Advance Subscription Agreements: Money now, shares later

An Advance Subscription Agreement (ASA) allows investors to ‘pre-pay’ for shares. For both founders and investors, ASAs can be a faster, more direct and more flexible way to get funds into the startup compared to a traditional ‘priced’ equity round, where the startup raises funds at a predetermined valuation.

We’ve seen Advance Subscription Agreements skyrocket in popularity over the past few years on SeedLegals. In this post, we explain what they are, why they’re a powerful alternative to a full round and how to use them.

In this post

• What is an Advance Subscription Agreement?
• How does an Advance Subscription Agreement work?
• Advance Subscription Agreement: pros and cons
• Difference between Advance Subscription Agreements and SAFEs
• Difference between Advance Subscription Agreements and Convertible Loan Agreements
• SEIS/EIS compatibility rules for Advance Subscription Agreements
• How to create an Advance Subscription Agreement on SeedLegals
• Key takeaways
• Talk to the funding experts

What is an Advance Subscription Agreement?

An advance subscription agreement (ASA) is a type of funding agreement between investors and a company. Under an ASA, investors commit to providing capital to the startup immediately in exchange for the right to receive shares at a fixed point in the future.

The terms of the agreement specify the trigger event – usually it’s a new funding round. If no trigger event happens before the specified deadline – the longstop date – then the agreement converts into shares at the pre-agreed longstop valuation.

For companies, the benefit of an Advance Subscription Agreement is obvious. You get access to cash much earlier than you would if you were negotiating a full funding round.

What’s in it for investors? By committing earlier, they can secure their right to shares at a lower valuation than they would during a round. Plus, companies can add an extra incentive to encourage investors to commit their capital early, by offering the ASA investor a discount on the shares as a reward for coming in early.

Read more of Anthony’s insights: How to pick the right terms for your Advance Subscription Agreement

How does an Advance Subscription Agreement work?

An Advance Subscription Agreement allows startups to secure funding from investors upfront even before a valuation has been set, and receive investment on a rolling basis.

Here are the terms you’ll specify in your Advance Subscription Agreement:

• Discount – founders can make the deal more attractive for the investor by offering a discount (typically between 10% and 20%) on shares in the next round.
• Valuation cap – you can set an upper limit on the valuation at which the Advance Subscription Agreement will convert into shares. If the next round valuation is higher than the cap, the agreement converts at the cap, giving the early investors a better deal than those who invest later.
• Longstop date – this is the deadline by which the agreement must convert into shares. If you don’t have a funding round before this date, then the ASA converts into shares automatically at the longstop valuation.
• Longstop valuation – this sets the price at which the ASA will convert if no trigger event happens.

Advance Subscription Agreement: pros and cons

Pros

• Fast to negotiate and complete – Instead of rounding up all the investors to fill up a funding round, agreeing a valuation with them and then doing all the legal paperwork, ASAs allow you to raise when the opportunity arises. You can defer the valuation discussion and the complex legal documents (Term Sheet, Shareholders Agreement, Articles of Association) until later.
• Locks in capital before a round – With an ASA, you can secure cash upfront while you work through the rest of your funding round.
• Use early cash to grow your valuation – you can use an ASA tactically. Take the cash you’ve raised via the ASA, invest in business activities that allow you to grow your valuation, so you can raise a full round at a higher valuation.
• SEIS/EIS compatible – as long as the investment complies with certain restrictions

Cons

• Restrictions on terms and investor rights for SEIS/EIS compatibility
• Risk-shy investors might prefer the added protection of a convertible loan instead or the additional investor protection rights that are negotiated in a Shareholders Agreement in a funding round
• You need a separate agreement with each individual investor. If you’re raising from multiple investors, this could drastically increase your legal costs. With SeedLegals Flex you can fix all your fundraising costs for the year – that means unlimited SeedFASTs (along with all the other funding options).

Difference between Advance Subscription Agreements and SAFEs

In the US, the standard pre-funding round agreement is Y Combinator’s SAFE (Simple Agreement for Future Equity).

