In Short
- Raising capital requires key documents like term sheets, shareholder agreements, and disclosure statements.
- These documents protect your interests and clarify terms for investors.
- Preparing comprehensive documents ensures smoother negotiations and avoids potential disputes.
Tips for Businesses
Ensure your capital-raising documents are clear, detailed, and compliant with regulations. This helps secure investor confidence and reduces the risk of future disagreements. It’s a good idea to seek legal advice to draft or review these documents before engaging investors.
Table of Contents
- 1. Business Plan, Investment Proposal and Investor Pitch Deck For Raising Capital
- 2. Term Sheet
- 3. Capitalisation Table
- 4. Shareholders’ Agreement
- 5. Constitution
- 6. Financial Statements and Projections
- 7. Due Diligence Materials For Raising Capital
- 8. Employee Share Option Plans (ESOP)
- 9. Valuation Report Before Raising Capital
- 10. Subscription Agreement
- Key Takeaways
- Frequently Asked Questions
Capital raising is typically a critical part of expanding your startup in New Zealand. One aspect of ensuring a successful capital raise is to understand the documentation you may need when securing funding from investors. Putting together the documentation required when raising funds is a complex task. To help you prepare for capital raising, this article will take you through 10 key documents you may need when raising capital for your New Zealand startup.
1. Business Plan, Investment Proposal and Investor Pitch Deck For Raising Capital
A robust business plan acts as the foundation for all investment activities. Potential investors will want to see that the business is well thought out and has a detailed roadmap for the company’s future growth and development. As such, the business plan should outline the:
- products or services offered;
- market opportunity;
- competitive landscape;
- marketing and sales strategy;
- revenue projections; and
- the team’s capabilities.
A business plan should also include an investment proposal. The investment proposal should focus on the financial aspects of the business. This includes:
- funding requirements;
- how funds have been spent so far; and
- expected return on investment for potential investors.
2. Term Sheet
A term sheet is a non-binding document that outlines the key terms and conditions of a potential investment between the startup seeking funding and prospective investors. Ultimately, the term sheet lays the foundation for more detailed negotiations. However, it will outline the key details forming the basis of the investment, including:
- the valuation and investment amount;
- the type of security being offered, such as preferred shares or convertible notes;
- ownership stake;
- the rights of the investors, such as any liquidation preference, anti-dilution provisions, board composition and voting rights, pre-emptive rights and drag-along and tag-along rights;
- any vesting provisions that may apply to the founders, in particular; and
- whether an exclusivity period applies for the relevant investor(s) to undertake due diligence.
3. Capitalisation Table
The capitalisation table (usually known as the ‘cap table’) outlines the complete list of security holders and the details of their securities in the company. Securities include, for example, existing shares, options, convertible notes and SAFEs. The cap table is key to demonstrating the company’s legal structure to potential investors.
An up-to-date cap table is crucial for establishing the company’s valuation and, therefore, the share issue price. It is also key for negotiating other aspects of a capital raise, including any employee share option plans existing or to be implemented as part of the raise.
Capital raising is a critical time for any startup. Take control of your startup’s equity with this free cap table template. It will also allow you to analyse and compare financing rounds to make the best capital raising decisions.
4. Shareholders’ Agreement
A shareholders’ agreement is an important document that governs the rights, responsibilities and relationships among shareholders. It typically details crucial aspects of shareholders and the company, including its decision-making processes, dispute-resolution mechanisms and exit strategies.
A well-crafted shareholders’ agreement will ensure clarity and alignment among shareholders. It should also safeguard the interests of both founders and investors.
If a startup has multiple shareholders prior to the relevant capital raise, it should already have a shareholders’ agreement in place. Typically, a capital raise will require the company to renegotiate the terms of any existing shareholders’ agreement with the incoming prospective investors (or just a lead investor). However, this will ultimately depend on the context.
5. Constitution
A company’s constitution outlines the basic internal rules for managing the company and binds the company and all shareholders. The constitution typically covers matters like share issues, transfer of shares and director appointments. It also sets the framework for decision-making and operational procedures.
The constitution sits alongside the shareholders’ agreement. The key difference between the two is that:
- the constitution is a foundational document governing the company alongside the relevant New Zealand company law and is publicly available on the Companies Office; while
- the shareholders’ agreement is a private, more detailed agreement between shareholders.
