Advance Subscription Agreements (ASAs): A Guide for UK Start-up Founders

In this article you will learn:

• What an advance subscription agreement is and how it works;
• How the discount rate, valuation cap and long-stop date affect your dilution;
• The HMRC rules an ASA must meet to qualify for SEIS and EIS relief;
• How an ASA compares with a SAFE and a convertible loan note; and
• The practical checks to make before signing.

Introduction

Raising investment often comes with a timing problem: a founder needs funding before the business is ready to agree a valuation. An advance subscription agreement (an “ASA”) solves this by allowing a company to take investment now and issue the shares later, usually at the next funding round.

This guide explains how an ASA works, the HMRC conditions it must meet to qualify for SEIS and EIS relief, how it compares with a SAFE and a convertible loan note, and the checks every founder should make before signing.

What is an advance subscription agreement?

An advance subscription agreement is a contract under which an investor pays a company upfront for shares that will be issued at a later date. The number of shares is fixed on conversion, normally by reference to the price paid by investors in the company’s next funding round, so neither side has to agree a valuation today.

An ASA is equity, not debt. The investor is paying in advance for shares: the money is not repayable and does not carry interest. You will also see the document described as an “advanced subscription agreement”. Both terms mean the same thing.

ASAs are the UK equivalent of the US SAFE and are widely used by start-ups raising from angel investors and early-stage funds, particularly where investors want SEIS or EIS relief.

How does an ASA work?

An ASA sets out when and how the investment converts into shares. The four terms that matter most are:

• Conversion trigger: the event that causes the shares to be issued. This is usually the next qualifying funding round, and often also a sale of the company.
• Discount rate: a percentage discount on the price per share paid by new investors in that round, typically between 10% and 30%. It rewards the ASA investor for investing early and taking more risk.
• Valuation cap: a maximum company valuation used to calculate the conversion price. If the round values the company above the cap, the ASA investor converts at the cap and receives more shares than a new investor paying the round price.
• Long-stop date: the deadline by which shares must be issued if the funding round has not happened. The ASA will set a fallback price or valuation for conversion on that date.

Where an ASA has both a discount and a cap, the investor normally converts at whichever gives the lower price per share. Founders should model how these terms interact across a range of round valuations: the difference in dilution can be significant for the founders and for existing shareholders.

A simple example

An investor pays £100,000 under an ASA with a 20% discount and a £4 million valuation cap. If the next round is priced at a £3 million pre-money valuation, the cap is not reached, so the discount applies and the investor converts at 80% of the round price. If the round is priced at £6 million, the cap applies instead and the investor converts as though the company were worth £4 million, receiving considerably more shares than an investor paying the full round price.

Can an ASA qualify for SEIS and EIS relief?

Yes. An ASA can qualify for the Seed Enterprise Investment Scheme (“SEIS”) and the Enterprise Investment Scheme (“EIS”), but only if it operates as a genuine advance subscription for shares rather than a loan. HMRC looks at substance, not the label on the document.

HMRC’s Venture Capital Schemes Manual states that it will not treat an ASA as suitable for SEIS or EIS unless the agreement:

• does not allow the subscription money to be refunded in any circumstances;
• does not carry interest;
• cannot be varied, cancelled or assigned;
• has a long-stop date, which HMRC does not expect to be more than six months from the date of the agreement; and
• is simple. The more complex the terms, and the longer the gap between payment and share issue, the greater the risk that relief is refused.

The ASA should also not give the investor rights or protections beyond those of an ordinary shareholder, and the shares must be issued before the shares in the next round so that the SEIS or EIS conditions are tested correctly.

Two timing points catch founders out. First, relief is given from the date the shares are issued, not the date the investor pays. Second, the company must meet all the usual SEIS or EIS conditions on the date of issue, not just when the ASA is signed. A company that is close to the SEIS trading age or funding limits should check its position before taking ASA money.

Most SEIS and EIS investors will ask for HMRC advance assurance before they sign. The application can cover a planned ASA, and we recommend making it before funds are received where relief matters to the round.

