Restraint of trade clauses can be categorised into:
Restraints of trade are relevant at all stages of the business lifecycle, including when:
To be enforceable, a restraint must protect legitimate interests such as goodwill, trade secrets or confidential information. Restraints against mere competition are not enforceable.
Non-compete clauses usually seek to prohibit a person from being involved in a competing business.
In employment agreements, non-compete restraints are usually only enforceable against senior employees in possession of confidential information or trade secrets.
Non-solicitation clauses do not seek to prohibit a person from working for a competitor or starting their own business, but rather they seek to prohibit a person from encouraging clients or employees to follow them. There are three types of “non-solicitation” clauses. They are:
To be enforceable, the restrained person must be in a position to gain trust and confidence so as to be relied on in a client’s affairs and there must be a possibility that the person may take the
client’s business with them.
The likelihood of successfully enforcing a non-solicitation restraint against an employee increases with seniority and pay.
Trade secret / confidential information clauses seek to prohibit the restrained party from exploiting trade secrets or confidential information acquired in their former position.
Employees (as well as directors and other officers) of corporations are also prohibited from using information to gain an advantage for a person or cause detriment to the corporation under section 183 of the Corporations Act 2001 (Cth).
There are three questions of reasonableness:
The validity of a restraint is to be determined at the time the contract was entered.
Restraints are most commonly drafted in severable (or cascading) terms, which list a number of possible combinations of restraint areas, restraint periods and restrained activities. This allows a court to invoke the “blue pencil” rule, which allows the court to strike out the unenforceable parts of the restraint, and leave the enforceable parts standing.
In New South Wales, restraints of trade are not presumed to be void. The Restraints of Trade Act 1976 (NSW) allows the Supreme Court of New South Wales to uphold a restraint to the extent it is reasonable, even if the clause is not drafted in severable (or cascading) terms.
Employee restraints, as the name suggests, are restraints in employment agreements. Employee restraints are less readily enforceable because there is usually an inequality of bargaining power between employers and employees, and most of the time the employee does not receive additional compensation for giving the restraint.
A goodwill restraint is a restraint included in a commercial agreement (such as a business sale agreement, share sale agreement, shareholders’ agreement or franchise agreement). Courts are more willing to enforce goodwill restraints because usually the person giving the restraint has received some form of payment or other consideration for giving the restraint and there usually is not an inequality of bargaining power.
Section 23 of the Franchising Code of Conduct prevents restraints in franchise agreements having effect after the agreement expires if:
Where no express restraints are included in an agreement for the sale of a business, there will be an implied obligation on the seller to not depreciate what has been sold. Where such an obligation is implied, it will be limited to not soliciting customers of the business sold. There will be no prohibition on setting up a competing business and accepting custom. This implied obligation will be negatived where an agreement contains express restraints.
The Supreme Court of New South Wales granted an interim injunction restraining a senior property manager from starting employment with a competitor pending a final hearing
The Supreme Court of Queensland refused to enforce three-year non-compete restraints contained in the standard REIQ Contract Business Sale (Second Edition), an employment agreement and a settlement agreement
Restraints in dispute
The Federal Court of Australia held that restraints in a shareholders’ agreement were binding on an individual even though that individual did not sign the shareholders’ agreement in his personal capacity, but the restraints were unenforceable due to being too broad
The maximum restraint area was the ACT.
The maximum restraint period was five years.
You have a solid business idea, and you are ready to launch your start-up. The only problem left to solve is money. How you fund your business will determine the trajectory of your start-up. In this article, we will break down the various types of funding available to start-ups, as well as the multiple stages to capital raising.
Often, start-up founders boot-strap their start-up with their own funds or by performing outsource services for other companies to get through the initial start-up phase. Start-up founds also tend to raise initial capital from family and friends as pre-seed funding. The average amount invested by friends and family into start-ups is $23,000 per year, according to Fundable. Yet, it comes with the risk of your start-up interfering with family relationships.
The seed stage is the first round where start-ups raise capital from external investors. This is usually where you start issuing equity instruments to investors in exchange for cash, and it is crucial to ensure these initial investors will bring strategic value to your start-up, instead of just being passive investors. High net worth individuals, known as “angel investors” tend to be active participants in the seed funding stage for start-ups. Angel investors are professional investors that do their due diligence before investing, so they will only invest in promising companies. However, if you secure an angel investor, they can become active and reliable capital sources throughout the life cycle of your start-up. For example, in 2019, Bill Grierson, won awards for being an active angel investor, making 80 investments in 48 companies over five years.
Now the seed of your business has started to grow, it is time to use that developing track record to raise more capital. This stage is all about optimising your customer base and product, and scaling for different markets. Some of your existing angel investors may continue, with the addition of venture capitalists and sometimes accelerators.
Venture capitalists are quickly becoming a popular option in Australia, hitting record levels of funding in 2019 at $1.7 billion. As a form of private equity financing, they are great for early-stage financing for businesses with high growth potential. Each fund comes with a specific set of goals, depending on the start-up’s location, sector and stage of investment. Do your research before applying to VC firms, and understand the risks involved, as VC firms will expect a rapid return on investment in return for the risk of investing in an early stage start-up.
As you continue to scale your start-up, you will most likely need to raise further funds from external investors to maintain momentum. Series B funding is harder to get, as investors look at your assets, market share, revenue, and existing profits, among other things. Most of your money will come from those existing angel investors and some VC firms, giving your capital raising strategy a firm structure.
As the last stage of funding before going public, you are now in the big leagues with Series C funding, helping you buy competitors and scale your company upwards. As funding becomes more complicated and private equity starts thinning out, hedge funds and investment banks start becoming more common.
When it comes to capital raising for your start-up, remember: