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Guide to Advance Subscription Agreements

An Advance Subscription Agreement (ASA) is a popular startup fundraising agreement in the UK that allows investors to provide funding now in exchange for shares later. Essentially, an investor “pre-pays” for equity: the company receives cash immediately, and the investor receives shares at a future date when a trigger event (usually the next funding round) occurs. This guide, based on our standard SEIS/EIS-friendly ASA template, will walk founders and investors through using an ASA in practice. We’ll explain how to fill out the template, demystify key terms (valuation cap, floor price, discount, longstop date, etc.), and provide tips on navigating tax relief rules (SEIS/EIS) in the UK context. The goal is a clear, educational walkthrough – startup-friendly, yet comprehensive – so you can confidently use an ASA for your next startup investment or fundraising agreement.

Below, we cover the essentials: what an ASA is and why to use one, how conversion works, guidance on choosing terms like the valuation cap/floor and discount, SEIS/EIS considerations (timelines, use-of-funds rules, etc.), common pitfalls to avoid, and a FAQ section addressing legal and strategic concerns. Let’s dive in!

What is an Advance Subscription Agreement and Why Use One?

An Advance Subscription Agreement (ASA) is a simple contract where an investor agrees to give money to a company now in return for shares to be issued at a later date. Unlike a priced equity round, an ASA doesn’t fix the company’s valuation today. Instead, the valuation is determined later (for example, at the next funding round or a predetermined longstop date). This lets startups raise funds quickly and flexibly without having to negotiate an exact valuation upfront.

Key reasons to use an ASA in the UK startup context:

• Fast, low-cost funding: With less documentation and no need for an immediate valuation agreement, ASAs are quicker and cheaper to execute than a full equity round. This makes them ideal for bridging finance (e.g. to hit a milestone or extend runway) while deferring the big valuation negotiation until later.
• Deferring valuation to a better time: Early-stage startups can be hard to value. By using an ASA, founders can wait to set a valuation until the company has grown or achieved proof-of-concept, potentially securing a higher valuation (and avoiding giving away too much equity too early).
• SEIS/EIS tax relief compatibility: Crucially, ASAs can be structured to qualify for the UK’s Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) tax reliefs. Convertible loan notes (CLNs) are usually ineligible for SEIS/EIS because they are debt (investors could be repaid, meaning capital isn’t fully at risk). An ASA, however, is equity-only – it cannot be repaid in cash and bears no interest – so it can meet HMRC’s requirements for SEIS/EIS relief. This is a major draw for UK angel investors who want the 50% or 30% income tax relief on investments (under SEIS or EIS respectively).
• Founder and investor benefits: For founders, an ASA provides quick funding and delays heavy legal processes (no need for a full shareholders’ agreement or term sheet until the round). Funds raised via an ASA are treated as equity (not debt) on the balance sheet, so they don’t burden the startup with loans or interest. For investors, ASAs often come with a reward for early commitment – typically a discount on the share price in the next round or a valuation cap that ensures a minimum equity stake, which can mean a better deal than later investors get. And of course, investors can potentially claim SEIS/EIS tax relief once the shares are issued, boosting their after-tax returns.

In summary, an ASA is a “money now, shares later” arrangement. It’s a startup fundraising agreement (UK) teams use to get cash in the door quickly while keeping investments SEIS/EIS-friendly and kicking the valuation can down the road. Next, we’ll break down how an ASA works and how to complete the template’s key sections.

How Does an ASA Work? (Conversion Mechanics and Triggers)

Under an ASA, the investor’s money is exchanged for the right to receive shares in the future. The agreement will specify certain conversion triggers – events that cause the advance subscription to convert into actual shares of the company:

• Qualifying Funding Round: In most ASAs, the primary trigger is the next equity financing above a certain size (e.g. “the Company raising at least £X in new equity”). When this Qualifying Round happens, the ASA funds automatically convert into shares immediately before the round closes. This timing ensures the ASA investor gets their shares at a price advantageous per the agreed discount or cap (discussed below) and typically as the same class of shares being issued in the round (often ordinary or the highest class being issued). For example, if new investors in the round pay £1.00 per share, an ASA with a 20% discount would convert the advance funds at £0.80 per share, giving the ASA investor more shares for their money.
• Sale of the Company: If the company is acquired or undergoes an exit (share sale, asset sale, or even an IPO) before any funding round, the ASA usually converts into shares immediately prior to the sale/exit completing. This way, the ASA holder becomes a shareholder just in time to receive their portion of sale proceeds.
• Longstop Date: The ASA sets a longstop date (a deadline by which shares must be issued). If no qualifying round or sale has happened by this date, the ASA will automatically convert on the longstop date into shares at a preset price or valuation (often called the “longstop valuation”). The longstop ensures the investor isn’t left in limbo indefinitely – they will get shares by a certain date even if no external event occurs.
• Insolvency or Winding Up: Many ASA templates, including this one, include an insolvency trigger for completeness – if the company goes into liquidation or administration before any of the above events, the ASA may convert into shares just before insolvency. In practice, if the startup fails, those shares could be worthless, but this conversion can allow the investor to at least claim loss relief on their SEIS/EIS investment (since tax relief is only available once shares are actually issued).

Importantly, ASA funds are never meant to be refunded to the investor – by design they must convert into shares under one of the scenarios above. No “money back” clause is allowed; otherwise the instrument would look like a loan (jeopardizing SEIS/EIS relief). The ASA template explicitly states that the subscriber acknowledges the funds cannot be refunded once invested. From the founder’s perspective, this means you get to keep the capital in a worst-case scenario – but from the investor’s side, it underscores that an ASA is a risk investment like equity, not a loan that can be reclaimed.

