Starting a Business

Building a startup is a monumental task.

It begins with an idea evolving through the development of a minimal viable product (MVP) and grows as you assemble a team, find product market fit and relentlessly drive your vision.

The reality is you’ll need funding to fuel this journey.

The pivotal question every founder faces is whether to raise capital. If your business can sustain itself and grow through earnings from existing customers or other sources, bootstrapping might be the preferred path. Alternatively, debt funding such as borrowing from a bank, or exploring government grants could be viable options.

For those considering raising capital from investors, it’s crucial to understand:

1. What you need the money for;
2. What is the minimum viable amount needed; and
3. What is the maximum necessary amount?

You want to know ‘what you need the money for’ so that you can explain this to investors and generally be best placed to use it wisely. You want to know ‘what is the minimum viable amount needed’ so that you know how much you need to raise to realistically achieve your objective. and then get to the next funding round.

And you want to know ‘what is the maximum amount necessary’ so that you don’t raise unnecessarily too much money and therefore give away more ownership than needed.

In the Pre-Seed and Seed rounds, you might require funds for market research and development of your MVP. As you progress to Series A, your focus will most likely shift towards hiring talent, improving your product and scaling your marketing efforts.

In all the stages, you might find developing a business plan with financial projections particularly useful to you, and investors, when answering those crucial questions of:

1. What you need the money for;
2. What is the minimum viable amount needed; and
3. What is the maximum necessary amount?

If you can’t do that yourself, then we can help.

Now, each funding stage attracts a different type of investor and involves giving away a share of ownership.

In the early stages, funding might come from “Family, Friends & Fools”, Angels, or through participation in Accelerators and Incubators.

In Australia, the total money raised in a Pre-Seed round may be around $150,000 with typical ownership given away of around 5-15%.

Money raised from participation in Accelerators and Incubators might be around $50,000 to $150,000 for around 5-10% equity.

As you move into a Seed round, early stage venture capital may come into play, often led by a “Lead investor”. It’s common in Australia for a Seed round to raise around $1 million in exchange for about 15-25% equity.

For a Series A round in Australia, you can expect funding of around $1-5 million for around 15% equity.

This funding generally requires that you have found product market fit and have annual recurring revenue of at least $1 million.

When raising funds and giving away equity, be mindful that you should reserve equity for key employees. Around 10% may be about right. Importantly, these aforementioned statistics are simply approximate guides.

Further, they do change over time and there are always outliers.

Now, regardless of the stage of funding, it’s essential to remember that securing investment shouldn’t just be about obtaining the funds. Choosing an investor is a significant decision, since you could spend several years partnering with them.

Be comfortable that you can work with them, such that they hold similar values to you and will provide constructive feedback, in appropriate ways. Further, consider if they’ll provide useful advice and connections.

Will they help you grow the business in more ways than simply giving you money?

The raising capital phase is often a time consuming process. Things you will most likely need to do throughout include:

• Create a forwardable blurb. This is a simple, compelling description of your startup that anyone can pass along to a potential investor in seconds.
• Create an investor deck and a pitch deck.
• Be investor ready. This means having all documentation ready for an investor to conduct their due diligence.
• Something that investors appreciate is confirmation from your accountant that your startup qualifies as an Early Stage Innovation Company, which they can utilise for the ESIC tax offset and incentives.
• Get the legal agreements arranged. This can start with a term sheet, evolve into a SAFE and Share Subscription Agreement. Be mindful of the terms and conditions, such as whether the valuation is pre or post money, and the liquidation preferences, to name just a few.
• There is also usually a need for a Shareholders’ Agreement and Intellectual Property Assignment Agreement.

Be prepared for talks with investors to not lead to a “Yes”, but also watch out for a common sin of investors where they don’t give you an outright “No”.

Sometimes your startup in its current stage isn’t right for an investor, but they like to keep the door open so that you might circle back later when you’re a little more progressed and appropriate for them.

Try to find this out early to avoid wasting each other’s time. But… stop on good terms so that you might raise from them later.

So, what happens when you actually get the money?

Very importantly, it belongs to the business. It’s not your’s for personal enjoyment. Investors expect you to use it appropriately to get the business to its next funding round, which might be in around two years time.

Throughout the raise, you should have already developed a plan of how you want to use the money and have talked with investors, about this, so that both parties are aligned around expectations. Be sure to include them in the topic of how much salary, if any, you intend to draw from the startup and how much you will pay others.