The broad principles are the same. But because the YC SAFE template is written for US law and uses US terminology (fair enough), if you use a YC SAFE this could cause complications for your company further down the line because:

• it’s Delaware law (not UK law)
• it contains various SEC and tax commitments that you don’t want
• it talks about Common Stock, Series Seed Stock and other terminology that just doesn’t apply in the UK. Your investor will be getting Ordinary or Preferred Shares, not Common Stock
• YC SAFEs don’t have the concept of a longstop date, but to make the investment compatible with the SEIS/EIS tax relief schemes you need to specify that the investment converts within six months. To avoid problems with some investments converting and others not, you’ll most likely want all your ASA investments to have a longstop date too.
• Nevertheless, if you’re raising from US investors, they might insist on using a SAFE. In that case, you can use the SeedLegals English law version of a YC SAFE to keep both parties happy.

We created this agreement to be as familiar as possible to a US investor who’s used to the actual YC SAFE template. We intentionally limited the changes to only the things needed to make it work for English law and UK companies.

Difference between Advance Subscription Agreements and Convertible Loan Agreements

Advance Subscription Agreements used to be relatively uncommon in the UK. Before SeedFASTs came along and changed the game, founders who wanted to raise before a funding round were limited to convertible loan agreements.

As the name suggests, the convertible loan agreement functions like a loan. The investment gives investors debt in your company, which is either converted into shares at the next funding round or at the longstop date or is paid back (often with interest).

Convertible debt allows investors to hedge their bets and therefore might appeal to most risk-averse investors. For founders, they’re often a less beneficial way to raise because:

• Depending on the terms, they can come with interest payments
• They’re not SEIS/EIS compatible, which might rule out UK investors for whom SEIS/EIS tax relief is a prerequisite for investing.

SEIS/EIS compatibility rules for Advance Subscription Agreements

UK legals around funding rounds are very similar to Ireland so Irish startups can often meet the criteria for EIS and SEIS advance assurance from HMRC.

For the Advance Subscription Agreement investment in your company to be eligible for SEIS/EIS tax relief, it must:

• Have a longstop date of no more than six months
• Convert into Ordinary Shares

The investment must also follow the other SEIS/EIS investor rules and company rules.

The requirement that sometimes causes confusion is the gross assets test. When you issue the ASA shares, your company can’t have more than £350,000 (SEIS) or £15 million (EIS) in gross assets. The rule applies to the date you issue the shares, not the date on which you sign the Advance Subscription Agreement.

When the investor comes to claim their SEIS/EIS tax relief, they’ll need to know which date and tax year applies to their investment.

The date that an investor’s SEIS/EIS investment is deemed to have been made is the day that they were issued their shares, not the day they signed the Advance Subscription Agreement. This means that the tax year in which the SEIS/EIS benefit is given is the tax year when the funding round took place, not the tax year in which the SeedFAST investment was made.

The good news is that HMRC allows investors to backdate their SEIS/EIS claim to the previous tax year. There are full details on HMRC’s guide to self assessment and SEIS/EIS.

So if your investors make investments in your company via an Advance Subscription Agreement today, even if it only converts into shares in the next tax year, they’ll be able to retrospectively claim their SEIS/EIS tax deduction then, for this tax year.

Read more: SEIS Compliance – how to make sure your investors get their tax relief

How to create an Advance Subscription Agreement on SeedLegals

On SeedLegals we’ve made it super simple and quick to create an Advance Subscription Agreement. It’s called SeedFAST and with it you can:

• Quickly build your agreement based on a template written by our lawyers
• Customise the agreement to suit your situation
• Follow clear step-by-step guidance
• Get expert help whenever you need it
• Sign, share and store it online

It takes just minutes to create your SeedFAST Advance Subscription Agreement on SeedLegals. And it’s fully integrated with our online signing process, digital cap table, share certificates and board management tools.

Need more than one SeedFAST? On SeedLegals you can duplicate terms from previous SeedFASTs to save time and effort when you’re raising from multiple investors.

Key takeaways

• Advance Subscription Agreements (ASAs) allows startups to raise cash ahead of a funding round
• ASAs are a significantly faster way for companies to raise cash compared to a traditional equity round
• Unlike convertible loan agreements, ASAs are eligible for SEIS/EIS tax relief
• With the SeedLegals SeedFAST, you can create, sign and share your agreement in just a few minutes

Talk to the funding experts

Need help figuring out your funding strategy? Or how SeedFASTs could fit into your fundraising? Use the form below to choose a time for a free call with a SeedLegals funding strategist.