Conversion Process: When a trigger event occurs, the number of shares the investor receives is calculated by dividing the advance subscription amount by the conversion price (the price per share determined by the ASA terms, such as applying a discount or cap). Shares are then issued to the investor, and the agreement terminates. At that point, the investor becomes a shareholder like any other, typically signing any shareholders’ agreement in place. It’s worth noting that for SEIS/EIS purposes, the official investment date (for tax relief) is the date the shares are issued, not when the cash was first advanced.

Example: A founder might explain an ASA deal to an investor as follows: “You give us £50,000 now, and we’ll issue you shares when we raise our next round. To reward you for the early risk, you’ll get a 10% discount on the price in that round. If we don’t complete a funding round within 6 months, then at that 6-month point your £50k will convert into shares at a valuation of £3 million”. In practice, this means if the next round values the company at, say, £4 million, the ASA investor’s conversion price will be based on a £3 million valuation (since the round didn’t happen in time, the longstop valuation kicks in). We’ll unpack valuation caps, floors, discounts, and longstop terms in the next sections.

Valuation Cap and Floor Price – Setting the Boundaries on Valuation

Many ASAs include a valuation cap, a valuation floor (longstop valuation), or both. These terms put upper or lower bounds on the price at which the ASA converts into shares, providing economic protections for either the investor or the founder:

• Valuation Cap: This is an investor-friendly term that sets the maximum valuation at which the ASA will convert. In effect, the cap ensures the investor gets a minimum percentage of equity if the company’s value soars by the time of conversion. If the next funding round’s valuation is higher than the cap, the ASA investor’s conversion price will be calculated using the capped valuation, effectively giving them a better price per share than new investors in that round. For example, if you agree to a £3 million cap and the next round values the company at £5 million, the ASA investor will convert as if the valuation were £3M (a significantly lower price per share). This rewards them for coming in early and taking more risk – they capture upside if the company’s valuation “runs away” above the cap. Common practice is to negotiate a cap that reflects a reasonable upper estimate of the company’s value at the next round; it might be, say, 1.5×–2× the valuation you’d accept today. Founders should be careful: a lower cap is attractive to investors but means more dilution for the founders if things go very well. In any case, including a cap does require discussing the company’s potential value (partially negating the “no valuation negotiation” benefit of ASAs), so it should be set thoughtfully.
• Valuation Floor (Longstop Valuation): The floor price is essentially the minimum valuation for conversion. It is a founder-friendly protection to prevent excessive dilution in a worst-case scenario. If no qualifying round happens and the ASA converts on the longstop date (or if there’s an early sale at a very low price), the conversion price will be based on at least the agreed floor valuation. This means the company won’t issue an unreasonably large number of shares to the investor even if its fortunes have declined. In other words, the founder and existing shareholders are protected from “unlimited dilution” if the company’s value plummets before conversion. For example, a £1 million floor valuation in the ASA template means that even if the company struggles, the investor’s £200k advance would convert into no more than 20% of the company (since £200k/£1M = 20%). Without a floor, if the company’s value dropped extremely low, that £200k might otherwise convert into a much larger ownership percentage, potentially giving the investor majority control for a small investment – an outcome the floor prevents. Essentially, the floor valuation sets a baseline company value for conversion calculations, limiting the investor’s upside in a down scenario to protect the founders. Founders should choose a floor that they feel is the minimum fair value of the company (often based on the last funding round or a conservative estimate of current value). Too high of a floor could turn away investors (since it limits their shares if things go south), but too low of a floor could leave founders very diluted if the longstop conversion happens.

In many ASA templates, the conversion price is defined as the lower of either the discounted round price or the price at the cap, for a funding round trigger; and the lower of last-round price or the floor price for a sale/insolvency trigger. In practice, this means an investor typically gets whichever calculation gives them more shares (subject to the cap or floor). For instance, on a qualifying round, if the round price (with discount) would yield a higher price per share than the cap-based price, the cap kicks in to give the investor a better deal. Conversely, on a longstop conversion, the floor sets the price – if the company has had a prior equity round at a higher share price, sometimes the ASA may use the last round’s price or the floor, whichever is lower, to favor the investor in a sale or insolvency scenario. All these mechanisms are designed to strike a balance between investor reward for early risk (via caps/discounts) and founder protection in downturns (via floors).

How to choose suitable values: Valuation Cap: This number is negotiated based on the company’s prospects. Founders might start by considering what valuation they could justify if they raised a round today, and then perhaps set a cap somewhat above that (since the investor is hoping the company will grow). The cap should be high enough that the founder isn’t giving away an unfair stake if the next round is modest, but low enough that the investor feels they have upside protection if the next round is very high. Common caps for early seed-stage ASAs in the UK might range from, say, £2M to £5M, but it varies widely by sector and deal. Valuation Floor: Often, if the company has had previous funding, the floor might be around that last valuation or slightly lower. If this is the first money in, some founders choose a relatively low fixed floor (like £1M as in our template example) to reassure investors that if things go sideways, the investor could end up with a significant stake – but not essentially the entire company. The floor should be low enough to only come into play in dire circumstances, and both sides should understand it’s not a prediction of failure but a contingency. As a rule of thumb, setting the floor to roughly the company’s current valuation (or slightly below) is common. Always ensure both cap and floor values are realistic and justifiable, as they will set expectations for future round negotiations.

Discount Percentage – Rewarding the Early Investor

The discount is another key term used to make ASA deals attractive to investors. It grants the investor a percentage reduction on the price per share in the next funding round. In effect, if a discount is applied, the ASA investor will pay less per share than new investors in that trigger round, giving them more shares for the same investment amount.

Typical discount range: Market standard discounts for ASAs (and similar instruments like SAFEs) are usually between 10% and 30%, with 20% being a very common choice. Discounts of 10% and 15% are also seen, but anything much above 25–30% is relatively rare. A higher discount compensates the investor for greater risk or a longer wait; a lower (or zero) discount might be used if the investor already has other incentives (like SEIS/EIS tax relief, or if a valuation cap is included as an alternative sweetener).

