You’ve found someone ready to invest in your startup - amazing! The next step is deciding how their investment will work.
Two options are issuing shares now or using an advance subscription agreement, usually called an ASA. Both bring funding into the company, but the investor receives their shares at a different time.
What does it mean to issue shares?
When you issue shares, the investor pays an agreed amount and becomes a shareholder straight away.
You and the investor will agree on the company’s valuation, the price per share, the number and class of shares being issued, and the rights attached to them. The company will then approve the investment, update its records and report the share issue to Companies House.
This gives everyone certainty from the start - the founders know how much of the company has been issued, and the investor knows exactly what they own.
A direct share issue can work well when you are ready to agree on a valuation and complete the investment now. It involves completing the company approvals and share issue paperwork at the time of the investment.
What does it mean to use an ASA?
An ASA allows an investor to provide money now and receive shares later.
Instead of setting the share price when the investor provides the funds, the ASA explains how their shares will be calculated and issued later. This usually happens when the startup completes its next funding round or, if no round takes place, by an agreed deadline known as the longstop date.
An ASA is not a loan; the investor is paying in advance for future shares, rather than lending money that the company is expected to repay.
SEIS and EIS are UK tax relief schemes that can make early-stage investment more attractive. An ASA can be designed with these schemes in mind, but it must meet specific conditions. HMRC generally expects an EIS ASA to carry no interest, prevent refunds and include a longstop date, usually within six months.
What about SAFEs and convertible loan notes?
Many US startups use SAFEs, meaning Simple Agreements for Future Equity, based on documents introduced by Y Combinator. Companies may also use convertible loan notes, which begin as loans and can later convert into shares.
UK companies can use both, but they are less common where SEIS or EIS relief matters. The standard US SAFE is not designed to meet HMRC’s ASA conditions, while shares issued by converting a loan note generally do not qualify because the conversion settles existing debt rather than raising new money. Many UK startups therefore choose an ASA when they want to offer investors SEIS or EIS relief.
What are the pros and cons?
Issuing shares gives both sides a clear ownership position immediately. It may suit a planned funding round where the valuation and investor rights are already agreed.
The main consideration is timing. The company needs to agree to the investment terms and complete the share issue process straight away.
An ASA can help the company receive funds sooner and agree on its valuation at a later round. The document is usually shorter, and the investor becomes a shareholder when the ASA converts.
However, the final number of shares may not be known when the ASA is signed. The founder and investor also need to agree to the conversion terms, which may include a valuation cap, discount, and longstop date.
Which option is right for your startup?
Issuing shares may be the better fit when you are ready to agree on the company’s valuation and give the investor their shares now. An ASA may be more suitable when you need funding ahead of a future round and would prefer to agree to the valuation later.
