Advance subscription agreement (UK)

What it means

An advance subscription agreement, usually shortened to ASA, is an agreement under which an investor pays for shares now and receives them at a future priced round. It is not a loan, it carries no interest, and it is not repayable in cash under any circumstances. That last point is the defining feature and the reason the instrument exists in this shape rather than as a convertible note. It normally carries a longstop date, at which the money converts anyway at a fallback valuation, and usually a valuation cap, a discount, or both.

Why it matters

SEIS and EIS relief is worth thirty to fifty percent of the investment to a UK angel, and it is often the difference between a cheque and no cheque. A convertible loan does not qualify, because HMRC requires the shares to be paid up in cash and not to carry a right of repayment. An ASA is written to satisfy that. For a UK founder this makes it the correct instrument in most early rounds, and using a US style SAFE or a convertible note instead can quietly cost the investor their relief and cost the founder the round.

Worked example

An angel puts EUR 150,000 into a UK company through an ASA with a GBP 4m cap and a twenty percent discount, with a longstop date twelve months out. The company raises a priced round nine months later at a GBP 6m pre-money. The discount gives a conversion at GBP 4.8m, the cap gives GBP 4m, so the cap wins and the angel converts as though the company were worth GBP 4m. Had no round happened by the longstop date, the agreement would have converted anyway at whatever fallback valuation it names, because the one thing that cannot happen is the money going back. Change one figure and the picture moves: had the priced round come in at a GBP 3m pre-money, below the cap, the cap would not bind at all and the angel would convert at the discounted round price of GBP 2.4m, receiving more shares still. The cap protects against a high round, not a low one.

The common mistake

Copying a US SAFE into a UK round because it is familiar and free to download. The instruments look similar and are not interchangeable: a SAFE is generally not treated as qualifying for SEIS or EIS, and an investor who discovers that after the fact has lost relief that cannot be recovered. The other frequent error is a longstop date set too far out, since the relief clock and the investor's patience both run from the date of the agreement rather than from conversion. A third mistake is treating the longstop as a formality. It is the date on which the money converts whether or not anybody is ready, and the fallback valuation it names is a price agreed today for a company nobody can value yet.

In practice

Expect six to twelve months to the longstop, a cap, and often a discount, and expect the investor's solicitor to check the non-repayability language carefully because that is the clause the relief depends on. Advance assurance from HMRC before the round is normal practice and worth the delay. If an investor asks whether the instrument is SEIS compatible, they are not asking a technical question, they are asking whether they can invest at all.

What to ask

Ask whether the instrument is SEIS or EIS compatible and whether the company has advance assurance from HMRC, because for a UK angel the answer decides whether they can invest at all. Ask what the longstop date is and what valuation applies if it arrives without a priced round, since that fallback is the real price of the money in the scenario nobody plans for. Ask explicitly whether there is any circumstance in which the money is repayable, and expect the answer to be no: if it is anything else, the instrument is not an ASA whatever the title says, and the relief the investor is counting on will not be there. Confirm the answers with a solicitor who has done SEIS rounds before, not a general commercial one, because this is a narrow area and the cost of getting it wrong lands on the investor.

Related terms

• SAFE vs convertible note Both defer the price to a later round. Only one of them is a debt that can fall due.
• Pre-money vs post-money SAFE Which of the two SAFE forms you signed decides whether your other convertibles dilute the investor or dilute you.
• Fully diluted shares The share count that assumes every option and every convertible has already converted. The only number worth quoting.