How the discount works: If an ASA has, say, a 20% discount, and the next qualifying funding round investors pay £1.00 per share, the ASA investor would convert at £0.80 per share (20% off). So for a given investment amount, the ASA holder ends up with roughly 25% more shares than they would have at the full price. The discount only applies at conversion; until then, the investor’s money is in the company without accruing interest (remember, no interest is allowed if SEIS/EIS is sought).

Choosing a discount: Founders and investors should negotiate a discount that reflects the time and risk until the next round. If you expect to raise a proper round very soon (e.g. in 3–4 months) and the ASA is just a bridge, a smaller or even 0% discount might be acceptable because the investor isn’t waiting long and presumably faces less uncertainty. On the other hand, if the investor’s money will be used for a year of development before a big Series A, a larger discount (20–25%) is more common to reward that early commitment. There’s also a relationship with the longstop: generally, the longer the period before conversion (longstop date), the larger the discount investors will expect. For example, one might agree on a 10% discount if planning a round in 4–6 months, but perhaps 20% if the round might be 12 months away. Keep in mind, offering a discount does dilute founders more (since the investor will get extra shares), so there’s a trade-off. Some founders opt not to give a discount at all, especially if the investor is already benefiting from tax relief or if the deal includes a valuation cap instead. In fact, roughly half of early-stage ASAs on some platforms have no discount – so it’s not mandatory. The right approach depends on how you want to incentivize the investor and your confidence in near-term milestones.

Discount vs. Cap (or both?): You can include both a discount and a valuation cap in an ASA. In such cases, the conversion will use whichever pricing is more favorable to the investor (usually explicitly the lower price per share resulting from either applying the discount or the cap). Some founders negotiate that if the cap comes into play, the discount might not stack on top – for instance, “20% discount or a £X cap, whichever gives the better price, but not both simultaneously.” The ASA template we’re discussing effectively does this by defining conversion price as the lower of (round price – discount) or (price at cap). It’s worth noting that having both terms gives investors double assurance, but is the most dilutive for founders in a success scenario (because if the company valuation is very high, the cap sharply lowers the conversion price; if the valuation is moderate, the discount still gives a reduction). Some founders who include a low cap choose to pair it with no discount, or a higher cap with a standard discount, as a way to balance terms. Ultimately, market standard is often to offer one or the other: data suggests about half of ASAs have a cap and many of those may have no discount, whereas those with no cap more often have a discount. The negotiation can be fluid – the goal is to ensure the investor feels adequately rewarded for investing now rather than later, while the founder keeps future dilution within reason.

Longstop Date – Timing the Conversion Deadline

The longstop date is the hard deadline by which the ASA will convert into shares, regardless of whether a financing round or other trigger has occurred. It’s essentially a safety net for the investor to ensure they will get shares within a certain timeframe. Picking the right longstop date is important for both practical and regulatory reasons:

• SEIS/EIS Timeline Requirements: HMRC’s guidance for SEIS/EIS compatibility expects the longstop date to be no more than 6 months from the ASA’s start date. In fact, as a general rule, HMRC has indicated that if the longstop extends beyond 6 months, they’re unlikely to grant advance assurance for SEIS/EIS, due to the risk that conditions may change too much over a longer period. Many UK startups therefore set a 6-month longstop to comply strictly with this. If you truly need more time (say 9 or 12 months) to reach the next milestone, it’s not that the conversion cannot legally happen later, but doing so may put the investor’s tax relief at risk (HMRC might view an ASA longer than 6 months as too much like a loan or too uncertain).
• Business Considerations: Aside from tax, consider how long you realistically need to either raise a round or use the money. A 6-month longstop means if no round happens, you’ll be issuing shares fairly soon – which could be fine, but if your plan was to raise a big round in, say, 9–12 months after hitting product development goals, you might worry that a 6-month conversion could spook later investors or complicate things (because the ASA investors become shareholders sooner than anticipated). Some founders prefer a bit more breathing room (e.g. 9 or 12 months) in the ASA. One compromise approach: use 6 months to keep HMRC happy for SEIS, but if the conversion happens at 6 months and you still aren’t ready for a priced round, you could immediately raise another ASA or include those new shares in the next round anyway. It’s not ideal, but it’s workable. Remember, you cannot extend the longstop date later by mutual agreement beyond what was initially set, at least not without voiding SEIS/EIS – HMRC explicitly forbids varying the ASA after the fact in ways that could be seen as extensions or cancellation. So choose a date you are confident with from the start.
• Choosing the Date: Most commonly, the longstop is defined as a number of months from the agreement (e.g. “6 months after the Effective Date”). Ensure the date is within 12 months at absolute maximum if any investors are using EIS, and ideally 6 months for safety. If you are combining SEIS and EIS investment via the ASA (perhaps the first £150k will be SEIS, rest EIS), note that SEIS rules require the company to issue the shares (i.e. do the conversion) within 3 years of the company’s trade starting – so longstop must also not overshoot that if you’re near the edge (this usually isn’t a problem for new startups). For practical purposes, if you think you’ll raise a round in the next funding season (say, within 6 months), go with 6. If you suspect it could take up to a year, you might discuss with investors: some may accept 12 months but waive SEIS/EIS (for example, non-UK investors might not care about tax relief and prioritize flexibility). However, UK angel investors likely will insist on a 6-month longstop to ensure their SEIS/EIS tax relief will be secure.

In summary, the longstop date is the “automatic conversion” date. Both parties should mark this on their calendars. Founders need to be prepared to issue shares by then (which means having authorized share capital and possibly getting board/shareholder approvals in place in advance). Investors should be aware that if no funding event comes, they’ll become shareholders at that time at the pre-agreed valuation (floor price). It’s wise to set the longstop with a bit of cushion but within HMRC’s recommended window. And remember – once set, don’t plan on extending it; if you approach the longstop and still need more time, the better path is usually to convert the ASA as agreed, and perhaps have those investors join another ASA or round later, rather than breaching the ASA terms.

