In this article:
Startup Capital Raising Tax
Where the Expensive Mistakes Happen
Whether to Raise — and How Much
Who to Raise From — the Four Lanes
Raising capital through loans, equity or notes
What Tax Sweeteners
Issuing crowd funding equity to senior staff
Funding Lanes for a Private Raise
Talk to Westcourt
Startup Capital Raising Tax in Australia: Part Two — Crowdfunding by issuing shares
In Part 1 we discussed crowdfunding through reward, donation and borrowing campaigns. In this part, we will discuss the tax and commercial impacts of crowdfunding through equity and convertible note raises.
For founders of a private business, either in Perth or Australia, looking at crowd funding by equity or loans – the tax risk in the crowd funding round round is usually set before money lands. Investor class, instrument choice, ESIC timing, CSF compliance, R&D interaction and employee option valuation should be checked before the term sheet is marketed.
Before you start
-
Haven't read part 1 yet?
Where the Expensive Mistakes Happen
You don’t lose control on the day investor money lands. You lose it on the day you signed the term sheet.
Every founder who raises equity discovers two things when they raise equity by crowd funding. The first is what they are willing to give up to get the money. The second is that they gave most of it up the day they signed the term sheet.
The tax structure, the instrument choice, the eligibility window, the cap-table sequencing — all lock in before the round opens to investors. The negotiation that follows happens inside that structure, not in spite of it. The expensive mistakes in a Perth seed round are not the price.
They are the framework the price was negotiated inside. This article runs through that framework in the order a founder decides it: whether to raise, who from, what instrument, what tax sweeteners, and how to keep the team’s options alive. The numerical examples below are hypothetical.
Whether to Raise — and How Much
Equity is the most expensive money you can raise. Use it when nothing cheaper will do.
Most private business owners do not issue equity as part of a crowd funding campaign. Equity is permanent. Debt is repayable. Grants are non-dilutive. Founder savings are flexible. An equity raise gives away the most for the longest. It earns its place when the business needs capital that no other source will provide on the timeline that matters — typically because you are pre-revenue, pre-asset, or expanding faster than retained earnings can fund.
Every dollar of equity is a dollar you cannot un-raise. A hypothetical founder who closes a $500,000 seed round at a $3 million pre-money has given up roughly fourteen per cent of the company permanently, before considering option pools or later dilution. If the business reaches $30 million in three years, that fourteen per cent was the most expensive working capital in the founder’s life.
Sizing is the companion question. Founders typically over-raise on the assumption that more is safer. It is not. Over-raising at a low valuation costs dilution. Over-raising at a high valuation creates pressure to grow into it, which forces decisions a smaller raise would have avoided. The right number is the smallest one that gets you to the next defensible valuation event.
Who to Raise From — the Four Lanes
For most private business raises under $1 million, sophisticated investor or small-scale personal-offer lanes are the default. CSF earns its place above $1 million.
A private business owner has four lanes to raise equity:
- Sophisticated investors under section 708(8) of the Corporations Act
- The small-scale personal offer exemption under section 708(1)
- Retail investors via CSF under Part 6D.3A
- Professional investors under section 708(11)
The audience and route decide the regulatory load and the cost.
Sophisticated investors are individuals certified by a qualified accountant as having $2.5 million in net assets or $250,000 of gross income for each of the past two years, or anyone investing at least $500,000. The accountant’s certificate must be current. ASIC guidance says these certificates are generally valid for up to two years after issue, provided the issuer has no actual knowledge that the certificate is incorrect. No Chapter 6D disclosure document is required.
The small-scale personal offer exemption allows up to twenty investors and up to $2 million raised in any rolling twelve-month period, subject to the personal-offer conditions. Common where the founder has direct relationships with the investors.
CSF lets eligible unlisted public companies and certain proprietary companies raise up to $5 million per twelve-month period from retail investors through a licensed intermediary like Birchal or Equitise. Retail investors face a $10,000 annual cap per company and a five-business-day cooling-off period. The offer document costs $20,000 to $50,000, plus ongoing reporting. At a $1.2 million raise that is three per cent of capital; at a $400,000 raise it is closer to nine per cent. CSF earns its place above $1 million where the public marketing benefit and the broader investor base justify the document cost.
