An advance subscription agreement, or ASA, is a contract where an investor pays money into a company now in return for shares the company issues later. The shares are usually issued when the company raises a priced funding round, at that round’s price less a discount, or on a fixed date called the long-stop date if no round has happened by then.
ASAs exist because a young company is hard to value, and the UK’s tax reliefs for early investors only apply to shares. A US-style SAFE, sometimes called a SAFE note, also leaves the valuation until later, but a standard SAFE doesn’t meet HMRC’s conditions for SEIS or EIS relief. An ASA drafted to HMRC’s rules does the same job and keeps those reliefs available.
I’ve raised £250m+ for my own companies and funded more than 750 businesses with over £1bn, so I’ve seen early rounds as a founder, as an investor and as a lender.
What an Advance Subscription Agreement Is
The investor signs the agreement and pays the full amount to the company straight away. The company can use the money from that day. Until the shares are issued, the investor holds only a right to them, with no vote and no right to dividends.
An ASA isn’t a loan. There’s no interest, nothing to repay and no repayment date. That’s the main difference from a convertible loan note, and it’s the reason HMRC can treat the money as paid for shares rather than lent.
The agreement sets out the events that turn the money into shares. They include things like:
- A qualifying funding round. The company sells shares at an agreed valuation and raises at least an amount set in the ASA.
- A sale of the company. The ASA often converts just before the sale, so the investor takes part as a shareholder.
- An insolvency event. Some ASAs convert the money into shares just before the company goes into an insolvency process.
- The long-stop date. If none of the above has happened by this date, the shares are issued anyway, at a valuation set in the agreement.
The investor paid before anyone knew what the shares were worth, and the ASA rewards them for that with a discount, a valuation cap, or both.
How an ASA Converts: Discount, Valuation Cap and Long-Stop Date
| Term | What it does | Figure used in the example below |
|---|---|---|
| Discount | Issues the ASA shares at a lower price per share than the new investors pay in the qualifying round | 20% |
| Valuation cap | Sets the highest valuation the ASA money can convert at, however high the round is priced | £2m |
| Long-stop date | The date by which the shares have to be issued if no other conversion event has happened | 6 months after signing |
| Long-stop valuation | The valuation the shares are issued at on the long-stop date | £1.5m |
| Qualifying round | The minimum amount of new money that triggers conversion | £500,000 |
The discount. If the new investors pay £3.00 a share and the ASA has a 20% discount, the ASA investor’s shares are issued at £2.40.
The valuation cap. 20% off a high price is still a high price, so the cap sets a maximum. A £2m cap means the shares are issued at the price per share the company would have at a £2m valuation, whenever that’s lower than the discounted price. Where an ASA has both, the investor gets whichever price is lower. The founder sets the cap and has to justify it, the same way as any valuation, and the investor brings their own number.
The long-stop date. This is what makes an ASA different from a SAFE. If the company hasn’t raised a priced round by this fixed date, the shares are issued on it at the long-stop valuation, which the agreement sets when it’s signed.
Worked Example
Say a company with 1,000,000 shares in issue takes £150,000 on an ASA with a 20% discount, a £2m valuation cap and a £1.5m long-stop valuation. The outcome depends on what happens within the 6 months.
| What happens | Round price | Discount price | Cap price | Price the ASA shares are issued at | ASA shares |
|---|---|---|---|---|---|
| £500,000 round at a £3m pre-money valuation | £3.00 | £2.40 | £2.00 | £2.00 (cap) | 75,000 |
| £500,000 round at a £2.2m pre-money valuation | £2.20 | £1.76 | £2.00 | £1.76 (discount) | 85,227 |
| No round by the long-stop date | None | None | None | £1.50 (long-stop valuation) | 100,000 |
In the first case, the new investors get 166,667 shares at £3.00, so there are 1,241,667 shares after the round. The founders hold 80.5%, the ASA investor 6.0% and the new investors 13.4%, and the ASA investor’s £150,000 has become shares worth £225,000 at the round price.
In the second case, the discount gives the lower price, and the ASA shares are worth £187,500 at the round price, the £150,000 grossed up by the 20% discount.
In the third case, the company issues 100,000 shares at £1.50 on the long-stop date, and the investor ends up with 9.1% of 1,100,000 shares.
ASA vs SAFE vs Convertible Loan Note
| Advance subscription agreement | SAFE | Convertible loan note | |
|---|---|---|---|
| Where it’s used | The UK | Created in the US | The UK and elsewhere |
| Debt or equity | Not debt: money paid now for shares issued later | Not debt: a right to shares later | Debt until it converts |
| Interest | None | None | Usually |
| Refund or repayment | None, if it’s to meet HMRC’s conditions | No repayment date | Repayable at the maturity date if it hasn’t converted |
| Fixed end date | Long-stop date, usually no more than 6 months for SEIS or EIS | None | Maturity date |
| SEIS and EIS | Can qualify if it meets HMRC’s conditions | A standard SAFE doesn’t meet HMRC’s conditions | Conversion shares don’t qualify |
The SAFE, a simple agreement for future equity, was created at Y Combinator in 2013 and is written for US companies. It has no end date, so the investor can wait indefinitely for their shares, and that open end is the main reason a standard SAFE doesn’t fit HMRC’s rules.
A convertible loan note starts as a loan, and HMRC treats shares issued by converting a loan as issued to repay a debt rather than to raise money, so they don’t qualify for SEIS or EIS.