Aside from the money hitting the bank account, the company records also get updated to reflect the new share holdings.

In Australia, this involves submitting a lodgment with the corporate regulator, ASIC. This is normally handled by your accountant. I.e. us. Investors might also join the board to help provide advice, oversight and governance.

You should also keep investors informed of progress with regular, perhaps monthly, email progress reports.

As business advisors and accountants familiar with startups, we invite you to a free Get To Know Each Other meeting to see how we may be able to help you successfully navigate ordinary compliance, such as tax registrations, business activity statements and tax returns, and non-routine parts of the startup journey, such as capital raising.

You’re also encouraged to take the spam free Raising Capital (Investor Readiness) Diagnostic to see which areas you might be lacking in relation to a Pre-Seed or Seed round.

Paying taxes is generally unavoidable and tax evasion is illegal. As a business owner with great ambitions, you can use proactive tax planning to legally pay no more than the bare minimum tax.

A couple of the main benefits of proactive tax planning are that you keep your money away from the ATO, legally, allowing you to reinvest into your business or enjoy personally, and you can better manage cash flow because you have a clear understanding of what taxes are going to be due at what time.

To ensure that you pay the bare minimum tax, you must be ‘proactive’.

It begins with selecting the right entity structure.

There are various business structures that are available:

• Sole Trader
• Partnership
• Company
• Fixed and Family Trusts

Believe it or not, there is no one-size-fits-all solution for this. As trusted advisors, our duty is to educate you and work together with you to decide on the best structure for you.

Here’s an example with regards setting up for future tax success, involving a family who first want to buy a business, and after many years, end up selling it.

When they are considering buying the business, we’d analyze their unique circumstances and, help them select a family trust structure with a company as trustee.

In this example, this is the desired structure because it would allow for income splitting across the family.

During annual tax planning, the proactive step to use a structure that enables income splitting, would then play a critical role in minimising taxes over many years.

Eventually, when the business is sold, thanks to proactive steps taken when choosing the structure, and for decisions made during yearly tax planning, this family is able to access the Small Business CGT Concessions; providing the wonderful benefit of zero capital gains tax.

So, if you are an aspiring business owner, don’t hesitate – reach out to us so that you can have a chat with a trusted advisor that truly cares about legally minimising your taxes.

Understandably, many people are very excited when they come up with a great business idea and look to go into business with family, friends or someone they met at a networking event.

It’s important in these moments to appreciate that starting a business is not easy. Partnering with someone could make the process easier, but it could also make things more difficult.

We’ve seen family relationships, and friendships, forever ruined because of a business that didn’t go well or there were disagreements in running the business.

This is why you should consider the following key aspects before you go into business with others:

• Do you share the same vision, values and work ethic?
• Do you have clearly defined roles, responsibilities and expectations?
• Do you have a shareholder’s agreement in place? Is the agreement fair?
• Do you have a system to resolve conflicts or disagreements? Do you have a system to ensure that everything is agreed in writing?
• Do you have a plan if one of you want to, or need to, to exit the business?

These are some of the things that you need to consider – it is not an exhaustive list. These may be daunting, but please be assured that we are not here to tell you to only go into business by yourself.

You deserve to have the necessary information to maximise your chances of business success.

Let’s use an example to illustrate how we could protect your best interests.

Mr A approaches a business owner, let’s call him Mr B, to help turn Mr B’s business around. Mr B is a wealthy and successful business owner, but one of his businesses needs help. Mr B offers Mr A an ownership share in his business in exchange for Mr A’s help.

Having received this offer, Mr A asked us for advice. We look into the agreement.

In reviewing the agreement, we find that there was a clause which would enable Mr B to buy back the shares from Mr A, for free, within the defined period of time.

Given in this example, Mr A has sought our advice, the conditions of the agreement are not in our client’s best interests, so we advise Mr A accordingly.

Mr A takes on this advice, discusses it with Mr B, and depending on how you want this example to end, it either results in Mr A getting a fair outcome, or saves Mr A from a disappointing end to his hard work in restoring Mr B’s business back to glory.

We help clients to be wary of going into business with others, but always with the objective of helping them make it work for their interests, as the first priority, and then for all involved too.

If you’re thinking of going into business with others, please don’t hesitate to reach out and book a Get to Know Each Other meeting. We can then discuss how we can help you to ensure that you are protected, and not getting disadvantaged, when going into business with others.

