You’ve found the person. Maybe it’s a co-founder who covers everything you can’t, maybe it’s an investor who has said yes in principle over coffee in the Valley. The conversation is going well. And somewhere in the back of your mind is a folder of company paperwork you haven’t opened since the day you registered the business.
That folder is about to matter a great deal. Due diligence, even the informal kind a friends-and-family investor does, has a way of finding every shortcut you took in year one. Here’s what to sort out before the term sheet lands, so the deal doesn’t stall while you scramble.
Due diligence finds the gaps you’ve been ignoring
When someone puts money into your company, they (or their lawyer) will generally check that the company you described is the company that exists on paper. That means the shareholding, the constitution, the IP ownership and the contracts. Any mismatch becomes a negotiating point, a delay, or a reason to walk.
A pattern we keep seeing in Brisbane businesses: the founder describes a 60/40 split with a mate who helped early on, but ASIC records show one shareholder holding everything, and the 40 percent exists only in a text message thread. Nobody lied. The business just grew faster than the paperwork.
Investors don’t expect perfection. They expect the records to match the story. Fixing gaps quietly, six months before you need money, costs a fraction of fixing them under deadline pressure with an investor’s lawyer watching.
Do you need a shareholder agreement before an investor comes in?
A shareholder agreement is generally not a legal requirement in Australia, but most sophisticated investors will expect one, and putting a shareholder agreement in place before an investor arrives is almost always cheaper and calmer than negotiating one afterwards. Once money is on the table, every clause becomes a bargaining chip. Before that, it’s just sensible housekeeping between people who currently agree.
The same logic applies to a co-founder. The best time to agree what happens if one of you leaves, stops working, or wants to sell is while you still like each other. In our experience the founders who resist this step (“we don’t need contracts, we’re mates”) are the ones who end up in the messiest exits.
Here’s how the two main governing documents typically compare:
| Feature | Constitution | Shareholder agreement |
|---|---|---|
| Who sees it | Can be public via ASIC | Private between the parties |
| What it covers | Basic company machinery | Commercial deal between owners |
| Changing it | Formal member vote | As the agreement itself allows |
| Typical detail | Generic, often off the shelf | Tailored to your situation |
They work together. A generic constitution plus a well-drafted shareholder agreement covers most small companies well. This is where specific advice matters, because the right split between the two documents depends on your situation.
What a shareholder agreement should generally cover
A shareholder agreement commonly sets out how decisions get made, how shares can be sold or transferred, what happens when someone leaves, and how deadlocks get broken. For a founder preparing for investment, the clauses that tend to matter most are:
- Pre-emptive rights, so existing shareholders get first option on any shares being sold or issued
- Founder vesting, so equity is earned over time rather than owned outright on day one
- Leaver provisions, covering what happens to shares when someone exits, and on what terms
- Drag and tag rights, so a future sale of the whole company can’t be blocked by a small holder, and small holders can’t be left behind
- Reserved matters, the list of decisions that need more than a simple director vote
Vesting deserves a special mention for co-founders. Without it, a co-founder who leaves after four months may keep their full stake forever, and every future investor will ask why someone who contributes nothing owns a third of the company. We’ve watched deals cool off over exactly this.
Get the company records to match reality
Before any investor conversation gets serious, your ASIC records, share register and cap table should all tell the same story. That means checking who the registered shareholders actually are, whether every share issue and transfer was properly documented, and whether the officeholders listed are the people actually running the company. ASIC is where an investor’s lawyer will look first, so look there first yourself.
Common problems we see when we review a business ahead of a raise:
- Shares promised verbally or in emails but never issued
- A spouse or accountant listed as a director from the setup days, long since uninvolved
- Options or “sweat equity” arrangements with no paperwork at all
- A trust in the structure that nobody can find the deed for
None of these is fatal. All of them are slow and awkward to fix mid-deal.
Confirm the business actually owns its IP
An investor is usually buying into the value of what the company owns, so the company, and not you personally or a contractor, generally needs to own the brand, the code, the content and the processes. This is the single most common gap we find in early-stage businesses.
The usual suspects: the app was built by a freelancer with no written IP assignment, the trademark (if there is one) was registered in the founder’s personal name, or the domain sits in an old personal account. Under many contractor arrangements, the person who created the work may retain rights to it unless a written agreement says otherwise, which surprises a lot of founders.
A lawyer will typically look at contractor agreements, employment contracts and any registrations, then paper over the gaps with assignments where needed. IP Australia is the place to check what’s actually registered and in whose name. Do that check this week. It takes ten minutes.
Common mistakes founders make in the run-up to a raise
The pattern failures we see most often, in rough order of how expensive they get:
- Waiting for the term sheet before starting the paperwork. Everything then happens under time pressure, and time pressure favours the other side.
- Downloading a template shareholder agreement and signing it unread. A bad agreement can be worse than none, because it may lock in terms nobody understood.
- Treating the co-founder conversation as a formality. Deadlock, exits and underperformance need answers written down, not assumed.
- Ignoring founder loans and director drawings. Untidy money between you and the company raises questions about everything else.
- Leaving employment and contractor agreements unsigned. Key staff with no contracts, or contracts with no IP and restraint clauses, show up in due diligence every time.
None of this is a reason to delay a raise. It’s a reason to start the tidy-up three to six months out, when it’s cheap.
Questions founders ask about shareholder agreements and investment
Is it a legal requirement to have a shareholders agreement?
Generally no. An Australian company can operate on its constitution or the default replaceable rules alone. But most investors expect a shareholder agreement, and companies with more than one owner and no agreement are relying on defaults that were never designed for their situation.
What are pre-emptive rights in a shareholder agreement?
Pre-emptive rights commonly give existing shareholders the first opportunity to buy shares before they’re offered to outsiders, whether through a new issue or a sale by another shareholder. They protect you from waking up with a stranger as a business partner and from having your stake quietly diluted.
What is the difference between an investor and a shareholder?
An investor is anyone who puts money into the business, which could be through shares, a loan, a convertible note or a SAFE. A shareholder specifically holds shares and the rights attached to them. Many investors become shareholders, but a note holder, for example, may not hold shares until conversion.
Can a director kick out a shareholder?
Generally no. Directors run the company but don’t usually have power to remove a shareholder just by deciding to. Removal typically only happens through mechanisms the shareholders agreed to in advance, such as compulsory transfer or leaver clauses in a shareholder agreement, which is one more reason to have one before trouble starts.
Should co-founders sign a shareholder agreement even without an investor?
Yes, in our view. Two or more owners with no written agreement is where most of the painful disputes we see begin, and a co-founder agreement with vesting and exit terms is far easier to agree while the relationship is good.
When is the right time to put all this in place?
Ideally when the second owner arrives, and at the latest three to six months before you start serious investor conversations. That gives time to fix IP assignments, tidy the share register and negotiate terms without a deal deadline hanging over you.
Start the tidy-up before the term sheet arrives
Most of what’s above is a few weeks of focused work when done early, and a deal-threatening scramble when done late. Everything here is general information, and the right answers for your company depend on your structure, your co-founder history and what your investor will actually ask for. The Queensland Law Society can help you find a solicitor, or start with a conversation with us. The legal side of our practice, working with partner counsel, can review where your paperwork stands today and tell you plainly what needs fixing before you sign anything.