SEIS/EIS Tax Relief Considerations

One of the biggest advantages of using an ASA in the UK is that it can qualify for SEIS (Seed Enterprise Investment Scheme) or EIS (Enterprise Investment Scheme) tax reliefs for investors – something a straight loan or convertible note cannot do. To maintain this benefit, the ASA and the subsequent share issue must adhere to certain rules and timelines. Here are the key SEIS/EIS considerations and best practices:

• No-risk investment structure: To be eligible, the ASA must look like a pure equity investment, not a debt or guaranteed return instrument. HMRC has explicitly set out that an ASA will not qualify if it allows refunds, can be cancelled/assigned, carries interest, or gives any preferential rights on the shares beyond ordinary shares. We’ve covered these, but to reiterate: no refund under any circumstances, no interest on the advance, no ability for investor to back out or transfer the ASA, and conversion shares must be ordinary shares with no special preferences. The ASA template reflects all of these: e.g. it states the funds are not refundable, and it [optionally] specifies that conversion shares will be ordinary shares or the highest class being issued (but if that class has preferences not EIS-compliant, then ordinary shares are issued instead). Founders should not tweak these protective provisions – doing so (like adding an investor right to demand repayment, or attaching a liquidation preference to the shares issued) would likely disqualify SEIS/EIS relief for that investment.
• Advance Assurance: While not legally required, it’s highly recommended that the company applies to HMRC for advance assurance before taking investments via an ASA. Advance assurance is an indication from HMRC that your planned investment should qualify for SEIS/EIS, assuming you follow through with the rules. Many investors will ask for it as a condition. Note that if you mention an ASA in your advance assurance application, HMRC will want to see the ASA terms to confirm they meet the criteria. Also, you can’t get retroactive advance assurance on changes to an ASA – HMRC won’t review revisions after the fact. So get it right upfront.
• Timing of share issuance: SEIS/EIS relief is only granted from the date the shares are issued (the “investment date” for tax purposes is when shares exist). That means the investor cannot claim any relief until the ASA converts and shares are allotted. If the company were to fail before conversion, unfortunately the investor gets no tax relief at all (because no shares were ever issued). This is a risk for investors – as an example, investing £50k via an ASA and the company collapsing in, say, 4 months (before conversion) means they lose the entire £50k with no SEIS/EIS cushion, whereas if they’d invested £50k in shares directly, they could have claimed perhaps £25k back in income tax relief and further loss relief. As a founder, be aware sophisticated investors think about this; it’s another reason to keep the longstop short and convert ASA to shares promptly if things are shaky, so investors can crystallize tax benefits or losses.
• SEIS/EIS investor limits and company status: Ensure you (the company) and your investors actually qualify for the schemes. SEIS is for companies <3 years old and has a £250k total cap of SEIS funds, among other conditions, whereas EIS is for companies <7 years (with exceptions) and up to £12m total, etc. Investors themselves have annual limits (£100k for SEIS, £1m for EIS) and can’t be connected to the company (no more than 30% shareholders, not employees, etc.). These are beyond the scope of this guide, but double-check all eligibility. If using an ASA to raise money that spans both SEIS and EIS (common in a round where first £150k is SEIS, remainder EIS), you might even use two ASA agreements or at least track the amounts, since the SEIS-eligible portion might need to convert first or separately. Also be mindful that a company cannot issue EIS shares until it has spent at least 70% of any SEIS funds raised prior – but if the ASA is all closing at once, that likely means if you max out SEIS, you should use that money before issuing EIS shares (in practice, many handle this by closing SEIS portion, spending it on qualifying purposes quickly, then closing EIS – but with ASA it’s tricky since conversion is at one time; seek tax advisor input if doing both).
• Use of Funds and 3-Year Rule: SEIS/EIS rules say that the money raised must be used for a qualifying business activity within a certain timeframe. For EIS, funds must be spent within 2 years of the share issue (or the date trading started, if later); for SEIS, funds must be spent within 3 years. The ASA template includes a “Use of Funds” clause reflecting this: the company agrees to use the Advance Subscription funds on a qualifying trade or R&D, within 3 years of the effective date. This is to satisfy HMRC that the investment is genuinely fueling growth (not just sitting idle or being used for non-qualifying purposes like acquiring another company). As a founder, make sure you abide by this – if you don’t deploy the capital on qualifying business activities in time, your investors’ tax relief could be clawed back. Qualifying use generally means working capital, product development, marketing, hiring – basically anything to grow your business (and definitely not to buy existing shares or assets unrelated to your trade). It’s good practice to keep records of how the ASA money is used, in case HMRC ever inquires when you submit the compliance statement (EIS1/SEIS1 forms after issuing shares).
• Conversion within SEIS/EIS window: If you’re raising under SEIS, note that the company must issue the SEIS shares within 3 years of its first trading date. This usually isn’t a problem for a brand new company, but if a company is, say, 2.5 years old and does an ASA for SEIS, be sure conversion happens before that 3-year anniversary of trading or the investor might lose SEIS eligibility. Similarly, a company generally can only raise EIS within 7 years of first trading (for non-KIC companies), but this is about when money is raised, not necessarily conversion date; however, since the money is “raised” via ASA now and shares later, it’s a gray area – likely the share issue needs to fall before that deadline as well. Again, advance assurance can clarify these specifics for your case.
• Post-Conversion Compliance: After the ASA converts and shares are issued, the company must file a compliance statement (SEIS1 or EIS1 forms) to HMRC to enable investors to get their relief certificates. Do not file this before the shares are actually issued (it will be rejected). Once the shares are in hand, promptly do the compliance form (with details of the ASA investor, amount, date of issue, that funds were used or will be used per rules, etc.). HMRC will then issue SEIS3/EIS3 certificates for investors to claim relief. Ensure all conditions remain satisfied for 3 years after issue – investors must hold their shares for at least 3 years, company must continue to meet EIS conditions for 3 years (no buybacks, still doing qualifying trade, etc.).

