If you’re reading this, there’s a good chance your startup has already proven it can build, sell and grow. You’re no longer pitching a concept - you’re pitching a business that’s working.
That’s exactly where Series B funding often sits. It’s commonly the round where Australian startups move from “early growth” into “serious scale”, and where the legal work gets more detailed (and the stakes get higher).
At this stage, investors are typically expecting more than momentum. They’ll usually want clear governance, well-managed risk, clear ownership, robust contracts, and a cap table that holds up under scrutiny. The good news is: you can absolutely get there - but it helps to know what to prepare before the term sheet lands.
Below, we’ll walk you through what Series B funding commonly involves, what investors will likely focus on in legal due diligence, and how to set yourself up so the round runs smoothly (and you keep control of the things that matter).
What Is Series B Funding (And Why Does The Legal Work Change)?
In simple terms, Series B funding is usually a growth round that comes after you’ve moved beyond product-market fit and you’re actively scaling. That often means:
- expanding into new markets (Australia-wide or offshore)
- growing headcount quickly
- spending more aggressively on sales and marketing
- maturing your product, security, and infrastructure
- professionalising your governance and reporting
Legally, Series B tends to feel different from earlier rounds because:
- More money usually means investors ask for stronger protections and more formal control rights.
- More complexity (subsidiaries, overseas contractors, enterprise customers, regulated markets) can create more diligence issues to work through.
- More scrutiny means anything informal or “handshake-y” from earlier stages can become a delay - or a negotiating point - later.
It’s also common for Series B to involve a more formal and negotiated suite of documents, more detailed disclosure and warranties, and more structured board-level governance expectations than a seed or Series A round (though the exact approach varies deal to deal).
How To Prepare Your Company Structure And Governance For Series B
Before you negotiate valuation or investor rights, it’s worth checking whether your corporate foundations will stand up to diligence. In a Series B process, investors typically expect your company to look and operate like it’s ready for institutional growth.
Make Sure Your Corporate Records Are Clean
Your internal company records should be up to date and consistent with what’s on the cap table. That includes:
- share issue records (including dates, classes, consideration paid)
- option grants and vesting schedules
- board and shareholder resolutions
- ASIC filings where required
- signed versions of key fundraising documents
If your company has grown quickly, it’s normal for admin to lag. But Series B is where gaps become expensive - because investors will often ask that issues are fixed as a condition to completion.
Check Your Shareholder Arrangements Still Fit A Scaling Business
Founders often set their early governance up when the business had two or three people and a simple decision-making process. By Series B, you may have multiple investor groups, employee option holders, and a board with external members.
This is usually when it becomes critical to review (or put in place) a properly drafted Shareholders Agreement so that decision-making rules, share transfers, founder obligations and exit mechanics are clear.
If you’re relying on a basic constitution (or a template), investors may push for updates. Where appropriate, a tailored Company Constitution can also help align governance with your fundraising strategy (including different share classes and voting rights, if relevant).
Be Ready For Board And Investor Controls
By Series B, it’s common for investors to ask for:
- board seats (or board observer rights)
- reserved matters (decisions that require investor approval)
- enhanced information rights (financial reporting, budgets, KPIs)
- veto rights on certain key transactions (for example, acquisitions, new share issues, or significant debt)
None of these are automatically “bad”. But they can affect how fast you can operate, especially if you’re scaling quickly and need to make decisions at speed. It’s worth thinking ahead about what approvals you can realistically live with, and where you need flexibility.
What Investors Look For In Series B Legal Due Diligence
Legal due diligence for a Series B round is often less about “do you exist as a company?” and more about “is there anything here that could create major risk after we invest?”
While every deal is different, there are some consistent diligence themes.
1. Cap Table And Equity Hygiene
Investors will want confidence that ownership is clear and enforceable. Common issues that slow Series B rounds include:
- unissued but “promised” equity
- unclear option terms or missing option paperwork
- unsigned founder vesting arrangements
- side letters with earlier investors that were never properly documented
- inconsistent records between the cap table, company register, and signed agreements
If you’ve raised multiple rounds quickly, you’ll want to confirm everything matches and that your historical fundraising documents are complete and signed.
2. Intellectual Property Ownership (Especially Developer IP)
For many startups, your IP is the asset. Investors will often drill into whether the company truly owns what it thinks it owns - especially if early development involved contractors, overseas developers, advisors, or co-founders.
Common red flags include:
- no written IP assignment from contractors
- code built under a freelancer agreement that doesn’t clearly assign IP
- unclear ownership of brand assets and domains
- licensing arrangements that restrict commercial scaling
This is also where trade mark strategy matters. If your brand is gaining traction, it’s worth protecting it early so your growth doesn’t create a dispute later.
3. Key Customer And Supplier Contracts
Series B investors tend to look closely at revenue quality. That means reading the contracts that actually generate (or could jeopardise) revenue.
They may focus on:
- contract term and renewal rights
- termination clauses (especially termination for convenience)
- change of control provisions (do customers have extra rights if you raise or sell?)
- liability caps and exclusions
- service levels, warranties and refund rights
If you’re selling online or via subscription, it’s often helpful to ensure your Subscription Terms and Conditions properly cover billing, cancellations, disputes and limitations of liability in a way that fits your product and customer base.
