An advanced subscription agreement is, in essence, a prepayment by an investor for ordinary shares in your company. The agreement provides that an investor provides funds on the date of the agreement, which convert into ordinary shares in the company if an ‘exit event’ occurs in the future.
What are the key provisions?
The agreement usually has the following key provisions:
The conversion is typically triggered by a next funding round, a sale or a listing.
The investor’s funds are converted into ordinary shares at a price per share which is at a discount to the then share valuation, usually the discount is between 15% and 25%.
There may be an upper limit on the number of shares that the investor can receive.
There is a longstop date if an exit event does not occur, which is currently set by SEIS/EIS rules at a maximum of 6 months from the investment date. On the longstop date, the conversion occurs typically at 15% to 25% discount to the current share valuation.
The investment is not a loan - the investor has no right to receive interest nor to repayment under the advanced subscription agreement.
Investors are eligible for SEIS/EIS tax relief
An investor using an advanced subscription agreement benefits from SEIS/EIS tax reliefs. However, the structure of the advanced subscription agreement is critical to ensure SEIS/EIS eligibility, and HMRC will look at this on a case-by-case basis.
What is the difference with convertible loan notes?
Convertible loan notes are similar in that ordinary shares are issued at a future valuation. Conversion is triggered in the same way by a next funding round, a sale or a listing with the shares being issued at a discount to the then share valuation.
Investment through convertible loan notes, however, is debt. Investors have entitlement to be repaid and receive interest. Repayment is typically at the third anniversary of the investment, with investors having the right to claim for their money back early if the startup become insolvent before then.
Investors also have the right to receive interest, although this is usually ‘rolled up’ so that interest is paid only when the convertible loan notes become repayable as above.
As convertible loan notes are debt, they do not allow investors to claim the tax reliefs under SEIS/EIS.
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