In short, design your ASA to be SEIS/EIS compliant from the start and follow through diligently. The tax reliefs are a strong incentive for investors, so founders should treat preserving them as a priority. That means sticking to the agreed terms (no repayments or changes), issuing shares by the longstop, spending the money on the business within the allowed timeframe, and handling the paperwork after conversion. If you do all that, an ASA can be a fantastic vehicle to raise angel funding with the bonus of giving your investors a valuable tax break.

Common Traps and Misunderstandings to Avoid

Both founders and investors new to ASAs should be aware of some common pitfalls. While ASAs are straightforward in concept, misunderstandings can lead to disputes or unintended consequences. Here are some frequent traps and how to avoid them:

• Assuming the ASA guarantees a certain valuation or outcome: One misconception is that setting a cap or floor “guarantees” the company’s value will be at least or at most that number. In reality, the cap/floor only affects the conversion calculation. If you set a £3M cap, it doesn’t mean the next round will actually be £3M – the round could be £10M, but the ASA investor just gets to convert as if it were £3M (resulting in a larger share of equity for them). Similarly, a £1M floor doesn’t ensure the company is worth £1M; it just means, come longstop conversion, the investor’s shares are issued at a price equating to £1M valuation even if the company’s true value is lower. Founders shouldn’t treat the cap as an aspirational target or the floor as a safety net valuation – these are mechanical terms, not valuations agreed with future investors. No ASA term can guarantee a successful round or exit; they only influence how many shares the ASA investor gets in those scenarios.
• Investor thinks they can get their money back if plans change: As stressed, ASA funds cannot be refunded. Investors sometimes assume if the company doesn’t end up doing a round or if things go awry, they might negotiate to unwind the deal. But HMRC rules prohibit refund clauses, and a properly drafted ASA doesn’t allow it. If an investor is uncomfortable with the idea that their money will convert to shares even if the company struggles, then an ASA may not be the right instrument for them. All parties should enter an ASA fully understanding it’s a one-way ticket to equity, not a loan. (From the investor’s side, this is why doing due diligence and being confident in the team is important, even if the paperwork is lighter than a full round – once you wire the money, you won’t see it back except as shares or possibly nothing if the company fails.)
• Using too long a longstop (or trying to extend it): Some founders mistakenly think they can set a longstop a couple of years out to give lots of flexibility. Not only does that threaten SEIS/EIS relief (HMRC expects ≤6 months), but it also leaves your investor in limbo for too long. Conversely, investors might later push to extend a longstop if a round is imminent but not quite there by the deadline. Both are problematic. Stick to a reasonable longstop (6 months to 1 year max as agreed initially) and if conversion arrives with no round in sight, just convert and then consider raising more if needed. Do not amend the ASA date casually; it could void tax relief and breach the contract. It’s better to convert and perhaps immediately do another ASA or round, than to quietly delay an ASA conversion without formalizing it.
• “Snowball” dilution from multiple ASAs: If a company raises multiple ASA rounds or large amounts on ASAs with big discounts/caps, be aware of the compounding dilution. Each ASA will convert into shares, increasing the total share count. By the time you do a priced round, founders might find their ownership significantly diluted more than anticipated – especially if the cap was low or discount high, effectively giving away a lot of equity for the money. Shoosmiths solicitors dub this the “snowball dilution” effect: the more ASAs (and the further their discount/cap price is from the actual round price), the greater the discrepancy between the company’s nominal pre-money valuation and the effective one after all conversions. Founders can avoid surprises by modeling out the cap table impact of ASA conversions. For example, if you take £500k on an ASA with a £2M cap and then raise at £5M, that ASA will take a much bigger chunk than if it had been priced at £5M originally. It might still be worth it (you got funding when you needed it), but plan for it. A cap table spreadsheet or using agile funding tools can help simulate the post-conversion ownership.
• Impact on future funding rounds: Having a lot of ASA or convertible notes outstanding can sometimes scare off new lead investors. VCs coming into a priced round will examine how much equity ASA investors will take upon conversion. If a substantial portion of the round is essentially going to convertibles (who often get a better deal via discount/cap), the new investor might end up with a smaller stake for the same money, or see the founders’ stake already heavily diluted. In extreme cases, a VC might require that some ASAs are renegotiated or even converted before they invest. Law firms often advise that “New investors will not be happy if a large amount of equity is being given away to ASA holders in return for a comparatively small amount of money.”. It could also affect a VC’s ability to hit ownership targets without triggering a complete company recapitalisation. In plain terms: too many cheap shares promised to early ASA investors can complicate bringing in a big investor later. The cure is to use ASAs judiciously – they’re great for bridge funding, but continually rolling them over instead of doing an equity round can make the eventual reckoning quite complex. Transparency with future investors and perhaps a cap on total ASA amount (relative to your next round) is wise.
• Investor rights and protections lacking until conversion: An often-overlooked point is that ASA investors are not shareholders until conversion. This means until they get their shares, they typically have no voting rights, no formal information rights, and none of the usual protective provisions that might come with an equity investment. The ASA contract itself may include basic warranties from the company (e.g., that the company is duly formed, has authority to issue shares, etc.), but it won’t usually grant the investor governance rights. This can lead to misunderstandings: for instance, an investor might assume they’ll be consulted on major decisions because they funded the company, but legally until they have shares, they often have no say. Similarly, if a shareholders’ agreement is signed at the next round, ASA investors will typically sign on at conversion, but they might end up agreeing to terms they weren’t involved in negotiating. A real scenario: an ASA converts just as a new VC comes in, and the ASA holder finds the new shareholders’ agreement gives the VC certain preference shares or control provisions that put the ASA holder (now holding ordinary shares) at a disadvantage. There’s not much they can do at that stage; they’re along for the ride. The lesson is for investors: understand that with an ASA you are deferring not just valuation but also your rights. For founders: don’t promise control or board seats to ASA investors unless separately agreed, and be aware you might have to loop them in when conversion happens to sign shareholder docs. Clarity up front (“this ASA gives no board seat or veto rights, those may be discussed in the future round”) helps manage expectations.
• Forgetting about SEIS/EIS nuances: Founders sometimes inadvertently break SEIS/EIS rules by, say, using funds in disallowed ways or issuing shares incorrectly. Common pitfalls include: using some of the ASA money to acquire another business or asset (forbidden use of EIS funds); not spending the funds within the required window (2 years for EIS); issuing shares that aren’t ordinary (e.g. accidentally giving ASA investors a class of shares with a preference or guaranteed dividend – which would void relief); or issuing EIS shares before the company has utilized 70% of prior SEIS funds (if applicable). Additionally, if a company reaches its SEIS cap (£250k) or does an ASA that crosses tax years, it needs careful allocation of what part is SEIS vs EIS. To avoid these traps, consult with an accountant or tax advisor when structuring the ASA and follow the HMRC guidance to the letter. The template’s inclusion of clauses about use of funds and ordinary shares is there to protect you – don’t override them without advice. And make sure to keep investors informed; for example, some may want to delay conversion slightly to fall into a new tax year for their personal tax planning, but this has to be balanced against the rules and the ASA terms.

