders might want more control and oversight of your business than you prefer. We can help you negotiate this in the Shareholders Agreement.

Crowdfunding

Crowdfunding allows members of the public to contribute money to a product or service that may not yet have launched. For example, buying a unique product in advance anticipating that you will receive the item once the business raises sufficient funds to finalise the product or service. Crowdfunding is often done through platforms like Kickstarter and RocketHub.

Crowdfunding is a great way for your business to gain broader exposure. It allows members of the public to support you in your business goals. You may receive more funds, or receive funds more quickly, than through traditional sources. Currently in Australia, it is difficult for small businesses to crowdfund because of the legal restrictions on offering shares. The Government is currently reviewing different ways to offer shares to a broader audience, and to assist businesses to use crowdfunding to issue or sell shares.

Conclusion

Through these articles, we have outlined the common methods businesses can choose to raise finance. LegalVision’s experienced business lawyers can help you decide which finance option best suits you and your circumstances, as well as step you through the negotiations and required documents.

Questions? Get in touch on 1300 544 755.

Ursula Hogben

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