As a small business owner or entrepreneur, pitching to potential investors to raise capital can be nerve-wracking. But when a potential investor has agreed to buy shares, guaranteeing that they will actually buy the shares is essential!
This is where a Share Subscription Agreement comes in. It ensures that potential investors who have agreed to buy shares will keep their promise.
Knowing the ins-and-outs of Share Subscription Agreements is important for small business owners and entrepreneurs, as it will give you an extra sense of security when expanding and growing your business.
But, don’t worry, it’s not as complex as it may sound!
What Is A Share Subscription Agreement?
A Share Subscription Agreement is a formal document that guarantees that your potential investors will buy the shares, and that your business will issue those shares.
The agreement goes into further detail about the promises made by potential shareholders to invest in your business.
Along with the Share Subscription Agreement, a term sheet will outline the terms of the deal between the investor and the founder. You can learn more about term sheets here.
What Do You Need To Include In A Share Subscription Agreement?
There are a number of terms within the agreement that spell out the investment and the process of buying and selling the shares.
Examples of terms a Share Subscription Agreement will include are:
- The number of shares to be issued
- The price per share of those shares
- Any conditions which the shares are subject to
- When the shares will be issued
Locking in a price for the shares is one of the main benefits of a Share Subscription Agreement.
That way, it will be much easier to demand that the investors hand over the money to fund the growth of your business!
As you woo more investors to buy shares, checking in with a commercial lawyer is necessary to navigate your business’ expansion.
Representations And Warranties
A Share Subscription Agreement will also include representations and warranties. These are statements that help the investors, the company and sometimes the founder understand what they’re getting into.
In particular, these statements would confirm what assets the company owns, that the information within the agreement is correct and complete, and that the business is not involved in any legal proceedings.
It is important that a lawyer ensures that the representations within the agreement are not misleading or deceptive or do not lead to any unwanted, illegal costs. Neither you nor your investor want that, that’s for sure!
Sometimes, after you’ve signed the documents, either party may not want to go ahead with the deal.
It may be disappointing when this happens, but a lawyer can help draft terms into the agreement that can release investors and businesses from going through with the deal.
Keep in mind, simply not wanting to follow through with the agreement may mean fulfilling a set of conditions, so make sure to read through the agreement carefully!
When Is A Share Subscription Agreement Needed? Are There Alternatives?
A Share Subscription Agreement would be necessary if a potential investor has requested one. As a small business owner or entrepreneur, you should note that venture capital investors are particularly likely to ask for a Share Subscription Agreement.
If your investor has stated that they do not want a Share Subscription Agreement, a Share Subscription Letter may be better instead, as it tends to be more favourable for the company.
A Share Subscription Letter sets out the promises made by the company, with the key difference being that there are no company or founder warranties. This means that the potential investor would have to conduct their own due diligence.
While it can be a great alternative to a Share Subscription Agreement, a Share Subscription Letter is more commonly used in the early stages of funding, particularly when you’re getting funds from friends and family.
What Happens After Signing A Share Subscription Agreement?
When all the parties have signed the agreement, the process outlined in the agreement must be followed.
This would involve processes such as:
- the company or board passing a resolution to issue the shares;
- the investors paying the money;
- issuing share certificates to the investors; and
- the company updating its member register.
What To Take Away
To put it simply, Share Subscription Agreements are important in ensuring that both potential investors and the business commit to buying and selling shares at an agreed price.
If the agreement is not catering to the best interests of the potential investors or the business, the warranties and termination clauses will allow you to back out of the deal!
If you’re considering raising capital for your business, email us at [email protected] and we’ll happily help you out!
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