What it means
When a company sells new shares directly to investors, rather than through a stock exchange, the sale is documented in a subscription agreement. The investor subscribes, meaning applies and commits, to buy the shares, and the company accepts the offer.
The agreement sets out the essentials: the number of shares, the price per share, the total amount, the payment date and the type of security. It also lists conditions that must be satisfied before the money moves, such as board approval or the signing of a shareholders' agreement.
A large part of the document consists of representations and warranties, which are statements of fact each side promises are true. The company might confirm that it is properly registered, that its accounts are accurate and that it has told the investor about any legal claims.
If a statement proves false, the investor may have a right to compensation or to cancel the deal. The investor also gives promises, such as confirming that it is allowed to invest, that it understands the risks and that it is buying for its own account.
In many countries, this helps the company show that it complied with securities laws on who may be offered private shares. Timing and mechanics matter as much as the price.
The agreement usually states when the investor must pay, when the company must issue the share certificates or update its register of members, and what happens if a condition is not met by a long-stop date (the final date after which either side can walk away). Missing those steps can leave the investor paid but not yet recorded as an owner.
For a founder or manager, the document deserves careful reading and legal advice before signing. Terms about how the price is set, what happens if the money arrives late and whether the investor gets special rights can shape the future of the company for years.
In practice
Real-world examples.
Example
A start-up agrees to sell 400,000 new shares to a venture fund for $1,000,000. The subscription agreement fixes the price at $2.50 per share and states that the money will be paid within ten days of signing. The fund's lawyers also add a condition that the founders sign a lock-in, so the key people cannot sell their own shares for two years.
Example
A family-owned manufacturer invites a local investor to buy a 10% stake for $2,000,000. The agreement includes a promise from the family that the accounts given to the investor are accurate and complete.
Example
A restaurant group raises $300,000 from ten small investors. Each investor signs a subscription agreement, and the company keeps the signed copies as evidence that every investor confirmed they understood the risks. A single standard form is used for all ten, which keeps the paperwork consistent and cheaper to check.
Formula
Calculation
The basic arithmetic is the number of shares and the resulting ownership:
Shares issued = Investment amount / Price per share
Ownership % = New shares / (Existing shares + New shares)
A company has 3,000,000 shares in issue, and an investor subscribes $500,000 at $2.50 a share. The investor receives $500,000 / $2.50 = 200,000 shares, giving ownership of 200,000 / (3,000,000 + 200,000) = 200,000 / 3,200,000 = 6.25%. The company is valued after the deal at 3,200,000 x $2.50 = $8,000,000, which means $7,500,000 before the new money.Case study
Seen in the real world.
Brightwater Labs is an illustrative, fictional software company that agreed to sell shares to a new investor for $1,200,000 at $4.00 a share. The founders were keen to close quickly and were tempted to sign the first draft of the subscription agreement without taking advice.
Their lawyer pointed out two problems. A warranty stated that the company had no pending legal disputes, but a small claim from a former contractor was in progress, and a clause required the company to repay the money in full if the deal did not close within seven days.
In this illustrative story, the founders disclosed the claim in a schedule to the agreement and extended the closing period to thirty days. The changes took two days to agree, and they avoided a breach of warranty and a repayment obligation that the company could not have met.
Watch out
Common mistakes.
- Signing without checking that the warranties are true, which can create liability for the company and its directors.
- Treating the document as a formality, when it fixes the price, the conditions and the remedies if something goes wrong.
- Forgetting to link the agreement to the company's other documents, such as the shareholders' agreement and articles of association.
Questions
People also ask.
Is a subscription agreement the same as a share purchase agreement?
No, because in a subscription the company issues new shares to the investor, while in a share purchase an existing shareholder sells shares that already exist.
Who signs it?
The investor and the company sign, and the company usually signs after its board has approved the issue, because only the board has the authority to create and allot new shares.
What happens if the investor does not pay?
The agreement normally sets out the consequences, which may include cancelling the issue or charging interest, so the company should not release any shares until the cash has cleared.
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