What Is An Advanced Subscription Agreement?

Dan Nailer
Dan NailerLegal Assessment Specialist
Updated on 23rd April 2024

Advanced Subscription Agreements are growing in popularity in line with the rise of start-ups. They work by allowing a company to secure investment upfront, with shares issued later when a significant investment round happens, or by an agreed longstop date if no investment happens before then. 

If you’re entering into the world of startups or investments, you might come across Advanced Subscription Agreements at some point. Before you jump in with both feet, it’s important to understand what an Advanced Subscription Agreement is and what you should consider before getting into one. 

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Table of Contents

What Is an Advanced Subscription Agreement? 

An Advanced Subscription Agreement (ASA) is an agreement where an investor commits to buying shares in a company at a discounted price, but the shares are not immediately issued.

Instead, they are issued later when a specific event, known as a "trigger event," occurs, usually during the next round of funding.

How does an Advanced Subscription Agreement work? 

Under an Advanced Subscription Agreement (ASA), an investor provides funding to a startup in exchange for the right to buy shares in the company later on.

Unlike traditional investments where shares are issued immediately, with an ASA, shares are issued later, usually when the company seeks its first round of funding.

Other trigger events can include:

  1. A predetermined ‘longstop’ date

  2. Sale of the company 

  3. An insolvency event. 

When an ASA converts, ordinary shares are issued at a discount of 10 to 30%. 

What are the benefits of an ASA for investors? 

Investors receive shares at a discounted price compared to those issued in the initial equity round under an Advanced Subscription Agreement. This means they can potentially get more shares for their money. 

Investors may also benefit from tax relief under certain incentive schemes. 

The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are initiatives by the UK government to encourage investment in early-stage and growth-focused companies by offering tax relief to investors. 

Eligible investments made through ASAs may qualify for SEIS or EIS relief providing they meet certain criteria. 

What are the benefits of an ASA for companies?

An Advanced Subscription Agreement gives startups and businesses an early cash injection to launch and scale their operations quickly. 

Unlike Convertible Loan Notes, companies don’t have to pay interest on the funds received through ASAs. Furthermore, they don’t have to repay the funds, nor are they considered debt instruments. This can provide financial flexibility through growth periods. 

Another benefit of ASAs, particularly for startups, is the company doesn’t need to undergo valuation until the first funding round. This can mitigate the risk of giving away too much equity too soon. 

What are the disadvantages of an Advanced Subscription Agreement for investors? 

If the company goes bankrupt or is sold off, investors who provided funds through ASAs might not get as much money back as those who invested through other methods because creditors who lent through other agreements, like CLNs get paid first. 

Further, funds given through ASAs don’t earn interest, unlike CLNs, so investors won’t earn any additional returns on the funds they provide. 

What are the disadvantages of an Advanced Subscription Agreement for companies?

The biggest drawback of an ASA to the founders is that their existing shares become less valuable when ASA shares are issued at a discount since they own a smaller percentage of the company. 

What’s more, the presence of outstanding ASAs may put off future investors. 

What role do company documents play in ASAs?

ASA investors must follow a company’s Articles of Association when shares are eventually issued. 

Further, if there’s a shareholders’ agreement, investors must understand how its terms will affect them. On the flip side, if no shareholders’ agreement exists, investors must decide if they’re comfortable investing without knowing future terms. 

What is a long-stop date? 

The long-stop date is the deadline, often within 12 months, by which shares must be issued, regardless of future funding outcomes. 

Shorter long-stop dates may be necessary to claim tax benefits like EIS or SEIS. 

What are pre-emption rights in an Advanced Subscription Agreement?

Pre-emption rights are the rights of existing shareholders to have the first chance to buy new shares before they’re offered to new investors. 

As an Advanced Subscription Agreement gives investors the option to buy new shares, directors must know if pre-emption rights apply before agreeing. 

What is the difference between a Convertible Loan Notes and an Advanced Subscription Agreement? 

Convertible Loan Notes (CLNs) and Advanced Subscription Agreements (ASAs) are ways for startups and growing businesses to raise funds, but they work differently.

CLNs are like loans that can turn into shares later on. Investors lend money to the company, which can be converted into shares when the company raises more money in the future. 

ASAs, on the other hand, involve investors paying for shares upfront, but they get the shares later, usually when the company gets more funding.

With an ASA, investors usually get a discount on the future share price as a reward for investing early, while CLNs often come with interest payments. 

These key differences make CLNs more attractive to investors as holding CLNs gives them higher priority over shareholders who invested through ASAs. 

What happens to the valuation under an Advanced Subscription Agreement? 

In an Advanced Subscription Agreement, since shares are not issued immediately, there’s no need to value the company upfront. 

Instead, valuation is deferred until closer to the next funding round. But startups must include a valuation cap. This gives existing shareholders an idea of how much their ownership might decrease when the agreement converts.

What should the target be for a qualifying investment round in an Advanced Subscription Agreement?

A qualifying funding round is when the startup reaches a predetermined funding target. 

In an Advanced Subscription Agreement, it’s important to strike the right balance when setting the target for a qualifying investment round.

if the target is too low, investments may convert before the startup has raised enough funds. On the other hand, if the target is too high, the investment may not convert even if the startup has received significant investment. 

Are there any other circumstances when shares should convert in an Advanced Subscription Agreement? 

In addition to a qualifying funding round or a long stop date, parties should consider other situations where shares should automatically convert. For example, if the startup is sold. 

These additional circumstances should be detailed in the agreement to ensure understanding. 

Get help with Advanced Subscription Agreements

If you need legal advice or assistance with drafting an Advanced Subscription Agreement, our network of corporate solicitors is here to help.

Get in touch with our Legal Assessment Team for more details and a fixed-fee quote from a specialist lawyer.

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