ASA vs SAFE vs convertible loan note

An ASA and a simple agreement for future equity (a “SAFE”) share the same principle: investment now in exchange for shares later. A SAFE, however, is a US document. It has no long-stop date and its standard terms can allow the investor to be repaid on a dissolution event, so a standard SAFE will usually fail HMRC’s SEIS and EIS tests. A SAFE should not be assumed suitable for a UK company without being redrafted.

A convertible loan note (a “CLN”) is debt. It has a maturity date, usually carries interest and is repayable if it does not convert. Because the investor can get their money back, a CLN cannot qualify for SEIS or EIS. It can still be the right tool where the investor is not seeking relief, for example an overseas investor or a corporate.

The right structure depends on the company’s circumstances, who is investing and what they expect. Where SEIS or EIS relief is on the table, an ASA drafted to HMRC’s conditions is almost always the starting point.

Practical steps before signing an ASA

Before accepting investment under an ASA, founders should:

• Review the articles of association for restrictions on the proposed share issue, share classes and any investor consent rights.
• Confirm authority to allot shares and pass any board or shareholder resolutions needed before the funds come in.
• Check pre-emption rights, which may give existing shareholders first refusal on new shares and may need to be disapplied for the ASA to convert.
• Review any shareholders’ agreement for consent requirements that apply to new investment or new shareholders.
• Model the dilution across a range of round valuations, including the long-stop fallback price if no round is raised. Keep your cap table up to date so you can see the effect of each scenario.
• Deal with SEIS and EIS early if relief matters to the investor: apply for advance assurance and check the company meets the conditions on the planned issue date.
• Plan the paperwork for conversion: a board resolution to allot, the share issue itself, an SH01 filed at Companies House within one month of issue, an updated register of members, share certificates, and the SEIS1 or EIS1 compliance statement so investors can claim relief.

Key takeaways

• An ASA lets a start-up take investment before agreeing a valuation, but it must be a genuine advance payment for shares, never a repayable loan.
• The discount rate, valuation cap and long-stop fallback price determine the dilution. Model all three before signing.
• For SEIS and EIS relief, the ASA must meet HMRC’s conditions, including a long-stop date of no more than six months, and relief runs from the date the shares are issued.
• A standard US SAFE or a convertible loan note will not deliver SEIS or EIS relief. Use a UK ASA drafted for that purpose.

FAQs

Is an advance subscription agreement a loan?

No. A properly drafted ASA is an advance payment for shares. The money is not repayable and carries no interest. If an agreement allows repayment, it is a loan in substance and will not qualify for SEIS or EIS relief.

How long can an ASA last?

There is no fixed legal limit, but where SEIS or EIS relief is sought HMRC expects a long-stop date of no more than six months from the date of the agreement. Shares must be issued by that date whether or not the funding round has happened.

Can ASA investors claim SEIS or EIS relief?

Yes, provided the ASA meets HMRC’s conditions and the company and share issue meet the usual SEIS or EIS requirements. Relief is given from the date the shares are issued, not the date the investor pays.

What is the difference between an ASA and a SAFE?

Both are advance payments for future equity. A SAFE is a US document with no long-stop date and terms that can allow repayment on a dissolution event, so a standard SAFE will usually fail HMRC’s SEIS and EIS tests. A UK ASA is drafted to meet those tests.

What happens if there is no funding round before the long-stop date?

The ASA converts at the long-stop date on the fallback terms agreed in the document, usually a pre-agreed valuation or price per share. Founders should check this fallback carefully because it sets the dilution if no round is raised.

Do I need HMRC advance assurance before signing an ASA?

It is not compulsory, but most SEIS and EIS investors will ask for it. Advance assurance confirms HMRC’s view that the company and the proposed investment are likely to qualify, and the application can cover a planned ASA.

How Buckworths can help

Buckworths works exclusively with start-ups and high-growth businesses. We draft and negotiate ASAs, advise on SEIS and EIS including advance assurance, and handle the share issue and Companies House filings when the ASA converts. If a convertible loan note or a priced round is the better route, we will tell you.

For a practical introduction to funding sources, SEIS and EIS and investor documents, watch our Raising Investment webinar recording.

To discuss your next investment, Book a Free Consultation, call 020 7952 1723 or email [email protected].