If your startup is raising capital, you will need a number of documents before the money hits your company bank account. A share subscription agreement is one document you may require. Although not every raise requires this agreement, it’s important founders know when it is (and isn’t) necessary to have one in place.
Where Does a Share Subscription Agreement Fit Into the Capital Raise?
If you are thinking about legal documents, it’s likely that you have already found a potential investor, wooed them with your pitch, and are finalising the terms of your investment. Parties will commonly use a term sheet to negotiate the key terms of the deal between the investor and founder. The term sheet is generally non-binding. This means that after parties have agreed upon the final terms, they will formalise this through both:
- a shareholders agreement (if there is not already one in place), and
- a share offer document.
A subscription agreement is one type of share offer document.
A share subscription agreement sets out the mechanics of the investment and will specify:
- how many shares the startup is issuing,
- if the shares are subject to any conditions such as vesting,
- the subscription price for those shares, and
- when the startup will issue the shares.
Additionally, a share subscription agreement will include company (and sometimes founder) representations and warranties. These warranties are for the benefit of the investor – they essentially help them know what they’re getting themselves into without having to do any extensive due diligence themselves. The warranties can include statements to the effect that:
- all material and information the company or founder (as applicable) supplied is accurate and complete,
- the company or founder (as applicable) is not aware of any matters which present a litigation risk, and
- the company possesses all intellectual property rights necessary to conduct its business.
When Would a Share Subscription Agreement be Necessary?
As mentioned above, a share subscription agreement is just one type of share offer document. If your investor has not requested a share subscription agreement, it would not be in the company’s interest to offer this up. An alternative is a share offer/share subscription letter. This is a shorter document which still sets out the key terms and mechanics of the investment but does not contain the company or founder warranties. Instead, the investor must conduct their own due diligence. A share offer/share subscription letter is commonly used in seed or series A rounds when raising from family and friends or angel investors. It is less common in later rounds or where venture capital investors are involved. If you are raising from a VC, they will probably insist on having a share subscription agreement containing detailed representations and warranties from the Company and the founders. You can, however, get advice or drafting assistance from a startup lawyer to help lessen the potential adverse effects of these provisions.
What Comes Next?
Once parties have signed the share subscription agreement, the investor and company must follow the investment procedure set out in the document, namely:
- company/board (as required) will pass a resolution approving the new issuance of new shares;
- investor will pay the subscription money;
- company will issue the investor with a share certificate; and
- company will update its Members Register and notify ASIC of the new shareholder and its shareholding.
A share subscription agreement is used to formalise the terms of the investor’s investment into the company, to bind the parties to the deal and to set out the investment process. However, the document can contain investor-friendly company (and sometimes founder warranties). Startups should then carefully consider whether it is necessary to enter into one or whether a share subscription letter will suffice.