When a company is expanding, so too does the desire to grow capital. Likewise, investors see the business as a good foundation for growth and capital appreciation. In this situation, one party will want to sell shares, while the other will want to buy shares. This is when parties use share subscription agreements. In such an agreement, the price is fixed as well as the number of shares.
What are share subscription agreements?
The obvious question is what does the agreement do and cover. This agreement is similar to a purchase and sell agreement. The idea is that a buyer commits to buying a certain amount of shares. Likewise, the company commits to selling those shares. Then when it comes to what is in the document there are a few essentials. This includes the company details like the ACN, the investment amount, price and number of shares. Then in the final stages would be the application for shares.
When would you use them?
You will usually use a share subscription agreement when it’s a private company that you wish to invest in. As a business, the agreement provides you with security that the investors will actually commit to buying shares. In other words, it helps you lock in a buyer. The process is usually in smaller rounds of funding as opposed to major public companies on the stock exchange.
Alternatives to share subscription agreements
You may decide as a business to go public. In that case, individuals may buy shares in your company using more complex arrangements. The public market already has measures in place that act in a similar fashion like options. These financial instruments allow you to have an option to buy shares at a later date and price.
Leaving the agreement
Furthermore, a key term is a termination clause. This would cover how the parties can exit the agreement before it comes time to sell the shares. Although the agreement is legally binding, depending on what is written in the termination section, parties may be able to void the agreement. Usually, a very specific set of conditions would need to be met not just a simple change of mind.
The benefit is that the parties lock in a price. Depending on how the market changes this will dictate who the price-fixing favours. This could favour the investor if she agrees to purchase 5 shares at $80 each in 20 days time. Now if the company had a research breakthrough during that time or secured a key contract with a supplier this would be a win for the investor. The true value of the share has increased above that $80. A small company would generally absorb this as they are the one demanding investors to hand over money and get them off the ground. As the companies get more complex the contracts may have terminations clauses that cover situations like what I described. You may decide that you want to check with a commercial lawyer about navigating shares and prices.
Share subscription agreements aren’t as complex as they sound. Ultimately it’s about two parties committing to buying and selling. It secures a hopefully good price for the investor. Likewise, the business gets an investor to commit to buying into their company.
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