Most growing ventures eventually need more money than the founders have. The first cheque often comes from family, friends or angel investors; later rounds may involve funds, strategic investors or offshore family offices.
Each round involves rules founders sometimes discover only after accepting money: when an offer needs a disclosure document, what a convertible instrument promises, how investor rights constrain later decisions, and when helping to raise money becomes a licensed activity.
This article outlines, in general terms under Australian law, the issues founders and their families commonly need to consider when raising capital.
Disclosure: when an offer needs a prospectus
Under Chapter 6D of the Corporations Act 2001 (Cth), an offer of securities generally needs a disclosure document, such as a prospectus, unless an exemption applies. Section 708 sets out exemptions that private companies commonly rely on, including:
- small-scale personal offers, which are limited in the number of investors and the amount raised over a rolling period;
- offers to sophisticated investors, including investors who meet a wealth or income test certified by a qualified accountant;
- offers to professional investors, such as certain licensees, large investors and funds.
Each exemption has conditions, and failing one can expose the company and its directors to liability. The tests for sophisticated and wholesale investors have been the subject of review in recent years, so the current requirements should be checked at the time of each raise. Restrictions on advertising and unsolicited offers may also apply, proprietary companies face limits on offering shares to the public, and crowd-sourced funding has its own regime.
SAFEs and convertible notes
Early investors often prefer not to agree a valuation. Two common instruments are:
- Convertible notes, which usually start as a debt that converts into shares on a later equity round or another trigger, often at a discount and sometimes subject to a valuation cap. A note may carry interest and a maturity date, and the documents need to say what happens if no round occurs.
- SAFEs (simple agreements for future equity), which originated in the United States and give the investor a right to shares on a later round, usually without interest or maturity. Australian versions vary, and US templates may not suit Australian corporate and tax law.
Both generally need a disclosure exemption. Whether they are characterised as debt or equity can affect the company and investors, a question for the accountant as well as the lawyer. Conversion terms, the constitution and any shareholders’ agreement need to work together.
Term sheets
A term sheet sets out the main commercial terms of an investment before the full documents are drafted. Many of its terms are expressed to be non-binding, but some, such as confidentiality, exclusivity and costs, are often binding. Terms agreed at this stage, such as valuation, board seats and vetoes, are hard to renegotiate later.
Employee share schemes and ESOPs
Startups often use employee share or option plans to attract staff. The Corporations Act has a dedicated regime for employee share schemes, which since October 2022 has made it easier for unlisted companies to offer interests to employees and some contractors, subject to conditions. Income tax law, mainly Division 83A of the Income Tax Assessment Act 1997, governs how employees are taxed, and concessions exist for eligible startups and for deferral of the taxing point, subject to detailed conditions. Plan rules, vesting and leaver provisions need care, and tax needs an accountant’s input.
Investor rights
Investors commonly ask for protections such as:
- pre-emption rights, to take up new shares before others so their percentage is not diluted;
- anti-dilution protection, which can adjust an investor’s position if later shares are issued at a lower price;
- drag-along rights, allowing a majority to require minority holders to join a sale;
- tag-along rights, allowing minority holders to join a sale on the same terms;
- information rights, board seats and vetoes.
Each may be reasonable, but together they can shift control, and they may interact with family shareholders and family trusts.
Investment from relatives and overseas investors
Money from relatives still needs to fit an exemption and be properly documented. Treating family investors casually can lead to disputes, particularly where some siblings invest and others do not.
Investment from overseas raises further issues. Under Australia’s foreign investment framework, certain acquisitions by foreign persons may need approval from the Treasurer through the Foreign Investment Review Board, depending on factors such as the investor, the size of the interest, the sector and whether the business is regarded as sensitive or relating to national security. A separate merger notification regime administered by the ACCC has also applied since 1 January 2026 to some acquisitions. Money coming from overseas must comply with the laws of the country it leaves and with Australian law; we work with lawyers in that country on any outbound approvals. Australian banks will ask about the source of funds and source of wealth, and anti-money laundering and counter-terrorism financing laws apply.
Avoiding unlicensed financial services
A business that carries on a financial services business generally needs an Australian financial services licence or to rely on an exemption. Anyone who helps find investors, advises on an investment or receives an introduction fee should consider whether they are dealing in or advising on financial products. Finder’s fees and success fees can raise licensing, disclosure and conflict issues, and should be disclosed and documented. Undisclosed fees or secret commissions are not acceptable. Getting more from a raise means structuring value lawfully and transparently, for example through equity, follow-on rights, an ongoing role or a properly documented fee.
A hypothetical scenario
Consider a founder who raised early money through online-template convertible notes from an uncle in Hong Kong, two friends and her parents’ family trust. When a fund offered to lead a priced round, questions arose about whether each investor fell within an exemption, how the notes converted, whether the uncle’s investment needed foreign investment approval and whether the family trust had power to invest. The right approach depended on facts that needed advice.
Questions to discuss with your adviser
- Which disclosure exemption is each investor relying on, and is it documented?
- Is a SAFE, a convertible note or a priced round better suited to this stage?
- Which parts of the term sheet are binding?
- How would the investor rights affect control and future raises?
- Do any overseas investors raise foreign investment or merger notification issues?
- Is anyone being paid to find investors, and do they need a licence?
Frequently asked questions
Can I raise money from friends and family without a prospectus in Australia?
Possibly, if an exemption under section 708 or another provision applies. The conditions are technical and need checking before money is accepted.
What is the difference between a SAFE and a convertible note in Australia?
Broadly, a convertible note usually starts as debt with interest and a maturity date, while a SAFE is usually a right to future shares without either. Treatment depends on the documents.
Do overseas investors in my startup need FIRB approval?
It depends on the investor, the interest acquired and the business. Some investments need approval and others do not, so it should be checked before completion.
Every family’s situation is different, and the answer often turns on details. Book a consultation so we can review your documents and circumstances before you act.
How Chua Tan Associates can help
Chua Tan Associates has practised in Melbourne since 1990 and advises founders, companies and family investors on capital raising documents, convertible instruments, employee share plans and shareholders’ agreements, including raises involving investors in Asia. Justin Chua trained in accounting (Bachelor of Commerce, accounting major) and worked in finance in Hong Kong before entering law. He is a Nationally Accredited Mediator and an Accredited Family Business Advisor. We work with the client’s accountant and registered tax agents and with lawyers in Asia, and we advise in English, Mandarin and Cantonese.
Important: This article is general information only and must not be relied on. It is not legal, tax or financial advice, does not take your circumstances into account, and may not reflect changes in the law after publication. Laws of other countries may also apply. Do not act or refrain from acting on the basis of this article. Reading it or contacting us does not create a lawyer–client relationship. Please book a consultation for advice on your situation.
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Chua Tan Associates acts for families, executors, trustees and their professional advisers in estate planning, estate administration and estate disputes in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an enquiry. Advice is available in English, Mandarin and Cantonese.
Justin Chua (蔡智勋), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal or tax advice.
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