Summary
- A share subscription agreement is a binding contract between a company and an investor, setting out the terms on which new shares are issued in exchange for capital.
- These agreements must address key matters including share price, conditions precedent, warranties, and any restrictions on transfer or future fundraising.
- Under Australian law, capital raising through share issuances may trigger disclosure obligations and must comply with the Corporations Act 2001 (Cth).
- This article explains share subscription agreements for Australian business owners raising capital, with a focus on Australian corporate law.
- The content is produced by LegalVision, a commercial law firm that specialises in advising clients on capital raising and corporate transactions.
Tips for Businesses
Before issuing shares, confirm your company’s constitution permits the proposed allotment. Agree on a clear valuation methodology and document all conditions precedent. Ensure warranties are carefully negotiated — overly broad warranties increase founder liability. Retain executed copies of all subscription documents for your corporate register.
A share subscription agreement formalises the terms on which a company issues new shares to an investor at an agreed price and valuation. Founders raising capital in a priced round need to understand when this document is required and what obligations it creates. This article explains where a share subscription agreement fits into the capital raise process, what it contains, and when you might use a simpler alternative instead.
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, but you should seek legal advice before signing because the formal legal documents will be 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 company or founder normally provides this type of information to an investor in a Virtual Data Room, along with the relevant representations or warranties.
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.
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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 receive the full benefit of the additional investment without taking on the potential downsides that come 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 make sure the company does not diminish their level of control without their agreement over time. So, you should prioritise addressing these competing needs.
One option is to cover these details in a shareholders’ agreement. However, you should make sure that your business plan and your relationships with members and directors do not suffer because you want to issue capital through 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.
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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.
LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced capital raising lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 1300 544 755 or visit our membership page.
Frequently Asked Questions
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.
Startup founders typically use a share subscription letter in seed or Series A rounds when raising funds from family and friends or angel investors.
Founders provide warranties in early-stage investments, though these are typically limited in number, scope, and maximum claim amount.
Companies typically pair a share subscription agreement with a shareholders’ agreement and maintain a capitalisation table reflecting post-raise ownership structure.
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