In short, communication and diligence are key. Ensure both parties understand the terms (no surprises about no-refund or lack of control rights), keep clean records for tax, and plan ahead for how ASA conversions fit into the cap table. When used properly, an ASA is a powerful tool – just steer clear of these common hazards for a smooth experience.

FAQ – Frequently Asked Questions

Q: Can I get my money back if the startup doesn’t end up issuing shares or things go wrong?
A: No – under an ASA, once you’ve invested, you cannot get your money back (short of negotiating a whole new agreement outside of the ASA). The funds are not refundable under any circumstances. This is intentional, as allowing a refund would violate HMRC’s “capital at risk” requirement for SEIS/EIS. Whether the company fails or simply never raises another round, the outcome is that your advance either converts into shares (even if they end up worthless) or, in a worst-case insolvency scenario, you stand in line as a shareholder (usually getting nothing in a bankruptcy). So, invest via ASA only if you are comfortable taking the equity risk. If you need the option to pull out your cash, an ASA is not the right instrument.

Q: Does an ASA guarantee a certain valuation or percentage ownership for the investor?
A: Not exactly. The ASA sets conversion terms like a valuation cap or discount that affect the price per share at which you convert, but it doesn’t guarantee what the company’s actual valuation will be in the future. For instance, a £4M cap means if the company raises money at a valuation above £4M, you convert as if it were £4M (so you get a better price). It guarantees you won’t pay more than the cap valuation for your shares. However, if the company raises at £3M (below the cap), you’d just pay that round’s price minus any discount – the cap doesn’t give you a minimum ownership, it only limits the max price. Similarly, a floor (longstop valuation) guarantees you won’t convert at a valuation below that floor for the longstop scenario, but it doesn’t promise the company is actually worth that – it’s just a mechanism to calculate your shares. So think of cap/floor as influencing conversion pricing, not an assurance of the company’s future valuation. There’s no guarantee of exit value either – if the company ends up being sold for less than the cap or even the amount invested, that’s unfortunate but possible. The ASA guarantees you’ll get shares under the agreed formula; it doesn’t guarantee what those shares will ultimately be worth.

Q: What happens if the company never raises a qualifying funding round?
A: That’s where the longstop date and valuation come into play. If no qualifying round (and no sale/exit) happens by the longstop date, the ASA will automatically convert into shares on that date. The price per share for conversion will be predetermined – typically using the valuation floor (longstop valuation) specified in the ASA. For example, if you invested £50k with a longstop valuation of £2M, at the longstop date you’d get shares equating to a £2M valuation (so your £50k becomes a 2.5% stake post-conversion). The company must issue you the shares at that point. After conversion, you’re a shareholder like any other. If the company still needs more funding, it might raise further money from new investors, but your shares issued from the ASA are yours. In essence, the ASA ensures you won’t be left hanging indefinitely – you either convert at the next round or at the longstop. If neither a round nor the longstop conversion happens (say the company simply fails quietly before either), then unfortunately you may end up with nothing (and no tax relief) because shares weren’t issued. But normally, the longstop prevents that by forcing an issuance of shares by a set date.

Q: How does an ASA affect future fundraising rounds (Series A, etc.)?
A: An ASA can impact the next priced round in a few ways. First, any ASA that converts will increase the total number of shares outstanding right before the new round. This means the founders’ percentage will be diluted more than if those ASAs hadn’t existed. New investors will calculate their ownership based on a post-money that includes the ASA shares. Second, new lead investors will examine the terms on which ASA money came in – if ASA investors are getting a significantly better deal (e.g. a very low cap), the new investor might perceive that a lot of equity is being “given away” for relatively little money, which might make them pause or adjust term. In some cases, a VC could insist that too many outstanding ASAs be converted before they invest, to clarify the cap table. Generally, small ASAs aren’t a problem – they’re expected at seed stage. But if you’ve financed the company via ASAs for a long time (say multiple notes accumulating), the new investor might negotiate tighter terms knowing a chunk of shares already belong to ASA holders. On the flip side, once the ASA converts, those investors typically will join the shareholders’ agreement of the new round, often getting essentially the same class of shares or rights as other investors in that round (if conversion happens concurrently). One thing to be careful of: ensure that the conversion mechanics are clear so that the new money investors and the ASA investors both end up with the correct share classes and rights. In summary, a single ASA used as a bridge usually smooths the path to a round (by helping you reach milestones), but piling up too many can complicate cap tables. Transparency with your future lead about any outstanding ASAs – how much, what cap/discount – will help manage expectations. Most startups and VCs deal with this scenario regularly. Just avoid surprises: last-minute revelations of a huge ASA pool at a low cap can definitely spook a term sheet.

