Funding Rounds are complicated, especially when multiple investors are involved. Founders often struggle to gather enough funds from a single investor, and many smaller investors are often not willing to lead the Funding Round. Meanwhile, the company is in dire need of cash to keep fueling its growth and maintain its momentum. Similar to the famed US SAFE (Simple Agreement for Future Equity) note, Advance Advanced Subscription Agreements (ASA) are a straightforward arrangement that allows Founders and investors to get equity investment in quickly.
Under an ASA, the investors pays in advance for shares that will be allocated at a later date. Usually, these agreements state that the shares will be issued just before the closure of a “qualifying” Funding Round – according to set criteria, typically a target investment size.
Many think that ASAs are very similar to Convertible Loan Notes (CLN), but the crucial difference between the two is that an ASA is solely an equity instrument, whereas a CLN can also be repaid in cash, and usually involves the ‘lender’ charging an interest.
Advantages of an ASA
The main advantage for the start-up raising funds is that the cash injection happens as soon as the ASA is signed. During the lead-up to a Funding Round, this can be essential, as having an investor who’s already committed funds can be instrumental in convincing other investors, plus allows for a longer runway in case negotiations take more than expected. Moreover, while other instruments such as Convertible Loan Notes allow the investor to charge interest on the money invested, ASAs don’t.
From the investor’s point of view, the main advantage is that shares under ASA are usually issued at an agreed-upon discount on the pre-money valuation of the qualifying Funding Round. If structured correctly, investments made under ASA are also eligible for EIS and SEIS, resulting in great advantages and tax reliefs for the investor.
It is important to note that ASAs do not permit the subscription payment to be refunded under any circumstances, and they cannot be varied, cancelled, or reassigned.
Elements of an ASA
There are a few key elements of the agreement that both parties need to consider when negotiating. Assuming that the amount invested has already been agreed, probably the most important point on which the parties need to reach a deal is what makes a Funding Round “qualifying”.
This is typically a target for the Round size. Obviously, the investor isn’t likely to want this to be too low, or they’ll end up investing in an underfunded company. Conversely, the start-up won’t want this to be too high, or they will risk not converting the investment at all.
Moreover, ASAs often specify a valuation cap at which the shares can be issued, so that existing shareholder have guarantees on the level of dilution that they’ll face upon conversion of the investment.
Additional elements to be agreed, that protect the interests of both parties, are long stop date and long stop price. In the event that the company does not manage to raise a qualifying round by the long stop date – this is expected not to be more than 6 months from the date of the agreement – the shares will still be issued at the long stop price.
Other clauses can be included regarding special circumstances such as the sale of the company or the company becoming insolvent. Typically, if the company is sold, the ASA dictates that shares are allocated just before the sale at a discount price over the sale valuation. In most cases, if the company becomes insolvent before a qualifying Funding Round, the amount invested through an ASA will be treated as debt and can be repaid in cash, ranking as an unsecured creditor of the company.