“Capital is the oxygen of your start-up - without it, your ideas suffocate before they ever breathe.” – Matt Glynn

The very first challenge every founder faces is: how do you pay for your start-up’s birth? Initial capitalisation is the fuel that powers incorporation, early operations, and the first steps toward revenue. But it’s not just about “how much” money you raise - it’s about where it comes from, on what terms, and how it shapes ownership and control.

Initial capitalisation refers to the pool of financial and non-financial resources committed at inception to fund incorporation, early expenses, and early-stage growth. 

It sets the ownership structure and financial foundation of the business from day one.

◼️Cash contributions – founder savings, investor injections, or early loans.

◼️Non-cash contributions – IP, tech, equipment, or services exchanged for equity.

◼️Debt instruments – loans, SAFEs, or notes that may later convert to equity.

Legal & Accounting Perspective

◼️Recorded as share capital on the balance sheet (plus premium if shares issued above nominal value).

◼️Determines founder and investor equity split at inception.

◼️Sets the baseline for future valuations and dilution.

◼️May be subject to minimum paid-up capital rules in certain jurisdictions.

This is an important stage of the start-up journey because:

◼️Runway: Provides operating capital before revenues arrive.

◼️Credibility: Signals seriousness to investors, banks, suppliers, staff and regulators.

◼️Ownership clarity: Establishes control and governance through equity allocation.

◼️Valuation baseline: Sets the foundation for investor negotiations.

◼️Momentum: Enables the business to launch, test, and iterate quickly.

Start-ups can adopt different capitalisation models depending on resources, risk appetite, and growth ambitions:

a) Bootstrapped Model
- Source: Founders’ personal savings, sweat equity, or in-kind contributions.
- Characteristics: Maximum control, minimal dilution, but limited cash runway.

b) Friends & Family Model
- Source: Personal network investing small amounts for equity.
- Characteristics: Easy access but risks straining relationships if things go wrong. Must be formalised to avoid disputes.

c) Angel Investor Model
- Source: High-net-worth individuals providing early seed equity.
- Characteristics: Adds mentoring and networks but dilutes ownership early and sets valuation benchmarks.

d) Accelerator / Incubator Model
- Source: Cash, mentoring, and office space provided in exchange for equity.
- Characteristics: Boosts credibility, provides structured support, but at the cost of early dilution.

e) Convertible Note / SAFE Model
- Source: Investor cash structured as debt-like instruments that convert into equity later.
- Characteristics: Fast and simple, avoids early valuation debates, but conversion terms may sting later.

f) Venture Capital (Seed Round) Model
- Source: Seed-stage VC funds providing significant early runway.
- Characteristics: Professional governance, valuation discipline, and investor oversight - with meaningful dilution.

Legal Implications
- Disputes from vague or undocumented founder contributions.
- Breach of corporate law minimum capitalisation rules.
- Exposure to claims if securities laws are ignored when raising funds.

Founder Relationship Issues
- Resentment if sweat equity, IP, or cash is undervalued.
- Misalignment when some founders contribute more financially than others.
- Conflict if early investors push governance demands without clarity.

Commercial Implications
- Insufficient capital cripples early growth and credibility.
- Poorly structured deals deter future investors.
- Weak valuation benchmarks make later fundraising harder.

Operational Implications
- Cash shortfalls disrupt hiring, product development, or go-to-market.
- Reliance on informal arrangements creates execution bottlenecks.
- Overstretching founders financially may cause burnout.

Biz Valuation Issues
- Weak capitalisation signals fragility to investors.
- Overly generous early dilution depresses future valuation.
- Poorly documented equity allocations raise red flags in diligence.

👉 The above lists are indicative issues – the relevance of which will depend on your circumstances.

We’ve identified quite a number of potential issues… below are some examples of the types of steps you can consider:

1. Clarify founder contributions – Cash vs in-kind vs IP, documented and valued.

2. Choose the right model – Bootstrapped, friends & family, angel, accelerator, SAFE/note, or VC seed.

3. Formalise arrangements – Shareholders’ agreement, subscription agreements, and cap table.

4. Check compliance – Local capitalisation requirements, securities laws, and tax treatment.

5. Think ahead – How today’s deal terms impact dilution and investor appetite later.

The above suggestions are just a few of the steps you can consider taking. There are many more things that need to be done to ensure the associated risks are effectively and pragmatically dealt with.

Capitalisation doesn’t need to be perfect from day one - but it must be clear, documented, and compliant. You can refine structures later, but getting the basics right avoids disputes and sets you up for scalable growth.

Uber’s SAFE-heavy early rounds
Uber raised large sums via convertible notes/SAFEs, delaying valuation debates. While it enabled fast scaling, early investors converted at discounts, causing massive dilution for founders by IPO.

Canva’s seed angel network
Australian design unicorn Canva tapped a broad angel network in its early rounds. This secured not just capital but critical introductions, helping it scale globally - showing how angel models bring more than money.

WeWork’s over-capitalisation
WeWork secured billions early but with governance concessions that left founders unchecked. The inflated valuation collapsed under scrutiny, proving that too much poorly structured capital can be as dangerous as too little.

◼️Share Capital – Equity issued to founders/investors representing ownership.

◼️Paid-Up Capital – Cash or in-kind contributions fully paid into the company.

◼️Convertible Note / SAFE – Debt-like instruments that convert into equity later.

◼️Dilution – Reduction of founder ownership percentage as new shares are issued.

Initial capitalisation is the DNA of your start-up’s financial structure. Get it right, and you set the stage for sustainable growth, investor trust, and founder alignment. Get it wrong, and you’ll be fighting fires - legal, operational, and relational - before you even hit the market.

◼️Founder contribution & equity structuring advice

◼️Drafting shareholders’ agreements and cap tables

◼️Valuation methodology support for early deals

◼️SAFE/convertible note drafting & negotiation

◼️Compliance with minimum capitalisation rules

◼️Friends & family investment formalisation

◼️Angel & VC seed round legal support

◼️Accelerator/incubator participation review

◼️Tax structuring for early contributions

◼️Dispute prevention mechanisms among founders/investors