What Is an Advance Subscription Agreement (ASA)? A UK Founder's Guide

An advance subscription agreement, or ASA, is one of the most common ways UK startups take investment before a priced round. It lets an investor put money in now and receive shares later, without anyone having to agree a valuation on the day. Used well, it's quick, cheap and SEIS and EIS friendly. Used badly, it can lose your investors their tax relief or make your next round harder to price. This guide explains what an ASA is, how it works, the key terms, the HMRC rules it has to follow and when it makes sense to use one.

What is an advance subscription agreement?

An advance subscription agreement is a contract where an investor pays for shares in your company now, and the company issues those shares later. The investor isn't lending you money. They're paying in advance for shares they'll receive at a future date, usually when you next raise a priced round.

Because the price of those shares isn't fixed when the money goes in, an ASA lets you take investment at a point when the company's value is hard to pin down. That's why they're popular at pre-seed and between rounds.

How an ASA compares to a SAFE or convertible loan note.

ASAs are often mentioned alongside SAFEs and convertible loan notes. All three let an investor put money in now and get shares later, but they work differently, and for UK founders the difference matters.

• ASA. An advance payment for shares, with no interest and no repayment. Built to work with SEIS and EIS, which most UK angels rely on. The standard choice for UK pre-seed.
• SAFE. The US equivalent. It works in a similar way, but often has no fixed conversion date and isn't designed for SEIS or EIS, so UK founders raising from SEIS or EIS investors generally use an ASA instead.
• Convertible loan note. A loan that usually carries interest and converts into shares later. Loans don't qualify for SEIS or EIS, even when they convert into shares, so investors relying on the schemes can't use one.

If your investors are relying on SEIS or EIS, an ASA is almost always the right one of the three.

How an ASA works.

The basic flow is simple:

1. The investor signs the ASA and pays the money. The company can use it straight away for the business.
2. The company raises a priced round. A new investor agrees a valuation and a price per share.
3. The ASA converts. The ASA investor receives shares at that round, usually at a discount to the price the new investors pay, and sometimes with a cap on the valuation they convert at.

If no priced round happens, the ASA still converts. Every ASA has a longstop date, and if there hasn't been a qualifying round by then, the shares are issued at a pre-agreed backstop valuation. Many ASAs also convert if the company is sold before a round happens, so check what yours says.

The investor doesn't own any shares until conversion. They can't vote, don't appear on your share register and, if they're using SEIS or EIS, can't claim their tax relief until the shares are issued.

The key terms in an ASA.

Most ASAs are short documents, but a handful of terms decide how much of the company the investor ends up with.

• Investment amount. How much the investor is paying in.
• Discount. The reduction the ASA investor gets on the price paid in the next round, as a reward for investing earlier and taking more risk. Discounts of 10% to 20% are typical.
• Valuation cap. An optional maximum valuation the ASA converts at. If your next round is priced above the cap, the ASA investor converts as if the valuation were the cap. The investor gets whichever of the discount or the cap gives them more shares.
• Qualifying round. The minimum size of round that triggers conversion, so a small top-up from one angel doesn't convert everything early.
• Longstop date. The date by which the shares must be issued, even if no round has happened. For SEIS and EIS, HMRC expects this to be no more than six months from signing (see below).
• Backstop valuation. Sometimes called the longstop or default valuation. The valuation the ASA converts at if it reaches the longstop date without a qualifying round. Check whether the discount also applies at this point, because it varies between agreements.
• Share class. Which shares the investor receives. For SEIS and EIS, these need to be ordinary shares.

A worked example.

Say you have 1,000,000 shares, all held by the founders. An angel invests £100,000 through an ASA with a 20% discount and a £3m pre-money valuation cap. A few months later you raise a priced round of £500,000.

In this example, the ASA shares are counted in the pre-money valuation, which is a common approach and how our dilution calculator works. That means the new investors get the percentage they're paying for, and the existing shareholders take the dilution from the ASA converting. It also means the round price per share is a little lower than the headline valuation divided by your current shares. The round price depends on how many shares the ASA converts into, and that in turn depends on the round price, which is why the figures below don't divide neatly. Our dilution calculator works this out for you.

Here's how the ASA converts at two different valuations:

At a £2m pre-money valuation, the discount gives the better price, so the angel's £100,000 converts into 66,667 shares worth £125,000. At £5m, the discount would only bring the price down to £3.87, so the cap kicks in instead and gives the angel a price of £3.00, about 22% lower. That's why investors like caps, and why founders should think carefully before agreeing to a low one.