4. Employment, Contractors And Incentives
At Series B, headcount growth usually accelerates - and so does employment risk. Investors may review your:
- employee and contractor agreements
- invention assignment and confidentiality terms
- workplace policies (especially around acceptable use, security and privacy)
- incentive plan documents (options, phantom equity, vesting)
Having consistent, properly drafted agreements (including a tailored Employment Contract) helps show investors your people risks are managed - and helps reduce the chance of disputes as you scale.
5. Privacy, Data And Security Posture
If you collect personal information (and most startups do), Series B investors may test whether your privacy posture matches the scale you’re aiming for - especially if you’re in health, fintech, SaaS, eCommerce, or anything dealing with sensitive data.
They may look at:
- whether you have a public-facing Privacy Policy that reflects what you actually do with data
- data handling and retention practices
- security incident response planning
- vendor and third-party tooling (and where data is stored)
Even where you’re not legally required to meet every enterprise-grade standard, investors often treat privacy and security as “value protection” issues. If you’re scaling fast, it’s worth tightening this early.
Key Terms In Series B Funding Documents (And What They Mean For You)
At Series B, your term sheet and definitive documents will often contain more detailed rights and protections than earlier rounds. You don’t need to memorise every clause, but you do want to understand what levers are being pulled - because they affect control, economics, and exit outcomes.
Valuation, Liquidation Preference And Participation
Liquidation preference clauses set the order and amount of payout when there’s a liquidation event (often an exit, sale, or winding up). The “headline valuation” can look great, but preferences affect what founders and employees actually receive on exit.
Watch for:
- multiple preferences across different rounds
- participating preferences (investors get preference and share in the remainder)
- stacking effects that change outcomes under different exit values
These are not purely “legal” issues - they’re commercial - but they are implemented through legal drafting, and they can materially change who benefits from an exit.
Anti-Dilution Protections
Anti-dilution terms protect investors if you later raise at a lower valuation (a “down round”). At Series B, this can become more heavily negotiated.
The key point is: anti-dilution can affect founder ownership and future fundraising flexibility. It’s important to understand the practical impact, not just the label.
Reserved Matters And Veto Rights
Reserved matters clauses can require investor approval for certain actions, such as:
- issuing new shares or options
- taking on significant debt
- changing the constitution
- acquiring or selling assets
- changing key business lines
This can be reasonable investor protection. But if the list is too broad, it can slow you down at the exact time you need speed.
Founder Matters: Vesting, Good Leaver/Bad Leaver, Restraints
Series B investors may revisit founder terms that were lightly documented earlier (or never fully implemented). This might include:
- continued vesting or reverse vesting
- good leaver / bad leaver mechanics
- non-compete / non-solicitation restraints (within enforceable limits)
- requirements to remain employed full-time
The goal is usually to ensure the people driving the business are aligned and committed. But the drafting matters - especially around what happens if a founder leaves due to illness, disagreement, or a restructure.
Warranties And Indemnities
At Series B, investors may require more extensive warranties (promises that certain statements about the business are true). If something turns out to be wrong, the company may have liability - and in some deal structures, founders or key shareholders may also be asked to give warranties or indemnities (though the scope and who gives them varies a lot between transactions).
Good preparation reduces the risk that you’re asked to “warranty around” issues you could have fixed earlier.
What Legal Documents Should You Have Ready Before Series B?
You don’t need to have every document perfect from day one. But by the time you’re entering a Series B process, having a solid legal suite is one of the best ways to reduce delays, reduce re-trades, and protect your negotiating position.
Common documents investors expect to see (or will ask you to upgrade) include:
- Shareholders Agreement: sets out governance, decision-making, share transfers, exits, and founder/investor protections.
- Company Constitution: supports how your company is structured and can be critical where you have (or will introduce) different share classes.
- Employment Agreements: clarify duties, confidentiality, IP creation and assignment, and termination terms as your team grows.
- Contractor Agreements: especially important if developers, designers, or consultants have created valuable assets for the business.
- Customer Terms (Including Subscription Terms): make revenue enforceable and reduce disputes around payment, service levels, cancellations and refunds.
- Privacy Policy: explains how you collect, use and disclose personal information (and helps reduce privacy and compliance risk).
- Key Commercial Contracts: supplier, distribution, integration, reseller, referral or partnership agreements as relevant to your growth channels.
Depending on your model, you may also need IP assignment documents, data processing terms, website terms, or industry-specific compliance documents.
If you’re unsure what is “must-have” versus “nice-to-have”, it’s usually worth reviewing your position before diligence starts - because fixing documents mid-deal is almost always harder.
Key Takeaways
- Series B funding is often where startups move from growth into scale, and investors may expect more mature governance, clearer documentation and more structured risk management.
- Before you enter the round, make sure your corporate records, cap table, option grants and prior fundraising documents are complete, consistent and signed.
- Investors typically focus due diligence on equity hygiene, IP ownership, customer and supplier contracts, employment arrangements, and privacy/data risk.
- Series B terms can materially affect control and exit outcomes, so it’s important to understand how preferences, veto rights, anti-dilution and founder terms work in practice.
- Having a solid legal foundation (like a Shareholders Agreement, Constitution, employment and contractor agreements, customer terms and a Privacy Policy) can reduce delays and strengthen your negotiating position.
This article provides general information only and doesn’t constitute legal advice. If you’d like a consultation on Series B funding for your startup, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
