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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.

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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.


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