Raising capital is one of the most challenging aspects of building a startup. Founders often set a target - say, £1 million - but frequently find that not all investors are ready to commit simultaneously. So, what should you do if you have some investors eager to invest now, but not enough to meet your total funding goal right away? This is where Advanced Subscription Agreements (ASAs) can be incredibly useful.

What is an Advanced Subscription Agreement?

An Advanced Subscription Agreement (ASA) is a type of investment agreement that allows an investor to commit funds to a company upfront, with the understanding that they will receive shares in the company at a later date. This is particularly useful for startups that need immediate funding but are not ready to complete a full investment round.

The Benefits of Using ASAs

• Immediate Access to Funds: With an ASA, your startup can access crucial funds right away, allowing you to continue operations and make progress while you seek additional investment to reach your funding target.

• Simplified Process: ASAs are typically shorter and require less administrative and legal work compared to a full funding round. This can significantly reduce the upfront time and costs associated with raising capital, with the core funding round legal work pushed to the end of the process when the ASA investments ‘convert’ to shares.

• Flexibility: The valuation of the shares issued under an ASA can either be pre-agreed or determined based on future criteria, such as a discount on the valuation of a future funding round. This allows for adjustments based on the company's progress.

How Does an ASA Work?

Here are some typical scenarios:

a) Investment Now, Shares Later: An investor commits to providing funds immediately but will receive shares in the future, typically within six months. This 6-month timeframe is necessary for compliance with SEIS and EIS regulations, which require shares to be issued within 6 months of the investment for tax relief purposes.

b) Valuation Flexibility: The shares can be issued based on a valuation agreed upon at the time of the investment or determined by the next funding round's valuation. Sometimes, the agreement includes a discount (usually between 10-20%) on the future valuation, providing an incentive for early investment. Equally, it can also provide a minimum valuation and a maximum valuation figure so there is at least a known valuation range when the ASA is signed, even if the exact valuation will be set and confirmed later.

Detailed Steps of the ASA Process

1. Drafting the ASA: The ASA document outlines the terms of the investment, including the amount invested, the future conversion into shares including the final valuation calculations, and any applicable discounts or valuation caps. This document is generally simpler than full investment agreements, making it quicker to prepare and execute.

2. Investor Commitment: Once the ASA is signed, the investor transfers the agreed funds to the company. These funds are typically used immediately to support business operations or growth initiatives.

3. Operating with Partial Funds: The company can use the invested funds to continue its operations and potentially make progress that could increase its valuation. This period allows the startup to demonstrate growth and attract additional investors.

4. Future Conversion Event: The ASA will specify the event that triggers the conversion of the investment into shares. This could be a specific future date (e.g. the end of the 6 month maximum period for SEIS and EIS purposes), the closing of a new funding round, or reaching a certain milestone in business development.

5. Valuation and Share Issuance: At the conversion event, the company issues shares to the investor based on the agreed terms. If the valuation was to be determined by a future event, it is calculated at this point, and the shares are issued at the appropriate price, including any agreed discount.

6. Signing the Shareholders Agreement: Once the shares are issued, the new shareholders will typically sign a shareholders agreement. This document governs the rights and obligations of shareholders, covering aspects like voting rights, transfer restrictions, and how future share issuances will be handled.

ASA v SAFE

An ASA is the most commonly used document format for ‘advanced’ investments in the UK, where the funds are sent in advance of the shares being issued. The ASA typically sets a ‘longstop date’ where the funds must convert to shares within an agreed period. This is often driven by SEIS and EIS requirements for the investment to convert to shares within 6 months.

A SAFE (or simple agreement for future equity) is more commonly used in the US, with the standard format coming from Y-Combinator. The SAFE does not by default have a longstop date and overall it contemplates a different type of investment process. It also contains specific terms for the type of shares which investors will receive in future, which may not be right for a UK startup.

In our experience, an ASA is the most common solution for UK startups, with a SAFE used only in particular circumstances where investors require it. Always seek advice on this before confirming an approach.

Managing Multiple ASAs

If you have multiple investors using ASAs, it’s important to manage their conversion to shares efficiently:

Simultaneous Conversion: Plan to convert all ASAs at the same time to simplify the process. This ensures that all investors receive their shares under the same conditions and reduces administrative complexity.

Cap Table Management: Maintain a well-managed cap table to track all investments and ensure accurate issuance of shares upon conversion. This is crucial for maintaining transparency and trust with your investors.

Advanced Subscription Agreements offer a practical solution for startups that have secured partial investment but are still working towards their full funding goal. By providing immediate access to capital with a flexible and simplified process, ASAs can help startups maintain momentum while continuing their fundraising efforts.

What If All Investors Are Ready Now? A Single Close

If, on the other hand, you have all your investors ready to commit at once, you can proceed with a single close investment round. This involves a more comprehensive process, including issuing shares immediately and executing a shareholders agreement upfront. This traditional route can provide more certainty and immediate clarity for all parties involved and is arguably the best way to close a funding round. However, not all startups have this luxury and the ASA process provides flexibility in a large number of cases to start taking investment funds in situations where a single close isn’t feasible.

Key Difference between Single Close Investment Round Vs ASA

The key practical difference with a single close investment round is that the core legal funding round process happens at the time of closing, whereas with ASAs, this happens after having completed all ASAs and collected all funds.

With a single close investment round, all investors will review the full investment round documents (see here for more info on angel rounds and here for more info on VC rounds) and then once the documents are agreed by all parties, then everyone will sign, and once everyone has signed, the investors will send their money and the company will issue the shares.

With an ASA, each investor can sign a short ASA document and then invest their money, with less administrative process up front. However, in practice the longer process is simply pushed to the point at which the investment converts to shares, and arguably it is better to close that process earlier and get it out of the way, rather than push it down the line. This will depend on context.

Which Approach is Best For Your Startup?

These decisions are generally taken with a review of the overall context and with professional advice. One of our team at Accelerate Law will be able to guide you through the process and make decisions with reference to the pros and cons of different approaches and your individual circumstances, to help you close your funding deal.

Accelerate Law provides flexible strategic and legal support to startups end-to-end through angel investment rounds and VC funding rounds, which includes supporting with SEIS and EIS matters, flexible funding for example through Advanced Subscription Agreements, and drafting and negotiating investment terms from term sheets through to completion. Accelerate Law also specialise in EMI Schemes for startups. Contact us here to find out more.