6. Financial Statements and Projections
Transparent financial reporting is essential to instil confidence in investors and to allow them to undertake sufficient financial due diligence on the company. As such, startups will typically be asked to provide recent and historical financial statements. This includes:
- income statements;
- balance sheets;
- cash flow statements and projections; and
- tax returns.
Further, financial projections should also be provided. Such projections can be used to illustrate the business’ growth potential and ability to generate returns for investors.
7. Due Diligence Materials For Raising Capital
Investors usually want to conduct thorough due diligence on a company they are considering investing in so that they can assess its viability and risks and make an informed decision around their potential investment. As such, startups should be ready to provide a comprehensive set of due diligence materials as requested by the investor. These typically include:
- financial documents (as outlined above);
- corporate documents, including the certificate of incorporation, governance documents (existing shareholders’ agreement and/or constitution), the cap table and corporate resolutions passed by the directors and shareholders;
- key material legal documents, such as employment agreements and supplier and customer contracts;
- details of all company intellectual property, including trademarks, copyrights, patents and any licensing agreements in place;
- details of any pending or historical legal disputes; and
- relevant operational information, like the business plan and organisational structures.
There may be other types of specific information requested by the prospective investor, which will often depend on the nature of the industry the business is operating in. Overall, the investor should be provided with all relevant information required to make an informed decision about their investment. If you withhold crucial information during due diligence, and that information later comes to light, there is a risk the investor could take legal action against the company. Therefore, it is essential to disclose all relevant information. If in doubt, disclose.
8. Employee Share Option Plans (ESOP)
An employee share option plan (ESOP) is a scheme used by startups, particularly those that allow employees and contractors to acquire options in the company they work for.
The key document for an ESOP is the plan rules, which outline the terms and conditions that apply to the options held by employees invited to participate in the ESOP. Amongst other terms, this document:
- defines the eligibility criteria;
- outlines the vesting schedule that applies to the options; and
- sets out the conditions required for exercising options into shares.
An ESOP can be used to ‘top up’ an employee’s salary when a startup does not have the cash flow to pay a competitive salary. It is also a useful tool for incentivising employee retention, increasing engagement and aligning an employee’s interests with the company’s success. For this reason, investors may see an ESOP as a valuable tool for supporting a startup’s success and will often require the ESOP to be implemented as a condition to their investment (if one is not already in place).
9. Valuation Report Before Raising Capital
A valuation report provides an independent assessment of a startup’s value. While not always necessary, it can be worthwhile, especially where there is disagreement as to what methodology should be used. The valuation then forms the basis for determining the equity stake an investor will receive in return for their investment amount. Such a document further adds objectivity to the valuation process, enhancing investor confidence which can make it a useful document to provide.
10. Subscription Agreement
A subscription agreement is the legal document required between the startup and the investor(s) investing in the company.
Key aspects that are typically covered in the subscription agreement include:
- details of the securities being offered;
- the purchase price and payment terms;
- investor and company representations and warranties;
- investment conditions; and
- the rights and obligations of both parties.
The subscription agreement is a crucial document for compliance with New Zealand securities laws and for formalising the terms of an investment.
Key Takeaways
The success of capital raising in New Zealand relies heavily on document preparation. Some of the critical documents you will need when raising capital for your New Zealand startup include a:
- business plan, investment proposal and investor pitch deck;
- term sheet;
- capitalisation table;
- shareholders agreement;
- constitution;
- financial statements and projections;
- due diligence materials;
- employee share option plans (ESOP);
- valuation report; and
- subscription agreement.
Capital raising is a heavily regulated area in New Zealand, so you should seek legal support when preparing the documents to ensure they comply with relevant laws and regulations.If your business has an upcoming capital raise, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.
Frequently Asked Questions
A shareholders’ agreement helps define the rights and responsibilities of shareholders, outlines the decision-making process, and includes provisions for resolving disputes. It protects the interests of the business and existing shareholders while ensuring that new investors understand the terms of their involvement.
When raising capital, key documents include a term sheet, shareholders’ agreement, and disclosure documents. These outline the terms of the investment, define shareholder rights and obligations, and ensure compliance with legal requirements, providing clarity for both business owners and investors.
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