What Should I Know About Priced Equity Rounds? A Guide for Australian Tech Companies

The priced equity round is a key fundraising strategy for Australian tech companies where capital is invested in return for shares in the company and any convertible securities such as SAFES are converted into equity (i.e. shares).

Understanding the process, what is required from tech companies and what investors are looking for, is crucial to successfully achieving any fundraising targets in priced equity rounds. 

What is Priced Equity?

When a tech company is looking for investment in their business and has already determined the value of their company, they can exchange shares in that company for an initial cash payment, based on the value of the tech company itself. This is a priced equity round.

For example, if a tech business has an agreed valuation of AUD 500,000 and offers an investor a 10% “share” of that company, the investor would give the company cash equivalent to the slice of the company that it wants to own which in this case is AUD 50,000.

As the tech company grows and its value increases, so does the investor’s slice of that overall value. Say next year the company valuation has doubled and is now worth $1 million—the shares the investor got for $50,000 would have doubled in size also and are now worth $100,000.

The investor who owns the shares can now sell these and make a profit, or hold onto them to sell at a later date and potentially make more profit. Maybe in five years the tech company will be worth $5 million, or $10 million, or even $100 million, with the investor’s stake in the company growing increasingly larger with it. 

This is the basis of long-term investment in tech start-ups and any tech business owner who is looking for investment needs to understand the process from the perspective of investors and what motivates them.

What are Australian Investors Looking For in Tech Companies in Priced Equity Rounds?

In the Australian market, as with any country—the main thing investors are looking for is to see a Return on Investment (ROI). They want to see assurances that any investment will be secure and their share of equity will increase and be a worthwhile investment.

In terms of assuring investors that a tech startup is a valid investment opportunity, they are looking for:

Realistic valuation: tech companies along with all businesses, will generally overestimate the value of their business and place an unrealistic figure on the valuation with little justification or evidence of sales or commercial interest to back this up. An overly inflated business valuation can be seen as a rookie move to tech investors.take a second opinion and consult with industry experts to see if the valuation of your business is indeed accurate and reflective of your current position.

Justified forecast: any expected sales figures and turnover/profits for the business should be backed up with clear evidence from existing orders or previous turnover figures showing a year-on-year increase.

Solid business plan: when a venture capitalist is looking to invest in an Australian technology business, they are also investing in the individual and team behind the company. The investor wants to know - have they done their homework? Do they have a detailed business plan and a good understanding of their market, customers and any rival firms selling a similar product that may be in direct competition with them? Answering these questions and showing a detailed understanding of the industry can show potential investors that their money is safe with you and your tech company.

What are the Benefits of Priced Equity Rounds for Tech Companies?

A priced equity round is the stage when financial investment is given in return for stock in a tech company, based on the negotiated value of the company. In a priced equity round the stock is sold as a set number of shares.

Priced equity rounds are a good option for tech company owners who have a clear idea of what their company is worth and are expecting significant growth. If the tech company can provide sufficient evidence and backing for both of these, then priced equity rounds can be used to raise a lot of capital investment.

The advantage of priced equity rounds is that they provide a clear picture to investors of what they are getting with a per-share-price, agreed valuation and terms sheets detailing the proposed arrangements.

This appeals to investors and can be used to generate a lot of interest in the tech company using a priced equity round as a means to secure investment.

How do Priced Rounds Work for Tech Startups?

If your tech company is a start-up firm that has recently entered the market, you may be looking to enter into a priced equity round as a means to issue equity or shares in the stock of your company, in return for capital investment.

The basic process for priced equity rounds for Australian tech start-ups is as follows

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• Tech company is valued: the tech startup gets a valuation for its business before going into any fundraising rounds. This value forms the basis of the share price that investors will pay. 
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• Negotiate with investors: the tech startup starts negotiations with potential investors to secure funding. As mentioned previously, it is critical for tech start-ups to justify their value with details on financial performance, growth prospects and any other relevant data that gives confidence to investors.
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• Terms agreed: when both the investor and tech company have agreed on the valuation of the company and the terms of investment, they reach an agreement on the details in the priced equity round such as the amount invested, how much equity is given to investors in return, and any special rights or controls such as board membership that may be given to the investor as part of the deal.
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• Investment secured: once an agreement has been reached the investors give their capital investment to the technology company and the tech startup issues shares of equity to the investors.
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• Follow-up: when the priced equity round is completed and the terms agreed upon, the tech start-up will update its company records to show any new ownership structure and how much of each equity stake in the company has been given to each investor. It is important for the tech startup to give regular updates on their financial performance, progress towards expected goals and any other key factors in order to maintain healthy relations with their stakeholders.
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• Further fundraising rounds: as the tech company grows, it might need further investment to facilitate any intended expansion of the business. In future funding rounds, the valuation of the tech company may have changed due to existing sales and other market conditions affecting its growth.

What are Unpriced Rounds? 

If a startup tech company does not already have an agreed valuation or does not want to give up preferred stock in exchange for investment, the tech company can use an unpriced round as an alternative to the traditional priced equity round.

Convertible Securities

Instead of giving out shares in the equity of the company, the tech start-up can provide what is known as a convertible security—the two most common types of which are Simple Agreements for Future Equity (SAFEs) and convertible notes.

These convertible securities would then be converted into actual equity shares at a predetermined point such as when the first priced equity round begins, as covered in the previous section.

Why Would Investors Choose to Invest in SAFEs Rather Than Traditional Priced Equity Rounds?

At first glance, it may seem like a no-brainer and surely an investor would prefer a more certain arrangement and more guarantee of return on investment as with typical priced equity rounds whereby shares in the company are given in return for an initial cash investment.

So why would an investor in Australia choose to invest in SAFEs where the value of the company is unknown and SAFEs and convertibles are not real currency or shares in the company?

For investors, the main reason that SAFEs appeal to them is the possibility of high returns on their initial investment. If the tech start-up is successful, its equity stake could increase significantly. As SAFEs are normally used for tech start-ups in the earlier stages of the business, the initial cost of investment is lower than in later fundraising rounds.

This means investors can get in early, and with a lower initial cost gain shares that are equal in value to the higher-priced equity shares, when the SAFEs are converted into real shares in the priced round.

Contact Biztech Lawyers

If you are a tech business or startup that is looking for more information on priced equity rounds and which process would be most suitable for your technology company, get in touch with Biztech Lawyers today.

Biztech Lawyers are specialists in technology-based industries: we understand the market and using our years of experience in the sector we help tech companies in Australia to reach their intended goals in terms of fundraising efforts and growth of the business.

Contact our expert advisors today so we can have an informal discussion and find out which process would be best for your technology business, and take a look at any proposals, terms sheets, or business plans you want us to review ahead of any important meetings with investors.