Articles > Startups

What is a share subscription agreement?

November 6, 2020   Brigid NelmesPhilip Evangelou

A share subscription agreement is a promise by a potential shareholder (AKA subscriber) to pay the company an agreed-upon sum in exchange for a particular amount of company shares. It is used to formalise a share issue agreed to between a future shareholder and a company. 

For a breakdown on how to issue shares for a startup, click here.

Do I need a share subscription agreement?

Not necessarily. A share subscription agreement is only one of the possible ways a share issue can be formalised. Another popular way to formalise a share issue is with a share subscription letter or share offer letter. 

This document is simpler and less complex than the share subscription agreement while still being legally binding. Consequently, a share subscription letter is often sufficient documentation (alongside the Shareholder’s Agreement and Term Sheet). 

However, more sophisticated investors will require a share subscription agreement to provide greater detail to the agreement. Additionally, a share subscription agreement (unlike a share subscription letter), includes company warranties which provide added protection to the investor and gives them confidence in the investment without conducting their own extensive due diligence. 

Common provisions in a share subscription agreement 

  1. Conditions precedent: this provision details certain acts which must take place before the agreement takes effect. This could include a requirement for the company’s board to pass a resolution approving the agreement. 
  2. Subscription price: this means the price of the shares.
  3. Number of issued shares
  4. When the shares will be issued 
  5. Rights attached to the subscription: for example, entitlement to dividends, redemption or liquidation preferences, voting rights.
  6. Company warranties: for example, the company may warrant that they own all the intellectual property central to the business or that all the information provided to the investor is accurate, complete and not misleading. 
  7. Founder warranties 
  8. Investor warranties 
  9. Confidentiality clause
  10. Default and termination provisions

Key takeaway

A share subscription agreement is an important document formalising a share issue when capital raising. Sophisticated investors will often request a share subscription agreement because of the added protection it provides in the form of warranties. The terms of the share subscription, in particular, the warranties should be carefully scrutinised by both parties to understand their rights and obligations. 

If you need any assistance drafting or reviewing a share subscription agreement, get in contact with us on 1300 337 997.

About Brigid Nelmes

Brigid NelmesBrigid is a legal intern at OpenLegal, working with our legal content team. She is currently completing her Bachelor of Laws and Bachelor of Arts (International Studies) at the University of Technology Sydney. Her interests are in digital/privacy and startup law.

About Philip Evangelou

phillipPhil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.