Reading time: 5 minutes

If your startup is raising capital, you will need a number of documents before the money reaches your company bank account. A share subscription agreement is one document you may require. Although not every raise requires this agreement, it is essential for founders to know when it is necessary to have one in place.

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

If you are thinking about finalising your investment terms in a legal document, you have likely already 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.

So, once you and your investor agree upon the final terms, you would formalise this through both:

  • a shareholders agreement (if there is not already one in place); and
  • a share offer document.

A subscription agreement is just one type of share offer document.

What Goes Into a Share Subscription Agreement?

A share subscription agreement sets out the mechanics of the investment 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; and
  • when/how the startup will issue the shares.

Additionally, a share subscription agreement will include company (and sometimes founder) representations and warranties. These warranties are for the benefit of the investor – they essentially help them know what they are getting themselves into without having to do any extensive due diligence themselves. The warranties can include statements to the effect that:

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

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 is a shorter document that sets out 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. It is less common in later rounds or where venture capital (VC) investors are involved. If you are raising from a venture capitalist, they will probably insist on having a share subscription agreement containing detailed representations and warranties from the Company and its founders. 

At this stage, it can be beneficial to seek legal advice or drafting assistance from a startup lawyer to help lessen the potential adverse effects of these provisions.

Issuing Further Capital and Anti-Dilution Rights

If you have investors coming on early in your startups’s life, you may want to guarantee your rights to issue further capital. On the flip side, investors may want to ensure 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. 

Instead, your collective corporate governance documents should facilitate the growth of the company in line with members’ wishes. 

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.

The Ultimate Guide for Startup Founders

The LegalVision Startup Manual provides guidance on a number of common challenges faced by startup founders including structuring, raising capital, building a team, dealing with customers and suppliers, and protecting intellectual property.

The guide includes 10 case studies featuring Australia’s top VC fund partners and leading Australian startups.

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

What is a share subscription agreement?

A share subscription agreement is a legal document between a startup and an investor. It will detail the mechanics of the investment, including the company issuing the shares and the investor purchasing the shares. It will also include details regarding how many shares the startup is issuing and the class of those shares.

When would a share subscription agreement be necessary?

Startup founders will typically use a share subscription letter in seed or series A rounds when raising from family and friends or angel investors. It is less common in later rounds or where venture capital investors are involved.

Webinars

Redundancies and Restructuring: Understanding Your Employer Obligations

Thursday 7 July | 11:00 - 11:45am

Online
If you plan on making a role redundant, it is crucial that you understand your employer obligations. Our free webinar will explain.
Register Now

How to Sponsor Foreign Workers For Your Tech Business

Wednesday 13 July | 11:00 - 11:45am

Online
Need web3 talent for your tech business? Consider sponsoring workers from overseas. Join our free webinar to learn more.
Register Now

Advertising 101: Social Media, Influencers and the Law

Thursday 21 July | 11:00 - 11:45am

Online
Learn how to promote your business on social media without breaking the law. Register for our free webinar today.
Register Now

Structuring for Certainty in Uncertain Times

Tuesday 26 July | 12:00 - 12:45pm

Online
Learn how to structure to weather storm and ensure you can take advantage of the “green shoots” opportunities arising on the other side of a recession.
Register Now

Playing for the Prize: How to Run Trade Promotions

Thursday 28 July | 11:00 - 11:45am

Online
Running a promotion with a prize? Your business has specific trade promotion obligations. Join our free webinar to learn more.
Register Now

Web3 Essentials: Understanding SAFT Agreements

Tuesday 2 August | 11:00 - 11:45am

Online
Learn how SAFT Agreements can help your Web3 business when raising capital. Register today for our free webinar.
Register Now

Understanding Your Annual Franchise Update Obligations

Wednesday 3 August | 11:00 - 11:45am

Online
Franchisors must meet annual reporting obligations each October. Understand your legal requirements by registering for our free webinar today.
Register Now

Legal Essentials for Product Manufacturers

Thursday 11 August | 11:00 - 11:45am

Online
As a product manufacturer, do you know your legal obligations if there is a product recall? Join our free webinar to learn more.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards