What is a Share Subscription Agreement?

In Short

• A Share Subscription Agreement (SSA) formalises investment terms between a startup and an investor.

• It details share quantity, price, type, and may include warranties to protect the investor.

• Early-stage startups might opt for a simpler subscription letter if investors don’t require warranties.

Tips for Businesses

Seek legal advice when drafting an SSA to ensure clarity and limit potential liabilities. For early-stage investments, consider using a simpler subscription letter if investors aren’t requesting warranties. This approach can streamline the process and reduce administrative complexity.

Summarise with: ChatGPT Perplexity Microsoft Copilot

---

Table of Contents

• Where Does a Share Subscription Agreement Fit Into the Capital Raise?
• What Goes Into a Share Subscription Agreement?
• When Would a Share Subscription Agreement be Necessary?
• Issuing Further Capital and Anti-Dilution Rights
• What Comes Next?
• Key Takeaways
• Frequently Asked Questions

If your startup is raising capital, you will need several documents before the money reaches your company’s bank account. A share subscription agreement is one document you may require if you are raising capital in a priced round. Although not every raise requires this agreement, if a company is issuing shares at an agreed valuation and price per share, a subscription agreement will be required. It is essential for founders to understand when it is required and what the agreement entails.

Where Does a Share Subscription Agreement Fit Into the Capital Raise?

When raising capital to get your startup off the ground, the Company and the investor will need to agree on a valuation for the Company prior to issuing any shares. The valuation will help determine the price being paid per share by the investor. If you cannot agree to a valuation for the Company, you may consider pivoting to a Simple Agreement for Future Equity or Convertible Note round.

If you are at the stage where you are looking to finalise your investment terms in a legal document, you have likely found a potential investor and wooed them with your pitch. At this stage, it is common to use a term sheet to negotiate the key terms of the deal between you and your investor. The term sheet is generally non-binding; however, seeking legal advice before signing a term sheet is highly recommended because the formal legal documents are drafted based on these terms.

Another step to consider before you put pen to paper on the legal documents is to generate a capitalisation table for your startup. A capitalisation table sets out the ownership percentage of each shareholder once the capital raise is complete. Once you and your investor have signed a term sheet and you are aware of your company’s share capital structure upon completion of the raise, you can formalise the next phase through both:

• a shareholders’ agreement (if there is not already one in place); and
• a share offer document, which can range from a simple share issue form to a share subscription agreement for more complex deals.

What Goes Into a Share Subscription Agreement?

A share subscription agreement sets out the key terms decided between your company and the investor and will specify:

• the company issuing the shares;
• the investor purchasing the shares;
• how many shares the startup is issuing;
• if the shares are subject to any conditions, such as vesting;
• the class of those shares;
• the subscription price for those shares;
• when/how the startup will issue the shares; and
• any conditions that the company must fulfil before the investor pays the money to the company.

Additionally, a share subscription agreement will typically include warranties from the company, as well as from the founder. These statements of fact pertain to the company, its business, and the shares being issued.

These warranties are for the benefit of the investor – they essentially help them understand what they are getting themselves into without requiring extensive due diligence. The warranties can include statements to the effect that:

• all information the company or founder (as applicable) supplied is accurate and complete in all material respects;
• the company or founder (as applicable) is not aware of any matters that present a litigation risk; and
• the company possesses all intellectual property rights necessary to conduct its business.

The type of information that a company or founder might be required to provide to an investor, along with a representation or warranty, is typically provided in a Virtual Data Room.

Warranty

If a warranty proves to be incorrect, an investor could bring a claim against the company or the founder (as applicable) for damages they suffer as a result of the warranty being incorrect.

Especially as deal sizes grow, investors will want more warranties to give them greater comfort and reduce the risk they are taking, while companies will want to offer fewer warranties, thereby exposing themselves to less risk. 

As warranties can be so extensive, companies will usually seek certain limitations in respect of their potential liability for breach of warranty. It is not uncommon to see a limited claim period of:

• between 12-24 months. This means the investor must bring a claim for breach of warranty within that limited period of time after being issued its shares; and
• a maximum claim amount. This means the investor can only make a claim against the company or the founder, as applicable, for a maximum agreed-upon amount.

In early-stage investments, founders are often asked to provide warranties. These are typically more limited (in both number and scope) than company warranties, and the maximum claim amount is usually significantly lower.

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 or share subscription letter. This document is concise, outlining the key terms and mechanics of the investment. However, it does not contain the company or founder warranties. Therefore, you get all the upside from the additional investment without the potential downsides associated with guarantees and liabilities. Instead, the investor must conduct their own due diligence. 

A share offer or share subscription letter is commonly used in seed or series A rounds when raising from family and friends or angel investors in a priced round. Venture capital (VC) investors are generally less involved in later rounds. If you are raising funds from a venture capitalist, they will likely insist on a share subscription agreement containing detailed representations and warranties from the Company and its founders.

Issuing Further Capital and Anti-Dilution Rights

If you have investors coming on early in your startup’s life, you may want to guarantee your rights to issue further capital. On the other hand, investors may want to ensure that their level of control within the company is not diminished unilaterally over time. So, you should prioritise addressing these competing needs. 

One option is to cover these details in a shareholders’ agreement. However, you want to ensure that your business plan and your relationship with members and directors are not impeded by your desire to issue capital via successive share subscription agreements. 

What Comes Next?

Once parties sign 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 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.

Cap Table Template

Capital raising is a critical time for any startup. Take control of your startup’s equity with this free cap table template.

Download Now

Key Takeaways

As a startup founder, you can use a share subscription agreement to formalise the terms of an investment. This can be particularly helpful when you are raising money from an investor and wish to legally bind them to the deal. Likewise, a share subscription agreement will detail the investment process and terms. Notably, the document can contain investor-friendly company warranties and sometimes founder warranties. So, you should carefully consider whether it is necessary to enter into one or whether a share subscription letter will suffice. 

If you need help with raising capital, our experienced capital raising lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions