Jump to Section
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 Subscription Agreement?
Subscription agreements are legal contracts that allow an investor to buy shares, bonds, or units of a company as a subscriber and shareholder with limited partnerships (LP) or private placement rights. Share subscription agreements are a type of subscription agreement that involves purchasing shares specifically. Subscription agreements, including share subscription agreements, 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.
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. In addition, many established companies use subscription agreements to raise capital. Overall, subscription agreements can be used by any company seeking investments. 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.
How Subscription Agreements Work
The subscription agreements that your company utilizes depend upon your needs, industry, company size, and more. They generally contain key details regarding a previously agreed upon return on investment (ROI) by new investors. You can negotiate a percentage or specific dollar amount.
The following steps describe how writing subscription agreements works:
- Step 1. Decide to get your subscription agreements in writing
- Step 2. Ensure your subscription agreements are simple
- Step 3. Identify the agreement principals and investors correctly
- Step 4. Write down all key details of the transaction
- Step 5. Set the consideration obligations in stone
- Step 6. Devise a safeguard in case a party wants to terminate
- Step 7. Determine how you will settle disputes with investors
- Step 8. Keep your negotiations and contracts confidential
- Step 9. Hire securities lawyers to draft your subscription agreements
Some startups and companies try to save a few dollars by using boilerplate contracts online. While this may help you accomplish this objective initially, a poorly written subscription agreement can cost you more in the long run. At a bare minimum, have attorneys review your contracts to ensure that they’re worth more than the paper upon which they’re written.
Key Parts of a Subscription Agreement
In certain cases, startups can use subscription agreements instead of registering with the Securities and Exchange Commission (SEC). These safe harbors are allowable under Subscription Agreement Governance, SEC Rule 506(b) and 506(c) pertaining to Regulation D. Registration with the SEC depends on a variety of factors so it is important to consult with legal counsel to follow applicable laws and regulation. Regardless of what the rules say, there are still specific provisions and guidelines that your startup should consider when writing your subscription agreements.
The key parts of a subscription agreement include:
- Outstanding shares
- Payout terms
- Share ownership structure
- Shareholder’s resolution
- Director’s resolution
- Minute books
- Indemnity and warranty
- Non-compete agreement
- Conditions precedent
- Confidentiality clause
Use subscription agreements when offering shares to investors. They can include the key parts as described above as well as incorporate company-specific provisions.
Other Investor Rules
More complicated deals can structure the subscription agreement for prospectus exemptions for accredited investors. Accredited investors follow different financial disclosure requirements. Add a declaration in the contract to specific exemption particulars that apply to each party.
Here is an article that discusses accredited investors.
Subscription Agreement Sample Language of Important Clauses
Sample 1 – Purchase Clause
Purchase. The Investor shall purchase from the Company the number of Units stated on the signature page of this Agreement for the purchase price (the “Purchase Price”) stated on the signature page of this Agreement (the Shares and Warrants comprising the Units being purchased by the Investor and the Warrant Shares issuable upon exercise of the Warrants being purchased by the Investor, the “Securities”).
Sample 2 – Payment and Escrow Clause
Payment; Escrow. The Investor shall pay the purchase price for the Units being purchased by the Investor by wiring immediately available funds in United States Dollars to Meister Seelig & Fein LLP (the “Escrow Agent”), in accordance with wire instructions provided by the Escrow Agent, those funds to be held with aggregate Offering proceeds in accordance with the terms of an escrow agreement between the Company, each Investor, and the Escrow Agent in the form attached as Exhibit A (the “Escrow Agreement”). If the aggregate Offering proceeds equal or exceed $______ prior to midnight at the end of August 31, 2004 and the Company has received and accepted completed subscriptions therefor from all Investors, (1) the Escrow Agent shall deliver to the Company in accordance with the terms of the Escrow Agreement the aggregate Offering proceeds and (2) the Company shall deliver to the Investor the Shares and the Warrants comprising the Units purchased by the Investor. If those aggregate proceeds do not equal or exceed $500,000 prior to midnight at the end of August 31, 2004 or if the Company has not advised Escrow Agent that it has received duly completed subscription documents from all Investors, then the Escrow Agent shall in accordance with the Escrow Agreement reimburse the purchase price to the Investor, this Agreement shall be terminated, and the Company shall not be obligated to sell Units to the to the Investor.
