Top 5 FAQs about advanced subscription agreements

1. What is an advanced subscription agreement (ASA)?

An advanced subscription agreement (commonly known as an ASA) is a type of investment document where an investor agrees to pay a certain amount upfront in exchange for shares that will be issued at a future date. Unlike a convertible loan note, ASAs are not considered debt and therefore do not accrue interest or have repayment obligations. Instead, they convert into equity (i.e. shares) upon the occurrence of a future qualifying event, such as a new funding round, the company's valuation reaching a certain threshold, or an initial public offering (IPO).

2. How can using an advanced subscription agreement benefit startups?

Advanced subscription agreements provide several advantages for startups, particularly those in their early stages:

• Simplicity and speed: ASAs are simpler and quicker to negotiate compared to traditional equity investments. This means startups can secure funding faster.

• No immediate dilution: Since shares are issued at a future date, there is no immediate dilution of existing shareholders' equity.

• Deferral of valuation: advanced subscription agreements allow the company to defer valuation discussions until a later stage, usually when the company has more traction and can command a higher valuation.

Example:

A startup needing £100,000 might use an ASA to secure the funds now, agreeing to issue shares to the investor at the valuation of the next funding round, anticipated to be higher than the current valuation.

3. What are the key terms of an advanced subscription agreement?

When entering into an ASA, it's important to understand the key terms typically included:

• Payment of advance subscription - the time period for the investor to pay the subscription amount;

• Right to subscribe for subscription shares - the investor is granted a right to subscribe for the subscription shares, at the subscription price;

• Further subscriptions - an acknowledgement that the company may enter into similar agreements for advance subscriptions with others within the subscription period (up to the aggregate subscription amount, if specified);

• Application of subscription amount - detailing how the subscription monies can be used by the company;

• Advance subscription, not a loan - making 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;

• Waivers and resolutions - 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;

• Eligibility for tax relief - an optional warranty from the company in relation to tax relief;

• Events triggering the issue of the subscription shares - the circumstances that will trigger the issue of shares to the investor;

• Issue of the subscription shares - time periods for issuing share certificates and entering the investor on the register of members;

• Adherence to shareholders’ agreement - agreement by the investor to sign a deed of adherence to the company's shareholder agreement;

• Effect of issue of subscription shares - when the agreement will come to an end; and

• Investor’s status - a warranty from the investor that it falls within one of the approved categories of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005.

Find out more about the key terms to include in advanced subscription agreements by using our handy checklist.

4. Are advanced subscription agreements SEIS/EIS compatible?

One of the most attractive features of advanced subscription agreements for UK investors is their compatibility with the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS).

Investments under advanced subscription agreements can sometimes qualify for S/EIS relief. S/EIS offers tax reliefs to individual investors who buy new shares in a company, if structured correctly. This typically means ensuring the advanced subscription agreement complies with HMRC's guidelines on advance assurances and obtaining specialist tax advice.

You can find out more about the scheme here.

5. What risks are associated with advanced subscription agreement?

While advanced subscription agreements offer many benefits, they also come with risks that both startups and investors should consider:

• Company failure: if the startup fails before the conversion event, the investor may lose their entire investment.

• Dilution: future funding rounds might dilute the investor's equity more than anticipated.

• Valuation disputes: if the conversion terms are not clearly defined, disputes can arise regarding the company’s valuation at the conversion event.

How can Docue help?

Creating a thorough and precise advanced subscription agreement is crucial for securing investment and maintaining clear terms between startups and their investors. Docue’s advanced 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 advanced subscription agreement in no time.

Want to try Docue for Free? Sign up now to use our advanced subscription agreement template!