Advance Subscription Agreement
What is an Advance Subscription Agreement?
An Advance Subscription Agreement (ASA) is a popular and streamlined method for early-stage UK companies to raise funds ahead of a formal equity investment round. It is an agreement to pre-pay for shares in a company which are allocated at a later date following a specific ‘trigger’ event. The shares are usually offered at a discount to the price per share in the next funding round. It enables a startup to get a quick cash injection and is particularly useful for startups looking to close investment quickly without the need for an immediate valuation or extensive legal complexity.
Why Should I Use an Advance Subscription Agreement?
Using an ASA can offer significant benefits, especially for early-stage startups or founders seeking to raise capital quickly:
- Simpler and Faster Than Equity Rounds
ASAs reduce the legal and administrative burden compared to issuing shares immediately. There is no need to set a company valuation upfront, negotiate complex shareholder agreements, or complete Companies House filings at the time of investment.
- Delays Valuation Until Later
Startups often use ASAs when it is difficult to value the business at an early stage. Instead of negotiating a valuation, shares are issued when a future funding round occurs, when more data (such as revenue, user growth, or market validation) is available.
- SEIS/EIS-Friendly
When structured correctly, ASAs can qualify for Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS) tax relief, making them attractive to investors.
- No Interest or Repayable Debt
Unlike convertible loans, ASAs do not demand an obligation to repay the investment or pay interest, further protecting the company’s cash flow and avoiding potential debt risks.
- Flexibility
ASAs are flexible in terms of timing, investor participation, and conversion mechanics. This allows businesses to close investments quickly while maintaining momentum toward a future equity round at which point shares will be issued.
Do Advance Subscription Agreements Affect SEIS/EIS Eligibility?
HMRC-Approved Equity Instrument
HMRC has confirmed that an ASA can qualify as a valid equity investment under SEIS/EIS, provided certain conditions are met. These include:
- No Right of Repayment: The investment must not be repayable under any circumstances — it must convert into shares.
- Fixed Subscription Amount: The investor must pay a set amount up front with no discretion to withdraw it.
- Shares Issued Within 6 Months: The agreement must provide for shares to be issued within 6 months of the payment date.
- No Interest or Discount (in some cases): While discounts to share price are allowed, care must be taken to ensure they do not jeopardise SEIS/EIS treatment.
Important: Not All ASAs Qualify
- Poorly drafted ASAs may be treated as debt or deferred consideration, which can disqualify the investment from SEIS/EIS relief. That is why it is critical to get specialist legal advice and, ideally, seek HMRC Advance Assurance.
At The Jonathan Lea Network, we ensure your ASA is fully compliant with SEIS/EIS rules, considerably increasing your chances of securing tax-advantaged investment.
Key Considerations When Using an Advance Subscription Agreement?
When putting an ASA in place, both companies and investors should consider the following:
- Conversion Terms
- What will trigger the conversion? (e.g., next funding round, long-stop date, exit)
- Will there be a valuation cap or discount?
- How will the number of shares be calculated?
- Long-Stop Date
- Set a clear long-stop date (e.g., 6–12 months) by which the shares must be issued if no funding round occurs — this is critical for SEIS/EIS compliance.
- Investor Protections
- While ASAs are simpler than shareholder agreements, investors may still want protections (e.g., warranties, information rights, or pre-emption on future funding).
- Impact on Future Rounds
- ASAs dilute existing shareholders once they convert, so companies should model the impact on cap tables. Also consider how ASAs interact with future investors’ expectations.
- Legal and Regulatory Compliance
- Ensure the ASA is properly drafted, includes all required terms, and complies with company law and HMRC guidelines.
Advance Service Agreement FAQs
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1. Why use an ASA instead of issuing shares now?
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Using an ASA saves time and reduces legal complexity. It is especially useful when a company is raising funds ahead of a larger equity round or when it is difficult to determine an accurate valuation. ASAs also help preserve SEIS/EIS tax relief eligibility for investors when drafted properly.
The best choice depends on your priorities: if you want control over the site and the ability to acquire it yourself, an option agreement is often preferable. If your goal is to maximise sale value with shared risk and reward, especially where you don’t intend to develop the land personally, a promotion agreement may be better. Legal and commercial advice should be sought to tailor the agreement to your objectives
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2. Can an ASA include a discount or valuation cap?
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Yes. ASAs often include:
- A discount on the price per share compared to future investors (e.g., 10–30%)
- A valuation cap, which sets a maximum valuation for conversion purposes
These terms reward early investors for their risk and are common in pre-seed and seed-stage fundraising.
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3. What happens if there is no funding round before the long-stop date?
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If a qualifying funding round does not occur, the ASA typically requires the company to issue shares at a price determined by a pre-agreed valuation or a fair market valuation. This ensures the investor still receives equity in the business.
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4. What is the difference between an ASA and a convertible loan note?
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An ASA is not repayable and does not accrue interest, which makes it more SEIS/EIS-friendly. Convertible loan notes are debt instruments that can be repaid and usually carry interest, which may disqualify them from SEIS/EIS relief.
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5. Do I need legal advice to put an ASA in place?
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While ASAs are shorter than full investment agreements and on the face of it look simple, they still involve important legal and tax considerations and a mistake or oversight can have detrimental implications for the company in the future. Our team ensures your ASA is compliant, commercially sound, and tailored to your fundraising goals.
Need Help Setting Up an Advanced Subscription Agreement?
If you are interested in raising money pursuant to an Advanced Subscription Agreement for your company, we offer a no-cost, no-obligation 20-minute introductory call as a starting point. Please email us at wewillhelp@jonathanlea.net to arrange a discovery call. Afterwards, 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.
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