Share subscription agreement explained: key terms, SEIS and EIS, advance subscriptions

A share subscription agreement is the contract a company, typically a start-up, uses to issue new shares to an investor in return for money. It is the standard document for raising equity finance, and it is not the same thing as a share purchase agreement. This page covers what goes in a share subscription agreement, why the shares must be new if your investors want SEIS or EIS relief, and how an advance subscription agreement differs from the standard version.

What is a share subscription agreement?

A share subscription agreement is a contract under which a company agrees to issue new shares to an investor, and that investor agrees to buy those shares, typically by giving the company money.

This is a common way for growing companies and start-ups to raise capital. The investor ends up with a stake in the company, and the company ends up with cash on its balance sheet to fund growth.

Equity finance vs debt finance

Raising money through a subscription agreement is commonly referred to as equity finance. You are giving away equity, part of your company, in return for money.

That is different from debt finance, which is when a company takes out a loan and has to repay it in the future. With equity finance there is nothing to repay. The investor's return comes from the shares themselves: dividends, and the value of the shares if the company grows or is sold. The trade-off is that you have a new shareholder with rights in your company.

Share subscription vs share purchase agreement

The share subscription agreement is not to be confused with the share purchase agreement, or SPA.

An SPA is typically used in M&A transactions, mergers and acquisitions, where a buyer is buying existing shares from an existing shareholder, usually as part of a larger deal in which the buyer is acquiring the entire company from the seller. The shares already exist and are changing hands.

A subscription agreement is the opposite: the shares do not exist yet. The company creates them and issues them to the investor. The money goes to the company, not to a selling shareholder. For a fuller comparison see share subscription agreement vs share purchase agreement.

What goes in a share subscription agreement?

The key terms of a share subscription agreement are:

• The parties. The company that is issuing the shares, and the investor. Is the investor subscribing as an individual, or through their own company? That needs to be clear, because it determines who the shareholder is.
• The number and type of shares. How many shares are being issued, and which class. If the company has different classes of shares, the agreement must say which one the investor is getting.
• The subscription price. How much the investor is paying per share, and therefore the total amount being invested.
• Timing. When the shares are going to be issued to the investor.

A standard subscription agreement is usually a relatively short document because the company is simply telling the investor what shares it is giving and on what terms.

SEIS and EIS: why new shares matter

Typically, companies raising from private investors want to apply for the Seed Enterprise Investment Scheme (SEIS) or the Enterprise Investment Scheme (EIS) so that their investors benefit from specific tax reliefs. Those reliefs are often what makes an early-stage investment attractive in the first place.

There are multiple conditions that have to be met for the relief to apply, but one of them is that the shares must be new shares. They cannot be existing shares held by, for example, one of the co-founders and transferred from that co-founder to the investor. A transfer of existing shares typically does not qualify.

This is a big reason why a share subscription agreement, and not a share purchase agreement, is the right document for an investment round. If a founder sells some of their own shares to an investor under an SPA, the investor is likely to lose the tax relief they were counting on. For more on the scheme itself see SEIS shares explained and how to apply for SEIS.

What is an advance subscription agreement?

With a standard share subscription agreement, the investor is typically issued the shares immediately.

An advance subscription agreement, or ASA, works differently. It is typically used by a company to line up its investors during a funding round. The process looks like this:

• Identify willing investors. The company goes around and finds investors who want to take part in the round.
• Sign the ASA. Each investor signs an advance subscription agreement pledging their money.
• Reach the target. Once the company has reached the amount of capital it set out to raise, it closes the funding round.
• Issue and allot the shares. The company then carries out the procedure to issue the shares and allots them to the investors.

So the money is committed up front, but the shares come later, once the round has closed.

Advance subscription agreement trigger events

Because the shares under an ASA are issued later, the agreement needs to spell out the trigger events: the events which, when they occur, oblige the company to issue the shares to the investors. Typically these are:

• Close of the funding round. The most common trigger. Once the round closes, the shares are issued.
• An IPO or sale of the company. If the company lists its shares or is sold as part of an M&A deal before the round closes, the investor's money converts into shares so that they take part in that event.
• A long stop date. A backstop date by which the shares must be issued regardless, so the investor is not left waiting indefinitely.

Getting the trigger events right protects the investor, who has handed over money on the strength of a promise, and gives the company a clear timetable for completing the round.

Next steps

If you are about to take on investors, decide first whether you are raising in one go, in which case a standard share subscription agreement is likely to do the job, or lining up several investors over a period, in which case an advance subscription agreement may suit better. Check the SEIS and EIS position early, because the shares need to be new shares, and have a corporate solicitor prepare the agreement and the company paperwork for issuing the shares.