Kirsty Grant, Chief Investment Officer, Seedrs
Over the past few weeks, we’ve been getting a lot of questions about how Seedrs works with convertible equity fundraises, also known as Advance Subscription Agreements (ASAs). Whilst this is something we’ve been doing for a few years, we thought it would be helpful to talk through how they work, and how they might benefit you, given the current climate.
At the bottom of this post, you can download the Seedrs ASA term sheet, so you can get familiar with the format and language. There’s also a glossary at the end of this post for some of the key terms used.
What are Advance Subscription Agreements
An ASA in its simplest form is an investment for equity, but with the shares priced and issued at a later date. The shares will usually be allocated to those investors at a discount to the share price in the next funding round, as a reward for taking on more risk and investing early.
Different to a Convertible Loan Note (which is debt-based), ASAs are purely an equity agreement, and the investment cannot be repaid in cash.
What are the benefits?
The main benefit for businesses raising funding through the Seedrs ASAs is that it enables them to raise funds now but fix the valuation at a later date. In the current climate, some businesses are finding it hard to raise funds at a valuation that fairly reflects their growth in a normal market, leading to significant dilution for founders and current shareholders. The ASA option gives businesses time to react over the coming months, and put themselves in a better negotiating position later down the line.
For investors, the Seedrs ASA is S/EIS-friendly meaning they can take advantage of the generous UK tax incentives to back British businesses, with EIS currently sitting at 30% relief, and SEIS at 50%. It also allows the investor to rely on the valuation being set by the lead investor in the next funding round, and in return for investing early, they will receive the shares at a discounted price-per-share.
The Seedrs Advance Subscription Agreements
The Seedrs ASA, which we call a Convertible Equity Campaign, is our version of this. It’s an easy-to-use, S/EIS-friendly convertible instrument. It’s similar to a SAFE which is commonly used in the United States, but ASAs are designed specifically for UK companies.
We have kept this process simple so it runs on the platform just like the other campaigns. Investors make the investment into the company now, and their investment will convert into shares at the company’s next funding round at a discount to the valuation for that round.
If the company doesn’t complete a further funding round within an agreed period of time, then their investment will convert to shares at a pre-agreed valuation.
- Trigger event: These define what causes the investment to convert into equity. This is usually a significant funding round (which requires a certain amount of money to be invested), IPO or change of control.
- Discount: This is the percentage reduction that investors participating in the ASA would receive on the share price for the trigger event. The discount is a reward for investing early.
- Valuation cap: This is applied to counter a scenario of runaway growth in the period after the ASA investment but prior to conversion. It limits the maximum price for conversion of the convertible, so investors are able to benefit from the upside of their investment if the company is valued above the valuation cap in the next funding round. .
- Default valuation: In the event that there is no trigger event before the longstop date, the investment will convert into shares at a default valuation agreed by all parties in advance. This is commonly set at the valuation of the business in its last investment round or a discount to its current valuation.
- Longstop date: This is the deadline date for the convertible trigger event to occur. If the conversion does not occur either on or before this date, the conversion will happen at the pre-agreed floor price (‘default valuation’)
If you are looking to raise funds at the moment, and think that an Advance Subscription Agreement is a suitable option for your business, then please submit your application to raise funds on our platform here, or you can use the form below to access the term sheet, and the relevant member of our Campaigns Team can get back to you.