Proprietary companies using CSF also take on additional governance and reporting obligations, including at least two directors, annual financial and directors’ reports, audit once $3 million or more has been raised from CSF offers, and related-party transaction rules.
Raising capital through loans, equity or notes
Most Perth based private businesses seed rounds open on convertibles or SAFEs, then price at Series A. Get the conversion mechanics right before signing the first one. Ordinary shares are the simple case. Capital raised generally sits in the share capital account and is not assessable to the company. Issue costs may be deductible over five years under section 40-880 of the ITAA 1997, subject to the usual exclusions and business-nexus requirements.
Most Perth seed rounds do not open with priced ordinary shares. Founders raise the first $250,000 to $750,000 on convertible notes or SAFE-style instruments, then price a Series A six to twelve months later when valuation is clearer.
A traditional interest-bearing convertible note is usually drafted as a debt instrument until conversion, but the terms still need to be tested. Interest accrues. On conversion at a discount to the next round, CGT events can apply, and the investor’s cost base in the resulting shares is the converted amount.
A SAFE — Simple Agreement for Future Equity — is not a statutory Australian tax category. A typical SAFE does not create debt and gives the investor a right to future equity, but the tax outcome depends on the instrument terms. Do not assume conversion is tax neutral; test debt/equity, CGT, accounting and ESIC timing before signing.
Both instruments can interact badly with ESIC eligibility if not drafted carefully, because the timing of the share issue affects the early-stage test. Confirm the eligibility position before the convertible is signed.
Preference shares deserve their own sentence. They look like equity legally and are often debt for tax under Division 974. A fixed coupon with mandatory redemption is likely to be debt for tax. A discretionary preferred dividend with redemption only at the company’s option is more likely to be equity. Same instrument name, opposite tax outcome — but the term sheet needs to be tested against Division 974.
What Tax Sweeteners
If the company qualifies as an Early Stage Innovation Company (ESIC), investors can claim a twenty per cent non-refundable carry-forward tax offset on their qualifying investment, with capital gains on shares held between twelve months and ten years disregarded.
There are three constraints that impacts who benefits:
- The offset caps at $200,000 per investor per income year, which is effectively $1 million of qualifying investment from any one backer.
- Non-sophisticated investors face a separate $50,000 annual investment limit. If they stay within it, the offset tops out at $10,000.
- And no investor who holds more than thirty per cent of the ESIC is eligible — which catches family-office vehicles taking large stakes.
A pre-revenue tech company with a well-documented R&D claim should usually test ESIC before raising. The evidence may overlap, but R&D eligibility does not equal ESIC eligibility. Where both apply, investors can claim the ESIC offset on their capital and the company may qualify for the R&D offset on eligible development spend. Marketing a round to investors who can use both is a stronger pitch than ESIC alone.
The eligibility tests are narrow. Run the eligibility check and document it before the offer is marketed. Marketing a round as ESIC-qualifying when the company does not qualify is a director liability exposure, not a tax-planning problem.
Issuing crowd funding equity to senior staff
Most founders run an external raise and an Employee Share Scheme at the same time, because the same dilution conversation answers both.
The Division 83A start-up concession can reduce the taxable discount to nil where the company, employee, scheme terms and valuation conditions are met. CGT treatment can then become relevant on disposal. The conditions include the corporate group being unlisted, ten years or younger, and aggregated turnover not exceeding $50 million. Employee holding limits and minimum holding-period rules also need checking.
Quite often the team acquire the shares through an employee share loan and then avoid the complications of Division 83A.
Sequencing matters. The fix for the valuation problem is either issuing the ESS at the same valuation as the round, or running the ESS issue early enough that the two valuations are independent and defensible.
Talk to Westcourt Before the Round Is Marketed
The decisions that decide the round are made before investor money is in sight. Send us the term sheet draft, or the IM if you have one. We will come back with the issues that need resolving before the round opens.
The strategy for a privately held business to grow and take it to the next stage of operations is wide and varied. The tax, legal, commercial and strategy impact of crowdfunding plays a significant role in how you plan your growth.
Connect with our team today