Sample 3 – Acceptable of Subscription Clause
Acceptance of Subscription. The Investor understands that this Agreement is binding in nature upon Investor and the Investor will be obligated to provide the funds set forth in section 2 if this Agreement is accepted. The Company, in its sole discretion, reserves the right to accept or reject this or any other subscription for the Units, in whole or in part, notwithstanding prior receipt by the Investor of notice of acceptance of this subscription. The Company shall have no obligation hereunder until the Company shall execute and deliver to the Investor an executed copy of this Agreement and the Stockholders’ Agreement. If this subscription is rejected in whole, all funds received from the Investor will be returned without interest, penalty, expense or deduction, and this Agreement shall thereafter be of no further force or effect. If this subscription is rejected in part, the funds for the rejected portion of this subscription will be returned without interest, penalty, expense or deduction, and this Agreement will continue in full force and effect to the extent this subscription was accepted.
Reference :
Security Exchange Commission - Edgar Database, EX-3.13 3 dex313.htm FORM OF SUBSCRIPTION AGREEMENT, Viewed May 12, 2021, < https://www.sec.gov/Archives/edgar/data/1303041/000119312505237549/dex313.htm >.
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.
Image via Pexels by Skitterphoto
Advantages and Disadvantages of Subscription Agreements
Subscription agreements can help both investors and startups achieve greater profitability. However, these transactions are often complex and require agreement principals to carefully consider whether it is right for them. Since subscription shares can be volatile, it is important for investors to do their own due diligence and consult with a financial advisor before making an investment decision.
Advantages of subscription agreements include:
- Attractive investing option for the market
- Flexible terms and conditions
- Transparency among parties
- No liability limited partnerships
- Ability to influence a company
Disadvantages of subscription agreements include:
- Investors could lose money if the deal doesn’t work out
- Regular securities and preferred shares have deadlines
- Must uphold legal and fiduciary duties to other parties
- No liquidity or voting rights for investors
- Lack of underlying security oversight
Subscription agreements offer valuable opportunities for investors in special situations looking for short-term trading and long-term leverage. From a legal standpoint, they also save both parties time and hassle by establishing the terms and conditions clearly beforehand. Clear, concise agreements are critical when trying to foster lucrative professional relationships.
Get Help With Subscription Agreements
Get help with subscription agreements by working with securities lawyers. When you couple their investment and legal knowledge, you can draft incredibly powerful agreements that protect your company’s legal rights. They can also help you in structuring the deal as well as handle future legal disputes in case they arise.
Here are 10 reasons why hiring securities lawyers makes sense:
- More clear contract terms and conditions
- Better understanding of your subscription agreements
- Someone can help you with a future dispute
- Experience in structuring subscription agreement deals
- Strong command of securities and financial laws
- Experience in your state, county, and city
- Help you avoid legal mistakes in the future
- Reassurance knowing a legal professional wrote it
- Offers negotiation representation when necessary
- Write other necessary contracts as the need arises
There are several other reasons why hiring securities lawyers make sense. Ultimately, you want to grow your startup into a successful company that provides value to the market. Protect this investment up front by working with an attorney that understands the law.
Attorneys Take Liability
An attorney’s licensure means that he or she is liable for the legal particulars of your contract, not you. Unfortunately, some startups do not realize that agreements work this way until it is too late. Instead of leaving your company exposed to liability, safeguard it with legal representation.
Services Continuity
In addition to liability, your attorney can help you draft and execute indirect or secondary agreements related to the original transaction. These services offer peace of mind to investors and startups alike in knowing that there is continuity from transaction to transaction. Rather than bringing in a different lawyer for each contract, work with one individual across all of your agreements for a more comprehensive result.
Need help with a Subscription Agreement?
Meet some of our Subscription Agreement Lawyers
Keidi C.
