Raise capital for your business using an advance subscription agreement. Advance subscription agreements offer a quick and easy way to raise money without necessarily agreeing a valuation with investors.
When should I use an advance subscription agreement?
What is included in an advance subscription agreement?
This advance subscription agreement covers:
the investor’s details
the company being invested in
how much is being investing
conversion price discounts
the longstop date
the funding round target
What is an advance subscription agreement?
An advance subscription agreement (or ASA) is an agreement under which investors invest in a company. It is a form of equity investment, rather than a debt investment, because the money being invested cannot be repaid to the investor as cash.
The ASA constitutes an agreement that while the subscription monies are paid at the outset, the shares relating to the investment will be calculated and issued at some point in the future (eg on a future equity funding round, a sale of the company or an agreed longstop date).
Do I need an advance subscription agreement?
Advance subscription agreements are generally used when a company is looking to raise funds quickly, usually to prove a concept, in anticipation of an equity funding round in the near future. ASAs allow companies to minimise the costs of raising money when budgets are tight. Certain ASAs (such as this one), also allow investors to be eligible for tax relief under the Seed Enterprise Investment Scheme (SEIS) and/or Enterprise Investment Scheme (EIS).
What is an investor?
An investor (also referred to as a ‘subscriber’) is an individual investor that is receiving shares in the company in return for their investment funds.
What is the conversion price discount?
The conversion price is the price at which the investment will convert into shares in the next funding round. A 'funding round' being an event where the company raises money.
The conversion price should be at a discount to the price per share to compensate the investors for the risk they have taken by transferring funds in advance and investing early. The conversion price discount is usually between 10-30%, with 20% being most common.
What are valuation caps?
A valuation cap is the maximum value at which the investor’s investment can convert into shares. Different valuation caps can be set in case of different events. For example, a valuation cap for the maximum value at which the investor’s investment would convert into shares:
before the qualifying funding round
if the company goes insolvent before the future qualifying funding round
in the event of an 'exit' by the company (eg the company being sold or made public)
on the longstop date
Valuation caps are included to ensure that the existing shareholders have some certainty as to the level to which their shareholding will be diluted on conversion. They also ensure that the investors do not end up with an unexpectedly low share value, if the company is successful in achieving a high valuation at the next funding round.
How is a funding round valuation cap set?
Setting the funding round valuation cap is a matter of negotiation between the investor and the company. The parties should aim to reach a compromise between the company's current valuation (ie the pre-money valuation) and the valuation it expects to reach at the qualifying funding round (ie the post-money valuation).
What if the company becomes insolvent, there is a company exit before the funding round or the funding threshold isn’t met?
If the company becomes insolvent before the qualifying funding round, the funding threshold isn’t met or there is an exit by the company (eg the company is sold or made public), the investment will convert into shares automatically just prior to that event.
In the event of an insolvency, the investor will become a shareholder and can make a claim on the company's assets, along with the other shareholders.
The value at which shares convert should reflect a more realistic valuation of the company and is typically lower than the valuation cap set for a funding round.
What is the longstop date?
The longstop date is a date that will trigger the allocation of shares to the investor regardless of whether the funding round is achieved or not. This ensures the investor receives shares for the investment and that the company doesn't delay share allocation to the investor.
The longstop date is not expected to be more than 6 months from the date of the advance subscription agreement.
Ask a lawyer for advice if:
the conversion shares are preference shares
the company isn’t based in England or Wales
you require assistance completing the document
This advance subscription agreement is governed by the law of England and Wales.