Scaling Your Startup with an Advance Subscription Agreement (ASA): What Founders Need to Know

As a startup founder looking to scale your business, securing funding is a critical step in accelerating growth. Whether you’re planning for your next expansion, developing new products, or improving your services, having access to capital is essential. However, navigating the complexities of investment agreements can be a challenge.

One powerful and flexible option for early-stage companies is the Advance Subscription Agreement (ASA). If you’re considering funding options for scaling your business, you’ve probably heard about ASAs but may not fully understand how they work and how they can benefit your startup. In this guide, we’ll explore what an ASA is, how it can help you scale, and why it’s an attractive funding tool for founders who want to focus on growth.

An Advance Subscription Agreement (ASA) is a funding agreement between a company (often a startup) and an investor. Through an ASA, investors provide capital to your business in exchange for shares at a future date, typically during a subsequent equity financing round.

Unlike a loan, the funds provided under an ASA do not accrue interest and are not repayable.

Instead, the investor’s money is converted into equity once certain conditions are met. The conversion usually happens when your business raises its next round of financing or another specific event occurs.

For early-stage companies and founders who are focused on scaling, ASAs provide a simple and flexible funding solution, allowing you to avoid the complexities of determining your company’s valuation upfront.

As a founder aiming to scale, you need capital but may not want to take on debt or immediately set a company valuation. This is where an Advance Subscription Agreement can be a game-changer. Here’s why ASAs are such a popular tool for early-stage startups:

1. Quick and Flexible Funding: Unlike traditional equity financing, an ASA allows you to raise money quickly without the need to negotiate a company valuation immediately. This is particularly helpful if you are at an early stage and haven’t yet proven significant growth.
2. No Repayment Pressure: Since an ASA is not a loan, there is no obligation to repay the funds or pay interest. You can focus on scaling your business and hitting milestones, without the burden of debt repayments.
3. Delayed Valuation: As your company grows and proves its potential, you’ll be in a stronger position to determine your business’s true value. An ASA lets you defer setting a valuation until a future financing round, which may help secure better terms for both you and your investors.
4. Attractive to Early Investors: For investors, an ASA offers an attractive opportunity to get in early. Investors can benefit from discounted shares or other favourable terms when the funds convert into equity in future funding rounds.

The key to an ASA is the conversion of funds into equity, but this conversion is dependent on certain conversion events. These events specify when and how the investor’s funds will be converted into shares in your company. Here are the most common conversion events:

1. Qualified Financing. A qualified financing occurs when your company raises a minimum threshold of capital, often defined in the ASA. For example, your agreement may specify that the ASA will convert if your company raises at least £500,000. Once this threshold is met, the investor’s contribution will convert into equity, sometimes at a discounted price compared to the new investors in that round.
2. Non-Qualified Financing. A non-qualified financing happens when your company raises funds, but the amount raised is below the agreed-upon minimum. In this case, the investor’s funds may still convert into equity, but the terms could be different, such as a higher conversion price or an agreed discount.
3. Exit. An exit event occurs if your company is sold, merged, or goes public. If an exit occurs before the next financing round, the funds will be converted into shares, often at an agreed-upon conversion price based on the terms of the exit deal.
4. Longstop Date. The longstop date is the final deadline for converting the funds into equity. If no qualifying event has occurred by this date, the investor will receive their shares on or about this date.
5. Dissolution Event. If your company dissolves or liquidates before the funds convert into equity, a dissolution event occurs. The ASA will dictate how the funds are handled—typically converted at a specified price.

In the UK, the Seed Enterprise Investment Scheme (SEIS) is a government-backed initiative that encourages individual investors to fund early-stage businesses by offering significant tax reliefs. For companies looking to raise funds through an ASA, SEIS compliance will make your business more attractive to UK investors by offering SEIS Relief.

For your ASA to qualify for SEIS, it must meet certain criteria set by HMRC, including but not limited to:

By ensuring your ASA is SEIS-compliant, you can attract investors who are looking for tax relief on their investments, which can be a huge advantage when scaling your business.

It’s typical for both the company and investor to agree to keep the terms of the ASA confidential. This protects sensitive information about your business and investment negotiations.

Most ASAs are governed by the laws of England and Wales, and any disputes arising from the agreement are usually resolved in English courts. If you are based outside the UK, it’s important to discuss the governing law with your legal advisor to ensure it’s suitable for your business.

ASAs are particularly appealing when you’re scaling quickly and need to secure capital fast. They allow you to defer complex valuation discussions and raise funds based on future growth potential, making it easier to focus on running and growing your business.

For founders looking to scale their startups, an Advance Subscription Agreement is an excellent tool for raising capital without the burden of debt or immediate equity dilution. By understanding the key features of an ASA, including conversion events and S/EIS compliance, you can use this funding mechanism to accelerate your company’s growth and create opportunities for both your business and investors.

If you’re ready to scale your startup and need the right funding tool, consider an ASA as a way to unlock capital while postponing complicated negotiations about long form legal documents. With an ASA, you can keep your focus on what matters most: growing your business.