This agreement sets out the terms under which an investor invests in the company by “pre-paying” for equity shares to be issued in the company in the future (when certain agreed events occur). Therefore, the agreement represents a right to subscribe for shares in the company.
The agreement sets out the events which “trigger” 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);or
- sale of the company or listing its shares on a public market (e.g. the LSE); or
- a “longstop date” being reached (agreed between the parties).
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 ASA). This is effectively a maximum price at which the amount invested will convert into shares.
If any subscribers wish to obtain “SEIS” or “EIS” tax relief, they will want to be assured that investing under an ASA will not compromise this. Therefore, companies should obtain specialist tax advice and often advance approval from HMRC.