In this video we will go through some of the key considerations you will need to make when hiring employees.

1. The first consideration is assessing your business needs:

Before you start, it’s a good idea to assess your business needs so that you can hire the right person for your business.

If you need help with just one specific task, such as bookkeeping, paying for their advice as a contractor is probably the best way to go. However, if you need someone to help with the day-to-day running of your business and to look after clients or customers, you may need an employee.

When determining whether you need an employee or contractor you need to think about:

• The tasks you need the employee or contractor to do;
• Any skills and qualifications they’ll require;
• How busy the job will be;
• How long you think you’ll need them for; and
• If you intend on hiring an employee, you will also need to think about if you are going to hire them on a full-time, part time or casual basis.

2. The second consideration is ensuring that you comply with the Fair Work Employment Standards or other relevant legislation.

As an employer, you are legally obliged to pay your employee the right wage for their work. A great place to start understanding what your legal obligations are when you hire employees is the Fair Work Ombudsman website.

Generally, the employment standards require employers to:

• Issue employees with payslips;
• Ensure the minimum employment standards and minimum pay rates are adhered to as set out by the Fair Work Ombudsman;
• Provide full and part-time employees with paid annual leave based on their ordinary hours of work, which is generally four weeks for each 12 months of service; and
• Provide full and part-time employees with 10 days personal leave (sick and carers leave) each year.

3. The third consideration is complying with your other legal requirements, such as:

1. Registering for PAYG Withholding.

   As an employer you must:

   • Understand the residency status of your employees;
   • Work out the amount to withhold;
   • Report and pay tax withheld amounts to the Australian Taxation Office; and
   • Provide income statements to employees and lodge an annual Single Touch Payroll finalisation report with the Australian Taxation Office after the end of each income year.
2. You also have superannuation guarantee obligations.
   • Superannuation is a retirement savings program in Australia to help provide employees with a pension in retirement.
   • There is a minimum amount you must pay based on your employee’s ordinary times earnings and current superannuation guarantee rate.
   • The payments need to be made to the employee’s nominated superannuation fund within the legislated time period. The obligation to pay superannuation is very strict and if the rules are not followed, then significant penalties, such as 200% on the amounts originally owed, may be imposed.
3. Have you taken out workers compensation insurance?
   • Workers compensation insurance is a form of insurance paid to employees if they are injured at work. It is typically compulsory for employers and needs to be taken out in each state you employ people in.
4. You also need to consider other insurances.

• • Business insurance brokers can often help with this.

4. The fourth consideration is setting up your systems. Such as:

Have you setup Single Touch Payroll (STP)?

Under Single Touch Payroll, employers send payroll information to the ATO each time they process their payroll.

This ensures that the ATO has up-to-date information on employee salaries and wages, and helps to streamline the reporting process for employers. It is a mandatory obligation for any employer who hires staff for their business.

There are a number of STP-enabled software solutions available, including both desktop and cloud-based solutions.

Have You Setup Your SuperStream Payments?

SuperStream is a way for businesses to make employees superannuation guarantee payments electronically. This means that businesses will need to send employee contributions to their chosen fund using an ATO-approved electronic data and payment method.

The purpose of SuperStream is to streamline the process of making super payments, making it simpler and more efficient for both employers and employees.

There are a number of different ways to setup your SuperStream payments, including using SuperStream compliant payroll software.

Have you prepared an Employment agreement?

An employment agreement sets out an employee’s rights, as well as your expectations about their performance and duties. Having an employment agreement is important for your business because, amongst other things, it can help protect your intellectual property and confidential information.

Once you have these essentials in place, you can then start looking for an employee.

When looking for an employee, you could consider:

• advertising your job vacancy online;
• using a recruitment agency; or
• asking friends and colleagues if they know anyone who may be suitable.

Once you have found your new employee, it is vital for you to also:

1. confirm if the new employee has the right to work in Australia;
2. if so, you will need to provide them with a tax file number declaration form that allows you to appropriately withhold tax from their pay; and
3. a superannuation choice form that lets them choose their preferred super fund.

Employee hiring and management is seldom a one off event, but rather an ongoing relationship that requires constant communication, feedback, and support.

If you do it right, you can build a loyal and motivated team that will help you take your business to the next level.

If you’re needing assistance with business and employment matters, please let us know. We’re here to help.