Key clauses to include
1. Payment of advance subscription
This clause will set out the time period for the investor to pay the subscription amount (i.e. the amount being paid upfront in return for the right to subscribe for shares in the future). A time period for the investor to pay the subscription amount is not strictly needed, though the company will usually enter into the advance subscription agreement in order to raise funds quickly and it can therefore be useful in this regard.
2. Right to subscribe for shares
The investor needs to be granted a right to subscribe for the subscription shares, at the subscription price. The price at which the amount of investment will convert to shares (i.e. the price per share) is usually the lower of:
a “discount” (often of between 10-20%) on the price of the shares (this is established at the “qualifying fund round”); or
“valuation cap” - an agreed “pre-money” valuation of the company’s shares (i.e. excluding the investment under the advance subscription agreement). This is effectively a maximum price at which the amount invested will convert into shares.
3. Further subscriptions
An acknowledgement is usually included so that it is clear that the company may enter into similar agreements for advance subscriptions with others within the subscription period (up to an aggregate subscription amount which may be pre-agreed and set out in the advance subscription agreement).
4. Application of subscription amount
This clause usually makes it clear what the company can use the monies from the subscription towards. For example, this could be its general working capital purposes (but not to repay any outstanding loans or other facilities), for the purposes of raising additional financing and for any other purposes agreed by the investor in writing.
5. Advance subscription, not a loan
This type of clause is often included to make it clear that the subscription monies are not a loan, that no interest will accrue or be payable in respect of the monies and that the monies will not be refunded by the company in any circumstances. This can be crucial from a S/EIS eligibility perspective.
6. Waivers and resolutions
It is common to include in an advance subscription agreement obligations on the company to obtain all consents, waivers and resolutions necessary to enable the allotment and issue of the shares to the investors to proceed free of any rights of pre-emption or other restrictions.
7. Eligibility for tax relief
If any subscribers wish to obtain “SEIS” or “EIS” tax relief, they will want to be assured that investing under an advance subscription agreement will not compromise this. Therefore, companies should obtain specialist tax advice and often advance approval from HMRC.
8. Events triggering issue of the subscription shares
The advance subscription agreement should set out the events which “trigger” the conversion of the investment into shares, for example:
a “qualifying funding round” – which is where an amount equal to or more than a set “target” has been raised by the company (through further investment);
sale of the company or listing its shares on a public market (e.g. the LSE); or
a “longstop date” being reached (such date to be agreed between the parties).
9. Issue of the subscription shares
This clause will include time periods for issuing share certificates and entering the investor on the register of members, after the trigger event.
10. Adherence to shareholders’ agreement
An advance subscription agreement will include an agreement by the investor to sign a deed of adherence to the company's shareholders' agreement when they become a shareholder of the company. Some investors will not like being obliged to sign a deed of adherence to an agreement that they have not seen or have seen but which may later be varied. Without this provision, the company and its shareholders may not be able to comply with any obligation to ensure that new shareholders execute a deed of adherence.
The argument that should be made to the investor is that the position here is no different to them subscribing for shares directly, in circumstances where the shares cannot be issued to them unless they have executed a deed of adherence. Alternatively, the company can take a view on this risk on the basis that the most likely conversion event will be a funding round in which the advance subscription agreements convert, and the investor will be expected to sign up to any shareholders’ agreement at that point.
11. Effect of issue of subscription shares
This type of clause makes it clear that the issue of the shares will mean that all of the company's obligations under the agreement are satisfied, and the agreement will terminate automatically upon the issue of the shares.
12. Investor’s status
Section 21 FSMA 2000 provides that a person (who is not an authorised person or has not had a communication approved by an authorised person) must not, in the course of business, communicate an invitation or inducement to engage in investment activity.
However, where a communication is made to those who fall within certain exemptions in the order, such communication will not be unlawful. This clause will make it clear that the investor falls within one of those categories.
How can Docue help?
Creating a thorough and precise advance subscription agreement is crucial for securing investment and maintaining clear terms between startups and their investors. Docue’s advance subscription agreement has been drafted and is maintained by business lawyers - all you need to do is answer a series of simple questions, and you’ll have a customised advance subscription agreement in no time.
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