A couple of startups in the DMG portfolio have raised funding through an Advanced Subscription Agreement, or ASA. ASAs are becoming more popular in the UK, so it’s worth taking some time to understand why one might be a good thing for the startup and for the investor.
A typical funding round for early stage startups can take, on average, 6-9 months from the point the founders decide to seek investment until all the money is in their bank account. However startups often need to move at a faster pace than this and there may be a case for raising a smaller sum and not wanting to commit the time, effort and cost to negotiating a full fundraise with its timelines, ‘herding’ activities and full set of documents.
On the investor side, most in the UK are looking for the SEIS/EIS tax relief that investing in early stage startups can bring. ASAs have been developed in the UK as an alternative to the Convertible Loan Note but they are not SEIS/EIS compliant (they’re called ‘convertibles’ because the money going into the startup is actually a loan but there is the anticipation that it will convert to equity at a later date. For investments to qualify for SEIS/EIS relief the money invested must be ‘at risk’ from the outset and under a convertible loan note it is possible for the investor to be repaid before the loan converts into shares so that wouldn’t count. With an ASA the investor cannot recover the capital as it goes towards the issue of shares under every eventuality.
WHAT IS AN ADVANCE SUBSCRIPTION AGREEMENT?
ASAs enable a startup to get funds into the company from investors quickly and in advance to being issued any shares.
Typically, ASAs have the following features:
The money from the investor to the startup will go towards the issue of shares in the next qualifying funding round
Investors receive a discount (often in the 10% to 30% range) on the issue of shares. This is because they have some additional risk from investing in advance
There is a long stop date so the advanced capital will definitely be applied to the issue of shares regardless of the funding outcome (in order to qualify for SEIS/EIS relief
Some warranties are given by the company, for example, the company is not insolvent, has authority to enter into the agreement and it is not involved in any disputes
ASA ADVANTAGES
ASAs have the following advantages:
They are relatively simple agreements so can be free from heavy negotiation and long timescales
Investors usually receive a discount on the issue of shares
The startup does not need to set a definitive valuation (this is done at the next equity round)
Please note: the information and any commentary contained in this article is for general information purposes only and does not constitute legal or any other type of professional advice. Dot Matrix Group Ltd does not accept and, to the extent permitted by law, excludes liability to any person for any loss which may arise from relying upon or otherwise using the information contained in this article.