Contracts / Subscriptions

 A subscription agreement could be your company’s or startup’s ticket to attracting highly qualified investors to back your next project or venture. However, poorly written subscription agreements can result in legal errors that cost you more than the money you originally received from the investment.

Avoid taking chances with your most precious asset by drafting and executing rock-solid subscription agreements. The article below contains everything you need to know.

What is a Contracts /Subscription Agreement?

Subscription agreements, also known as share subscription agreements, are legal contracts that allow an investor to buy shares of a company as a subscriber and shareholder with limited partnerships (LP) or private placement rights. They establish terms and conditions around key provisions of the transaction, such as the number of shares and capital contribution requirements. A subscription agreement tracks current disbursements and outstanding shares. OR

A subscription agreement is between a company and a private investor to sell a specific number of shares at a specific price. This investor fills out a form documenting his or her suitability for investing in the partnership. A subscription agreement can also be used to sell stock in a privately owned business.

Common types of investors that accept subscription agreements include:

• Friends and Family Investors
• Startup investors
• Angel investors

Startups generally offer subscription agreements in their early investing stages. However, a well-written subscription agreement can help your organization stand apart from the crowd while protecting your legal rights with more experienced parties. Doing so can help you avoid disputes in the future.

Contracts /Subscription Agreement: What Is It?

The subscription agreement is used to keep track of how many shares have been sold and at what price the shares sold at for a privately held company. The subscription agreement details all the information about the transaction, such as the number of shares and price, and confidentiality provisions.

Some agreements include a specified rate of return that investors are guaranteed to receive. That might be a percentage of the company's net income, or it could be a specific amount in lump sums that are to be paid out on specific days.

Subscription agreements are most common with startups and smaller companies. They're used when business owners don't have the resources to work with venture capitalists or to take the company public.

When do you need a Contracts /subscription agreement?

Although a subscription agreement isn’t mandatory, it is a useful document as it will clearly record the terms on which a person (the subscriber) agrees to purchase shares from the company.  It can also be an important document to keep for tax purposes.

Some subscription agreements are relatively short and informal - for example, where someone is subscribing for shares in their own family's business.

More commonly however, and particularly where an arm's length investor is concerned, a more formal subscription agreement is used.

What does a Contracts /subscription agreement cover?

At a minimum, a share subscription agreement will identify:

• the company issuing the shares,
• the investor subscribing for the shares,
• the number of shares to be issued,
• the class of shares to be issued (eg ordinary shares, B class shares etc), and
• the amount to be paid by the investor (called the 'subscription amount'), and the time by which the amount is to be paid.

Sometimes all of the subscription amount is required to be paid upfront. In other cases, the subscription agreement is required to be paid in tranches over time (and some of these payments may be subject to the company achieving certain goals).

Beyond these bare minimum terms, the content of a subscription agreement will vary depending on (1) the specific transaction concerned, (2) the level of sophistication of the parties (some investors will have more prescriptive requirements than others) and (3) whether there is a shareholders agreement (and if so, the contents of that agreement).

Examples of other provisions often included in share subscription agreements are set out below.

Investing With Contracts /Subscription Agreements: Advantages and Disadvantages

When it comes to investing, there are definitely some good and some bad in choosing to do so using subscription agreements.

Advantages

• Subscription agreements provide a way to sell stock without registering securities with the Securities and Exchange Commission (SEC). Creating the prospectus needed for registering with the SEC is time-consuming and expensive.
• It's a one-time investment, unlike venture capitalist investing, which requires much more time and typically multiple investments.
• It's not a huge time commitment since you're a silent partner in the investment.
• It's a limited partnership, so there's no worry about being liable.
• Disadvantages
• There are no voting rights and no way to help the business be successful. You have to trust that the leaders of the business know what they're doing.
• Once you've invested your money, there's no way to get the money back if you change your mind.

Contracts /Subscription Agreements With Private Placements

Subscription agreements with private placements guarantee that your company will engage in the sale of stock for a specific number of shares at an agreed-upon price. You include these details in the private placement memorandum unless prospectus exemptions apply.

• How Private Placement Works
• If you want to raise cash, your startup will issue regular and private shares of stock, either to the public or through private placement. A private placement is where you sell your stocks to accredited investors.
• Make the Offer More Attractive
• Ensure that your memorandum is just as airtight as your subscription agreements. The way you structure the deal will give reassurance and priority to your investors so that they can start earning an ROI that pays out to shareholders versus company owners.

Summary

A subscription agreement is a formal agreement between a company and an investor to buy shares of a company at an agreed-upon price.

It contains all the details of such an agreement, including Outstanding Shares, Shares Ownership, and Payouts.

A well organized and well-structured subscription agreement will include the details about the transaction, the number of shares being sold and the price per share, and any legally binding confidentiality agreements and clauses.