What is a Subscription Agreement? How do I secure my company’s Investment Funds?

When your company is ready to grow, whether you are developing a new product, expanding into new markets, or hiring a key team, you’ll need capital. An investment round brings in the funds you need, but you can’t just shake hands with an investor. You need a legally binding document that locks in the investor’s cash and formally welcomes them as a shareholder of your company.

This crucial document is called a Subscription Agreement.

In this article, we’ll break down what a Subscription Agreement is, why your company needs one for its fundraising round, and what it must include.

What is a Subscription Agreement?

A Subscription Agreement is a legally binding contract between a company and an investor (or “subscriber”).

Think of it as the instruction manual for the investment. It’s where the investor says, “I agree to buy X number of new shares in your company for Y price.”

The key purpose is to bring in capital into the company by creating new shares.

Why is a Subscription Agreement important for raising capital?

If you don’t have a Subscription Agreement, the investment is open to:

• Risk: an investor could back out of their investment at the last minute, leaving your company short on funds; and
• Ambiguity: you have no clear record of the exact terms of the investment, which could lead to future disputes.

When you have a properly drafted Subscription Agreement in place, the investment has:

• Certainty: the investor’s commitment to pay for the shares is legally enforceable; and
• Clarity: the price, number of shares and type of shares are clearly defined.

Key terms in a Subscription Agreement

• The Investment Terms: the Subscription Agreement will set out the fundamental commercial details of the transaction:
• Investor: the name and address of the investor.
• Shares: the type (e.g. Ordinary Shares, A Shares etc.) and number of shares being issued.
• Price: the price per share agreed between the company and the investor and the total cash amount to be paid by the investor for the shares.
• Completion: the details of when the shares shall be issued by the company and how the investment will be paid by the investor.
• Warranties and disclosures

As the investor will be risking their money in your company, the company will usually make formal promises (or “warranties”) to the investor about the state of the company. In the event that a warranty turns out to not be true, the investor can bring a claim for breach of contract against your company. Typical warranties include that:

• the company has the legal authority to issue the shares;
• the company’s financial accounts are accurate;
• the company is not subject to any lawsuits; and
• the company is the owner of its intellectual property rights (e.g. logo, branding, inventions).

Warranties are usually very blanket statements. You can help protect your company by including a provision that the company will not be liable for a breach of warranty if a matter is disclosed to the investor. Then, once you have formally disclosed an issue to the investor (usually by way of a disclosure letter), the investor will be deemed to have taken this into account when making their investment.

• Limitations: While warranties are promises that your company will make to an investor, the limitations section is vital for protecting your company by capping its exposure to risk.

The most common limitations protect your company by establishing a floor and ceiling for liability, including a time limit on claims, as well as taking into account the investor’s pre-investment knowledge.

• De Minimis Threshold (Floor): this prevents the investor from bringing small value claims. It would not be practical for your company to deal with a claim from an investor, where a small breach of warranty arises. The agreement can set a minimum monetary threshold required before the investor can bring a claim against your company.
• Maximum Liability (Ceiling): this caps the aggregate liability of your company for all warranty claims from an investor. The maximum amount that a company must pay is usually the total amount of the investor’s original investment.
• Time Limit: the agreement can specify a time limit (e.g. 12 months from completion) after which the investor is not allowed to bring a warranty claim against your company. This gives your company a fixed period of exposure, allowing the company to move forward without indefinite financial uncertainty.
• Investor’s Knowledge: the investor can be prevented from making a claim where they knew or were aware that a warranty was untrue before signing the Subscription Agreement. This is because the purpose of warranties are to protect the investor against unknown risks and not issues that the investor was already aware of.
• Investor risk acknowledgments and legal compliance

Your company’s Subscription Agreement can contain detailed acknowledgements by the investor, which will help protect your company by ensuring that the investor cannot later claim they did not understand the risks of their investment. Examples of acknowledgments include:

• Risk of loss: the investor may lose all of their capital;
• Illiquidity: shares in early stage companies can be highly illiquid as it is unlikely that there will be a secondary market for the shares;
• Dilution: the shares held by the investor may be subject to dilution if the company raises additional capital by issuing further shares in the future; and
• Investor status: under laws relating to the promotion of financial investments, non-FCA regulated companies are not allowed to communicate financial promotions to the public. The main two exceptions to this are where an investor is a “high net worth individual” or “self-certified sophisticated investor”. The Subscription Agreement can include an acknowledgment that one of these exceptions applies to the investor.

SEIS/EIS qualification

If your company is securing investment under the Seed Enterprise Investment Scheme or Enterprise Investment Scheme (government schemes which incentivise investors to invest in growing companies), the investor will want to ensure that the company does not do anything to jeopardise the qualifying SEIS/EIS status of the investment.

The Subscription Agreement can include obligations on the company to prevent it from being disqualified under the SEIS/EIS rules.

Taking the next step in your Fundraising Round

A Subscription Agreement is more than just a money-in, shares-out contract. It is a complex document that secures your capital whilst protecting your company from future claims. Getting it right from the start is the foundation for a successful fundraising round and future growth.

How We Can Help

Raising capital is an exciting time for any business, but the legal process can be complex and intimidating.

At The Jonathan Lea Network, our experienced solicitors focus on delivering clear, commercial, and practical legal support for companies undergoing investment. We are here to help you draft and negotiate a Subscription Agreement that ensures a smooth, secure, and successful close to your funding round.

We can help you:

• Prepare, review and negotiate the terms of the Subscription Agreement, focusing on protecting your company’s long-term interests and minimising exposure from warranties.
• Manage the completion process to ensure all legal conditions are met on time.
• Draft all necessary ancillary documents, including the board and shareholder resolutions required to effect and record the share issues.

We offer a no-cost, no-obligation 20-minute introductory call as a starting point or, in some cases, if you would just like some initial advice and guidance, we will instead offer a one-hour fixed fee appointment (charged from £250 plus VAT to £350 plus VAT* depending on the complexity of the issues and seniority of the fee earner).

Please email wewillhelp@jonathanlea.net providing us with any relevant information ensuring that any call we have is as productive as possible or call us on 01444 708640. After this call, we can then email you a scope of work, fee estimate (or fixed fee quote if possible), and confirmation of any other points or information mentioned on the call.

 

Frequently Asked Questions

 

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.

 

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