Q: Can we modify the ASA later, for example to extend the longstop date or change the amount?
A: In general, no – you shouldn’t modify key terms of the ASA once it’s signed, unless you’re prepared to risk SEIS/EIS relief and potentially breach the agreement. HMRC explicitly warns that an ASA that can be “varied, cancelled, or assigned” will not be considered eligible for relief. So if, for example, you and the investor informally agree to push the longstop out by a few months, that technically could violate the terms and HMRC’s rules (they expect the longstop to be a firm date). Likewise, changing the discount or cap after signing would be problematic. If circumstances change drastically, a cleaner approach might be to terminate the ASA by mutual agreement (though this likely nullifies any tax relief prospects) and enter a new one or another investment agreement – but again, returning funds or canceling is against the spirit of SEIS/EIS. In short: set terms you can live with. That said, some less critical modifications (like a minor administrative change) could be done via an amendment signed by both parties, but exercise extreme caution and get legal advice. Any change that reduces the risk for the investor (like extending time or adding a right) could be seen as making it more like a loan – not what you want. If the longstop passes and neither conversion nor round has happened, a strict reading means the company should issue the shares per the agreement. You can’t just mutually agree to delay issue without essentially breaking the ASA. So, treat the ASA as essentially locked in stone once executed.

Q: What kind of shares will the investor get on conversion?
A: In an SEIS/EIS-friendly ASA, the investor will get ordinary shares upon conversion (or potentially whatever is the most senior class of shares being issued in a round, but if those have preferential terms not allowed for EIS, the fallback is ordinary shares). Ordinary shares are standard common equity – no guaranteed dividends, no liquidation preference. This is required for the tax relief: EIS/SEIS shares must be full-risk ordinary shares. If the conversion happens during a priced round that has, say, Series A preferred shares, a well-drafted ASA might say the ASA investor gets the same class if it doesn’t prejudice their EIS status. In practice, it often ends up that ASA investors get the same class of shares as the new money, but possibly without certain preferential rights if those rights would void EIS. Many companies solve this by just converting ASAs into ordinary shares right before the round, and then maybe offering those investors to sign onto an investors’ agreement. It’s a detail to coordinate with your lawyers at the time of conversion. But as a simple answer: expect to receive ordinary shares (for SEIS/EIS) or whatever class is being issued (if not seeking relief). The ASA template explicitly notes that conversion shares will be ordinary unless the round’s shares can be EIS-compliant.

Q: Do ASA investors get any say or control in the company before conversion?
A: Typically, no. Until conversion, an ASA investor is not a shareholder and thus doesn’t have voting rights or statutory rights in the company. The ASA contract itself might include some covenants (for instance, the company might warrant it won’t do certain things like issue cheaper shares to someone else without offering the same terms to the ASA investor – though many simple ASAs don’t even have that). Some ASAs or side letters might grant major investors information rights or observer rights pre-conversion, but that’s by negotiation, not default. Most early-stage ASAs keep it simple: the investor trusts the founders to use the funds properly and waits until they become a shareholder later. Once converted, the investor would have whatever rights attach to the shares they receive. For example, if they convert in a Series A round as a Series A shareholder, they’ll then have voting rights, perhaps a board seat if negotiated, etc., per that round’s terms. But before that point, an ASA investor is more like someone with a claim to future shares, not an owner. Founders should still communicate and update ASA investors (after all, they are stakeholders and likely allies), but legally you don’t owe them much beyond what the ASA contract stipulates. Investors should be aware that during the ASA period, they rely on the contractual terms only – so read the ASA carefully for any information rights or assurances. One common clause is that the company agrees not to issue shares to others at a lower valuation than the ASA’s terms before conversion, or that if it does, the ASA gets that lower price (to prevent the company from bypassing the ASA with a cheaper deal). But absent such clauses, there isn’t much control. If specific protections are important to an investor, they’d need to negotiate those into the ASA (bearing in mind too many protections can threaten EIS eligibility).

Q: What if the company raises a smaller round that doesn’t meet the “Qualifying Round” threshold?
A: Many ASAs define a qualifying round by a minimum amount (e.g., “a bona fide equity raise of at least £X”). If a smaller round happens (sometimes called a non-qualifying round in the ASA), the default is usually that the ASA does not automatically convert, unless the investor and company agree to treat it as a trigger. Often the ASA will give the company the option to invite the ASA investor to convert at the small round’s price (with discount) even if it’s not mandatory. Or it might give the investor the option to convert during that round. If neither chooses to convert at that time, the ASA just stays in place and waits for either a bigger round or the longstop date. Why do this? It protects the investor from being forced to convert in a too-small round that might not move the needle for the company. The investor might prefer to hold out for a larger round or the longstop if the intermediate raise is tiny. On the other hand, if the company is doing okay and raises a bit of money (say below the threshold), it might be mutually beneficial to convert the ASA anyway to simplify the cap table going forward. In practice, if a round is close to the qualifying size, the company and ASA investor will often agree to just include the ASA conversion. If it’s well below, they usually let the ASA ride to the next event. Always check your ASA clause on this. If silent, it’s safest to assume no automatic conversion on a non-qualifying round – conversion would then wait for longstop or a later big round.