In the £2m round, the post-money valuation is £2.5m. The new investors receive 266,667 shares for their £500,000, which is 20% of the company. The ASA investor ends up with 5% and the founders with 75%, rather than the 80% they'd have kept without the ASA.

Here the cap is divided by the shares in issue before the round, but exactly how a cap is applied varies between agreements (some calculate it on a fully diluted basis, including the option pool), so check the wording in yours. Adding an option pool shifts the numbers again. Our dilution calculator models ASAs with discounts and caps alongside your option pool, and gives you the full cap table to download.

ASAs and SEIS and EIS: the HMRC rules.

This is the part founders most need to get right. HMRC accepts that ASAs can qualify for SEIS and EIS, but only if they're simple and genuinely an advance payment for shares. Its guidance (VCM33025 for SEIS and VCM12025 for EIS) says it won't consider an ASA suitable unless the agreement:

• Doesn't allow the money to be refunded under any circumstances.
• Can't be varied, cancelled or assigned once signed.
• Bears no interest.
• Has a longstop date by which the shares must be issued.

HMRC expects that longstop date to be no more than six months after the ASA is signed. If it's longer, HMRC is unlikely to give advance assurance.

A few other points from the same guidance are worth knowing:

• It can't be a loan in disguise. An ASA used to turn a debt or another obligation into shares won't qualify.
• No extra investor protections. The ASA has to be just an agreement to subscribe for shares, not an investment instrument with added benefits for the investor.
• The money must be for growing the business. You'll need to show how the timing and terms fit your business plan and planned spending.
• Apply for advance assurance before you sign. HMRC says companies should apply before the ASA is entered into, and it won't give further assurance on changes made afterwards.
• Relief starts when the shares are issued. Not when the ASA is signed or the money arrives. The SEIS1 or EIS1 compliance statement can't be submitted until then.

The rest of the SEIS and EIS rules still apply when the ASA converts, including issuing SEIS shares before EIS shares and the 30% limit on any one investor's holding. Our SEIS and EIS guide covers these in full.

When an ASA makes sense.

ASAs are useful when you need money before you're ready to price a round, or when agreeing a valuation would slow things down.

• Getting early angels in. An angel who wants to back you before you've found a lead can commit now, and the lead sets the valuation later.
• Bridging to a priced round. If you're a few months from a round and need runway, an ASA from existing or new investors can cover the gap.
• Moving quickly. ASAs are short and cheap to put in place compared with a full priced round, which usually involves new articles, a shareholders' agreement and more legal work.
• Follow-on from existing investors. We've used ASAs ourselves at Solid Bond, mainly when investing further into companies we've already backed at pre-seed.

They work less well when the ASA money is large compared with the round you're planning, because it can end up shaping the valuation of that round (more on this below).

Things to watch.

• The six-month clock. For SEIS and EIS, the longstop forces conversion within about six months. If your priced round won't happen by then, the ASA converts at the backstop valuation, so set that number carefully.
• You can't change it later. Because an SEIS or EIS ASA can't be varied, get the terms right before anyone signs.
• Setting the cap too low. A low cap can mean giving away much more than you intended if your next round prices well. Run the numbers at a few different valuations first.
• Stacking lots of ASAs. Several ASAs on different terms make your cap table harder to follow, and your next investor will want to understand exactly how each one converts.
• ASA money shaping the next round. If ASAs make up a large part of the round, a lead investor may anchor on the cap or on what the early money effectively paid, rather than pricing the round fresh. Our guide to pre-money vs post-money valuation explains how this works.

Getting an ASA in place.

The simplest routes are a startup legal platform or a lawyer, many of whom have a standard SEIS and EIS compatible ASA. Whichever you use, check the longstop date is no more than six months, apply for advance assurance before signing, and make sure you understand how the discount, cap and backstop valuation will work at a few different round sizes.

When you get to your priced round, it's also worth knowing about the model documents from UK Private Capital (formerly the BVCA). They're free to download with an account and cover a subscription agreement, shareholders' agreement, articles of association and summary of terms. They're drafted for Series A rounds rather than seed, and there's no model ASA in the set, but they're a useful reference for what standard terms look like.

Raising your round.

For more on raising your first round, read our guides to pre-seed funding, SEIS and EIS and how much equity to give away at pre-seed, and model your ASAs in the dilution calculator.