Advance Subscription Agreement Template

Under an advance subscription agreement (ASA):

• an investor provides investment funding to the company in the form of an advance subscription for shares
• the advance subscription will convert into shares in the company in the future on the occurrence of the company’s next funding round (or earlier in certain circumstances)
• the conversion price will be based on the price per share of the company’s next investment round. Depending on the negotiations between the company and the ASA investors, the conversion price could be at an agreed discount to the investment round price and also potentially subject to a cap on the investment round valuation of the company
• as an alternative, the conversion price for an ASA can be an agreed fixed amount, especially where the company is about to conclude an investment round at a known price per share but requires funding for the period prior to the conclusion of the investment round

There are 3 forms:

• Advance Subscription Agreement Percentage Discount – the advance subscription will convert into shares at a discount to the price achieved by the company in its next funding round
• Advance Subscription Agreement Valuation Cap – the advance subscription conversion price will be subject to a cap on the company valuation in its next funding round, protecting the advance subscription investors from a potentially high future valuation
• Advance Subscription Agreement Fixed Price – the advance subscription will convert into shares at an agreed fixed price

The aim of an ASA is to enable a company to raise investment funds quickly, ahead of a future anticipated investment round and on relatively simple terms from a legal perspective. An advance subscription agreement enables this to happen before the company valuation for that investment round is fixed and prior to the company going through the full legal process which an investment round requires. These practical advantages are normally reflected in any advanced subscription agreement template, which is designed to deliver consistent and investor-ready terms.

The company can enter into a number of advance subscription agreements on the same terms with different ASA investors, all of which then convert into shares in the company on the closing of the investment round.

For ASA investors, the benefits of an ASA include:

• speed and cost: ASA investors do not have to negotiate detailed legal terms for their investment or pay lawyers to do so. When the advance subscription converts into shares, the ASA investors benefit from the investment terms negotiated for the investment round
• valuation: ASA investors do not have to come to their own view on the current company valuation. They can effectively piggy-back off the company valuation at the next funding round
• discount: the ASA can provide that the shares issued to ASA investors on the closing of the next funding round are priced at a percentage discount to the share price of that funding round
• valuation cap: to protect ASA investors from the future funding round being at too high a company valuation, the ASA can include a valuation cap which must be fixed at the time that the ASA is entered into
• SEIS/EIS reliefs: ASAs, on conversion into shares, can qualify for SEIS/EIS tax reliefs if the ASA terms meet HMRC’s requirements and if the company and investor meet the usual eligibility requirements

For the target company, the benefits of an ASA include:

• timing and cost: a company can quickly raise funds under one or more ASAs, which is particularly important for start ups or companies running out of cash before an investment round. Funding can be received from a series of ASA investors without waiting for the full legal documentation of a formal funding round
• valuation deferral: deferring a company valuation by raising money under ASAs may reduce the dilution founders would face if they agreed an early valuation
• SEIS/EIS reliefs: being able to offer investment that may qualify for SEIS/EIS tax reliefs widens the pool of potential investors

For an ASA investor, the downsides include:

• risk: the investment is not treated as debt, is not repayable and does not carry interest. A convertible loan would offer interest and repayment but would not qualify for SEIS/EIS reliefs
• long stop date conversion: if no investment round has completed by the long stop date, the advance subscription will convert into shares at an agreed default valuation
• insolvency: on insolvency, ASA holders do not rank with creditors but with shareholders. Had the investment been made as a convertible loan, they would rank with other creditors

For the target company, the existence of one or more ASAs may negatively affect the future investment round. Investors may reduce their valuation to take into account discounts or valuation caps agreed with ASA investors, which can lower the pre investment valuation and increase dilution for founders and existing shareholders.

HMRC has issued guidance on ASAs and their use as qualifying SEIS/EIS investment arrangements. A company can apply to HMRC for advance assurance before entering into an ASA. In summary, HMRC guidance includes:

• ASA terms should not be complex. More complexity increases the risk of failing SEIS/EIS qualification rules
• the ASA should not offer additional investor protections
• the advance subscription should not be a loan or a means of converting debt or other obligations into shares
• the advance subscription should not bear interest
• the company must show how the timing and terms of the ASA fit into its business plan and planned expenditure on growth and development
• the ASA must not permit refunds under any circumstances
• the ASA must not be capable of being varied, cancelled or assigned
• the ASA should include a longstop date by which shares must be issued. HMRC expects this to be no more than 6 months from the ASA date

Yes but not immediately. An Advance Subscription Agreement (ASA) is a contract where an investor agrees to pay money to a company now, in return for shares to be issued at a later date. The shares are not issued immediately. Instead, the advance converts automatically when the company next raises investment (known as a qualifying funding round).

The number of shares issued is usually calculated by reference to the share price in that next funding round. Usually, the investor gets a discount on that price or benefits from a valuation cap. If no funding round occurs by an agreed long-stop date, the ASA normally provides for the investment to convert into shares at a default conversion price.

This structure allows companies to raise money quickly without setting a fixed valuation upfront. It’s often used by early-stage companies that expect to raise a larger round soon.

No, although both are used to raise early-stage investment, they are not the same. A SAFE (Simple Agreement for Future Equity) is a US concept and not generally used in the UK. ASAs are designed specifically to work within UK legal and tax rules, including SEIS and EIS.

Unlike a SAFE, an ASA is commonly structured to meet HMRC’s criteria for tax relief schemes. For example, it must not be repayable, must not carry interest and must result in the issue of shares within six months. A SAFE, by contrast, may not meet these requirements and could lead to a loss of tax relief for investors.

Yes. A subscription agreement, including an ASA, is a legally binding contract. It sets out the terms on which an investor agrees to provide funds in exchange for shares to be issued later.

Once signed, both the company and the investor are legally bound by its terms. This includes the timing and pricing of the share issue, and (in the case of an ASA) what happens if no funding round takes place. If either party fails to comply, the other may have legal remedies under contract law.

Yes, ASAs can qualify for SEIS or EIS reliefs — but only if certain conditions are met. The agreement must comply with HMRC guidance, which includes several strict requirements:

• the advance must not be repayable
• the advance must not carry interest
• the investor must not receive additional rights or protections
• the shares must be issued within six months
• the investment must be in cash and used for growth

Both the investor and the company must also meet the usual SEIS/EIS eligibility rules. It’s best to apply for HMRC advance assurance before offering ASAs to SEIS/EIS investors.

No, an ASA and a Convertible Loan Note (CLN) are different. Both convert into shares in the future, but a CLN is a loan that can carry interest and is repayable unless converted into shares.  As a loan, it also ranks as an ordinary liability of the company.  Because of this, CLNs do not qualify for SEIS or EIS tax reliefs.

An ASA, by contrast, is not treated as debt. It’s an agreement to issue shares in the future  – not a loan to be repaid. This distinction is important for both tax and legal purposes. ASAs are specifically designed to comply with HMRC’s conditions for tax relief.

ASAs can be negotiated and signed relatively quickly compared to other investment arrangements.  Nevertheless, there are a number of terms which will need to be discussed and agreed between ASA investors and the company before the ASA can be entered into. Understanding these negotiation points is important when preparing or reviewing an advanced subscription agreement template, as template clauses often set out the baseline position on discounts, valuation caps and long-stop arrangements.

These include (and depending on the discussions and negotiations between the company and ASA investors):

discount rate: the discounted price per share (expressed as a percentage) at which the holders of ASAs will receive shares in the future funding round

valuation cap: whether the ASA should contain a valuation cap on a future funding round (to protect ASA investors from a high valuation)

qualifying financing round: the minimum amount of funding which a company must raise before that funding round will count as the future funding round under the ASA which results in the conversion of the advance subscription into shares

long-stop date: the long-stop date after which (and in the absence of a prior qualifying financing round) the ASA will automatically convert into shares, together with the default conversion price/valuation which would then apply

HMRC has issued guidance on ASAs and their use as qualifying SEIS/EIS investment arrangements. A company can also apply to HMRC for advance assurance before the ASA is entered into. In summary, the HMRC guidance includes the following:

• ASA terms should not be complex – the more complex the ASA, the higher the risk that qualification rules for SEIS/EIS relief will not be met
• The ASA should not offer other benefits for the investor, such as investor protections
• The advance subscription should not be a loan or used as a means of converting a debt or other obligation to shares
• The advance subscription should not bear interest
• The company will need to demonstrate how the timing and terms of the ASA fit into the company’s business plan and its planned expenditure on growth and development
• The ASA should not permit the advance agreement to be refunded under any circumstances
• The ASA should not be capable of being varied, cancelled or assigned
• The ASA should have a longstop date by which the shares must be issued. HMRC expects this to be not more than 6 months from the date of the ASA

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