Q: Could an ASA convert into no shares (for example, if the company goes bankrupt before anything)?
A: Yes, that is a grim scenario but possible: if the company completely collapses and dissolves before any conversion event, then the ASA might never convert. The contract might become effectively frustrated at that point – there’s no company to issue shares. The investor in that case loses their entire investment and, because no shares were issued, cannot even claim tax relief or loss relief. This is why, from an investor’s perspective, an ASA carries slightly more risk than an immediate equity purchase. To mitigate this, founders who see trouble should consider converting ASAs sooner (even outside of a round) to get shares in investors’ hands, though doing so without a contractually agreed trigger can be legally complex unless mutually agreed as an amendment. But typically, if bankruptcy is looming, conversion won’t salvage value – it would only serve a tax relief purpose if done just before insolvency. In our ASA template, an insolvency event trigger attempts to handle this by converting the ASA immediately prior to an insolvency proceeding, so that the investor becomes a shareholder at the last moment. While those shares likely have no economic value in bankruptcy, at least the investor might be able to claim EIS loss relief on their investment (a small consolation).

Q: Is an ASA the same as a SAFE?
A: They are similar in concept – both are agreements for future equity – but there are differences, especially in a UK context. A SAFE (Simple Agreement for Future Equity), popularized by Y Combinator in the US, is very much like an ASA in that investors pre-pay for shares later, with possible discounts or caps. However, SAFEs under US law don’t worry about things like SEIS/EIS, and they often have no longstop date (some SAFE versions are perpetual until a trigger). In the UK, the term ASA is used and structured to meet UK company law and tax requirements. You could say a ASA is the UK-adapted version of a SAFE. One key distinction: a SAFE might allow certain investor protections or be more flexible on triggers, whereas an ASA for EIS is intentionally very simple to avoid being deemed debt. In practice, when UK folks reference a SAFE, they often mean an ASA. The bottom line: functionally they serve the same purpose (“money now, shares later without debt”), but if you’re using a UK ASA template, stick to that terminology and ensure it’s HMRC-compliant – don’t just use a US SAFE form without adapting it. UK company share issuance processes and terminology (like pre-emption rights, etc.) also differ slightly, so an ASA accounts for those.

Q: Any tips for using the ASA template in practice?
A: Certainly – here are a few practical tips when completing the template:

• Fill in the blanks carefully: The template has placeholders like the investment amount, the names of the company and investor, the Valuation Cap, Valuation Floor (longstop valuation), Discount, Longstop Date, and bank details for payment. Double-check each of these. For instance, make sure the cap and floor values are in the correct currency and that you haven’t misplaced zeros (e.g., £3,000,000 cap means a £3M pre-money valuation for conversion – is that what you intend?).
• Check the trigger definitions: The template defines what counts as a “Qualifying Financing Round” (often by amount of money raised). Set this threshold at a level that makes sense for your situation. Too high, and you might force conversion at longstop even if you did raise some money; too low, and you could trigger conversion on a very small round. Commonly, startups set the qualifying round threshold to the amount they’re targeting for the next raise (for example, if you plan to raise £500k next, you might set that as the trigger minimum).
• SEIS/EIS sections: If the investor will claim SEIS or EIS, ensure the template’s SEIS/EIS compliance clauses are included (they often are optional or in brackets if not applicable). For example, our template had a section saying the investor is investing with intention to claim SEIS/EIS and the company will use reasonable endeavours to help them get it. Keep that in if it applies. Also, if only SEIS or only EIS is relevant, you might edit to just say the correct scheme.
• Use of funds clause: There was a clause stating funds will be used within 3 years on a qualifying trade. Don’t delete this – it’s there for compliance. You might adjust “3 years” to “2 years” if you know it will all be EIS money, but 3 years covers SEIS. It’s fine to leave as 3 (that satisfies SEIS and doesn’t conflict with EIS’s 2-year rule as long as you indeed spend within 2 for EIS – 3 is just a max).
• Warranties: The template likely contains some basic warranties by the company (and possibly by the investor, e.g. confirming they’re eligible for EIS). As a founder, read these and ensure they’re true – e.g., the company is duly incorporated, has authority to issue shares, etc. If something isn’t accurate, correct it now. As an investor, don’t expect extensive warranties like in a full share purchase agreement; ASAs usually keep it minimal (so perform your own due diligence accordingly).
• Signing and execution: ASAs can typically be signed electronically (unless your investor insists on wet ink). Make sure the board of the company approves the ASA issuance (passing a board resolution to approve the agreement and the share issuance in due course). Also ensure you have enough authorized share capital (or the ability to create new shares) for when conversion happens. Under UK law, if you have limited share capital, you might need to create new shares – an ASA might include an undertaking from the company that it will take whatever actions (shareholder resolutions, etc.) are needed to issue the shares. Check that in the template and be prepared to do those corporate steps.
• Keep everyone informed: Founders should keep ASA investors updated on progress towards the trigger event. Investors will appreciate communications like “We’re in talks for our next round, likely closing in two months” or “We might hit the longstop in three weeks; if no round by then, we will convert your ASA as per agreement.” Surprises or last-minute decisions are what cause disputes, so proactive communication is key.
• Get legal advice if you are unsure. Fundraising is incredibly important and is complicated. Use the form on this page to reach out to us and we will connect you with a partner law firm for a competitive and no-obligations quote. All in, law firms can often be cheaper than online tech platforms aimed at fundraising, and you’ll have the additional confidence of knowing you’ve been advised by a qualified and insured solicitor.

By following the template carefully and adhering to the guidance in this article, you can confidently use an Advance Subscription Agreement to fuel your startup’s growth in a way that’s fair to both founders and investors. ASAs, when done right, create a win-win: founders get crucial early funding without heavy dilution upfront, and investors get a piece of the company with favorable terms and potential tax benefits.