The ASA only matters when the investors are UK taxpayers who want the income tax relief. Companies in the US, Singapore, Australia or the UAE raising before they have a valuation can use a SAFE or a convertible note, because there’s no HMRC long-stop rule to meet. The same applies to a UK company whose investors don’t need the reliefs, such as overseas investors or a fund.
Advance Subscription Agreement SEIS and EIS Rules
HMRC’s guidance on advance subscription agreements for SEIS, with matching guidance for EIS, expects the terms to be simple. The ASA mustn’t offer the investor other benefits such as protection against losing their money, and it can’t be used to turn a debt into shares.
HMRC won’t consider an ASA suitable for SEIS or EIS unless the agreement:
- doesn’t allow the money to be refunded under any circumstances
- can’t be varied, cancelled or assigned to someone else
- carries no interest
- has a long-stop date by which the shares must be issued
HMRC generally expects the long-stop date to be no more than 6 months after the ASA is signed. Where it’s longer, HMRC says it’s unlikely to give advance assurance.
The company also has to show how the timing and terms fit its business plan and what the money is going to be used for.
The usual SEIS rules still apply: a company can raise up to £250,000 through the scheme if its gross assets are no more than £350,000 and it has fewer than 25 full-time equivalent employees when the shares are issued.
The shares have to be full-risk ordinary shares with no special rights to the company’s assets, paid up in full, in cash, when they’re issued. GOV.UK says the company should have a way to accept payment before the shares are issued, and an ASA is one way of doing that.
When the Relief Starts
SEIS and EIS relief is only available from the date the shares are issued, not the date the money was paid. The company can’t submit its compliance statement, form SEIS1 or EIS1, before that date either. An investor who pays in March, with shares issued in May, makes the investment in the new tax year, although SEIS and EIS investors can choose to treat some or all of an investment as made in the previous tax year.
Advance Assurance and the ASA
Advance assurance is an optional opinion from HMRC that a planned share issue is likely to qualify. HMRC says to apply before the ASA is signed, and once assurance is given, any changes to the ASA are only looked at when the compliance statement goes in.
What to Check Before Signing an ASA
- The long-stop date. No more than 6 months after signing, if the investors want SEIS or EIS relief.
- The HMRC conditions. No refund in any circumstances, no interest, and no right to vary, cancel or assign the agreement. Investor protections written into the ASA can take it outside the rules.
- The conversion terms. The discount, the cap, the long-stop valuation, what counts as a qualifying round, and whether the share count behind the cap includes any option pool. These decide how much of the company the ASA investors end up with.
- The share class. For SEIS and EIS, the shares issued have to be ordinary shares with no preferential rights to the company’s assets. If the priced round issues preference shares, an ASA that converts into the round’s share class can lose the investors their reliefs, so the class is set in the agreement.
- The approvals. The directors need authority to issue the shares, and existing shareholders’ pre-emption rights usually have to be waived or disapplied, so the conversion isn’t held up later.
- The filings. When the shares are issued, the company files a return of allotment, form SH01, with Companies House within a month, with a statement of capital, and updates its register of members and its cap table.
Before investing, an ASA investor looks at the business, the plan and the terms. They will then do their due diligence and check what they have been told is true. The investor pitch deck says how much is being raised and on what structure.
ASA or Priced Round
An ASA tends to fit when:
- the founder and the investors can’t agree a valuation yet and expect a priced round within the long-stop period
- the company needs the money now and the legal work of a full priced round would be out of proportion to the amount
- the investors are UK taxpayers who want SEIS or EIS relief
A priced round, where shares are issued straight away at an agreed valuation, tends to fit when:
- the founder and the investors can already agree a valuation, because an ASA adds nothing that a share issue at that price doesn’t already do
- a lead investor wants their rights set out in a term sheet and a shareholders’ agreement from the start
- no priced round is planned within 6 months, so the shares would be issued at the long-stop valuation anyway, which is a valuation agreed today in another form
At pre-seed, an ASA is one of the structures UK companies use for their first money from angels, with a priced round later once there’s more to value. Whatever the structure, the amount comes from what the money is going to be used for and the plan, built up from its parts. It isn’t just a round number plucked out of the air.
FAQs
Is an advance subscription agreement debt or equity?
An advance subscription agreement isn’t debt. The investor subscribes now for shares that are issued later, there’s no interest and no repayment, and HMRC’s conditions for SEIS and EIS rule out any refund of the money.
What is a long-stop date in an ASA?
A long-stop date is the date by which the company has to issue the ASA investor’s shares if no funding round or other conversion event has happened first. For SEIS or EIS, HMRC generally expects it to be no more than 6 months after the ASA is signed.
Is an ASA the same as a SAFE?
No, but it does a similar job. Both let an investor pay now for shares issued later at a discount or capped price. A SAFE has no end date and is written for US companies, while an ASA has a long-stop date and can be drafted to meet HMRC’s SEIS and EIS conditions.
Can you get SEIS relief on an advance subscription agreement?
Yes, if the ASA meets HMRC’s conditions and the company and shares meet the SEIS rules. The relief only starts when the shares are issued, not when the money is paid.
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This explains how advance subscription agreements generally work for UK companies. It isn’t legal, tax or investment advice, and a solicitor and accountant should review the ASA before it’s signed.
