SAFE / ASA
Early-stage valuations may feel uncomfortable for both founders and investors. One way to cope with this is to use Equidam’s services or defer the decision to a later stage. Convertible rounds are a great way for early-stage companies to onboard investors while postponing any premature discussion on valuation, but they don’t qualify for SEIS and EIS reliefs in the Uk. Are there other ways to achieve a similar result but still enable your investors to access tax reliefs?
ASA - ADVANCED SUBSCRIPTION AGREEMENT
Entering the ASA, or Advanced Subscription Agreement. An ASA is a type of equity instrument where investors pre-pay for stock or shares within a company. They complete the transaction and pay for the shares but only receive the shares at a later funding round. Here, we explain everything you may need to know about ASAs.
1. When will investors receive their shares?
When investors will receive their shares will be outlined in the ASA but typically they will receive them at the next funding round or when the company reaches a specific target.
2. What about the valuation?
Investors’ shares will be discounted on the pre-money valuation of the next round, with the conditions outlined in the ASA. Exactly as in a convertible note, it is possible to include in an ASA both a discount and a cap to the valuation in order to recognise the trust that early stage investors put into the venture.
3. Is an ASA considered debt or equity in the UK?
Any investments made in a company through an ASA is generally considered an equity agreement and any money paid through an ASA shouldn’t be repaid in cash.
4. What happens if a company becomes insolvent?
The exact course of action that will take place if a company becomes insolvent will be outlined in the ASA. In some cases, the amount invested through the ASA can be treated as debt and be repaid but this may get in the way of EIS reliefs.
5. What happens if a company is sold?
If a company is sold before the qualifying funding round, shares would usually be allocated at the sale valuation or with a discount. In general, what happens in this scenario is specifically outlined within the ASA.
6. Can you receive interest on investments in an ASA?
An ASA is considered equity and therefore it is not common practice to receive interest on any amount invested via an ASA.
7. Are shares in an ASA SEIS/EIS eligible?
The specific terms of the ASA will outline whether or not the structure of the ASA is SEIS/EIS eligible. EIS eligibility is not automatic, so be sure to follow the guidelines needed to be EIS compliant.
IS IT SAFE?
An ASA can be considered the UK version of a SAFE and it’s compliant with UK law. SAFEs, on the other side, are designed to be legally compliant with US law.
ASAs are a clever way to reach a balance between co-founders and investors at an early stage, and have the merit, like convertible notes, to align the interests of both parties. But that’s not the only way to structure your early deals maintaining both the flexibility of a convertible round and EIS compliance: Contact us if you’d like to learn more about this or would like to learn how we can help you secure funding.