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How can you raise seed investment quickly?
One option is to use an advance subscription agreement ("ASA").
An ASA is contractual arrangement between investors and a business. The investors advance money upfront and receive shares in the company at an agreed future time.
Often likened to the Simple Agreement for Future Equity ("SAFE") in the United States, ASAs offer startups agility and efficiency by simplifying the fundraising process and mitigating the complexities associated with traditional fundraising cycles.
Key Provisions
Businesses opting for ASAs can customise key terms to suit their specific requirements. These terms usually include:
- Discount: Businesses entice investors by offering discounted shares in subsequent funding rounds, enhancing the investment's attractiveness. The discount recognises and rewards the additional risk taken by earlier investors.
- Valuation Cap: Businesses can impose an upper limit on the valuation at which the ASA converts into shares, providing investors with a favorable investment proposition. Or it may be required by the investor so they're protected against a runaway valuation.
- Longstop Date and Valuation: The agreement delineates a deadline (longstop date) by which the ASA must convert into shares, along with the corresponding valuation for the conversion.
Considerations
While ASAs offer numerous benefits, they also come with potential drawbacks.
Pros include:
- quick to complete: an ASA is a short document with only a few key provisions regarding how many shares an invetor will receive, when they'll receive them, and the share price. It cut's out a lot of other documents and negotiations. Critically, it defers the need to agree a valuation until a future date.
- bridge funding: you might need capital in a hurry, whether from existing shareholders or incoming investors. ASAs are often used to fund a business while it works through a larger funding round.
- angel investors: angels usually invest lower amounts and so are often understanding of lighter documentation and the rationale for deferring valuation discussions.
- costs: compared to traditional equity rounds, ASAs often involve fewer legal hurdles (depending on the investor), making them a cost-effective and quicker method of raising capital.
Cons include:
- light-touch: not all investors will be happy about light-touch documents. They may expect more substantial rights, a shareholders agreement or a side letter. It often depends on the investor, their experience, and the investment amount.
- dilution: because it's such a simple approach, some businesses use ASAs without fully understanding the dilutive impact when the ASAs convert into shares in future. Be sure to scenario model your cap table so the implications are understood.
Wondering how ASAs differ from convertible loan notes? Check out other posts in the WCC Academy.