Keidi S. Carrington brings a wealth of legal knowledge and business experience in the financial services area with a particular focus on investment management. She is a former securities examiner at the United States Securities & Exchange Commission (SEC) and Associate Counsel at State Street Bank & Trust and has consulted for various investment houses and private investment entities. Her work has included developing a mutual fund that invested in equity securities of listed real estate investment trusts (REITs) and other listed real estate companies; establishing private equity and hedge funds that help clients raise capital by preparing offering materials, negotiating with prospective investors, preparing partnership and LLC operating agreements and advising on and documenting management arrangements; advising on the establishment of Initial Coin Offerings (ICOs/Token Offerings) and counseling SEC registered and state investment advisers regarding organizational structure and compliance. Ms. Carrington is a graduate of Johns Hopkins University with a B.A. in International Relations. She earned her Juris Doctorate from New England Law | Boston and her LL.M. in Banking and Financial Law from Boston University School of Law. She is admitted to practice in Massachusetts and New York. Currently, her practice focuses on assisting investors, start-ups, small and mid-size businesses with their legal needs in the areas of corporate and securities law.
Nicholas M.
Nicholas Matlach is a cybersecurity expert (CISSP) and an attorney who is dedicated to helping small businesses succeed. He is a client-focused professional who has a deep understanding of the challenges that small businesses face in the digital age. He also provides legal counsel to small businesses on a variety of issues, including formation, intellectual property, contracts, and employment law.
Ramanathan C.
Dual Qualified New York Attorney & Enrolled NZ Barrister & Solicitor
Thomas G.
https://www.tgravelylaw.com/
January 23, 2023
Joseph M.
Joe provides premium legal services to both individuals and businesses throughout the Commonwealth. Experience litigating civil and criminal matters, as well as drafting/negotiation transactional issues involving contracts, real estate, business formation, estate planning and more. Prior to entering private law practice, Joe worked for two decades in financial industry including regulatory and compliance for both national and regional banks and investment firms.
January 26, 2023
Judi P.
Driven attorney with a knack for alternative dispute resolution, real estate, corporate law, immigration, and basic estate planning, with superb people skills and high emotional intelligence, and for working smart and efficiently, as well as time and financial management skills to deliver excellent legal work and solutions to legal issues. Seasoned with 20+ years of law firm and legal experience (real estate/corporate).
January 26, 2023
Brittany T.
Brittany is an experienced attorney specializing in transactional and complex contract matters including but not limited to SaaS development and product implementation, technology/data agreements, licensing, and compliance. She has over 7 years of experience providing strategic legal advice to individuals and business clients of all sizes, from start-ups to large corporations. Brittany has a strong understanding of the legal issues related to technology and software and is well-versed in drafting and negotiating contracts ranging from software licenses to data sharing agreements. She is a highly-skilled negotiator and is adept at finding creative solutions to challenging legal issues.
Find the best lawyer for your project
Browse Lawyers NowNeed help with a Subscription Agreement?
Business lawyers by top cities
- Austin Business Lawyers
- Boston Business Lawyers
- Chicago Business Lawyers
- Dallas Business Lawyers
- Denver Business Lawyers
- Houston Business Lawyers
- Los Angeles Business Lawyers
- New York Business Lawyers
- Phoenix Business Lawyers
- San Diego Business Lawyers
- Tampa Business Lawyers
Subscription Agreement lawyers by city
- Austin Subscription Agreement Lawyers
- Boston Subscription Agreement Lawyers
- Chicago Subscription Agreement Lawyers
- Dallas Subscription Agreement Lawyers
- Denver Subscription Agreement Lawyers
- Houston Subscription Agreement Lawyers
- Los Angeles Subscription Agreement Lawyers
- New York Subscription Agreement Lawyers
- Phoenix Subscription Agreement Lawyers
- San Diego Subscription Agreement Lawyers
- Tampa Subscription Agreement Lawyers
ContractsCounsel User
End user subscription contract
Location: California
Turnaround: Less than a week
Service: Drafting
Doc Type: Subscription Agreement
Number of Bids: 7
Bid Range: $850 - $2,999
ContractsCounsel User
Update company operating agreement (LLC) to handle investors
Location: New York
Turnaround: Less than a week
Service: Drafting
Doc Type: Subscription Agreement
Number of Bids: 8
Bid Range: $1 - $3,500
related contracts
- Convertible Note
- Executive Summary
- Fundraising Contract
- Pro Forma Cap Table
- Promissory Note
- SAFE Note
- Simple Agreement For Future Tokens
- Terms Sheet
other helpful articles
- How much does it cost to draft a contract?
- Do Contract Lawyers Use Templates?
- How do Contract Lawyers charge?
- Business Contract Lawyers: How Can They Help?
- What to look for when hiring a lawyer