There is no universal way to purchase shares of a startup. However, a highly customizable legal document called a subscription agreement is often utilized for this purpose. A subscription agreement, or purchase agreement, is when a business promises to sell a number of shares to an investor at a certain price in exchange for an agreement by the investor to pay that price. This is the most popular method for funding smaller businesses as they typically do not have neither the resources needed to go public nor the criteria that a venture capital (“VC”) firm would require.
Investors (called subscribers) and businesses prefer this agreement because it imitates a limited partnership or a silent partner as the individual investor is not expected to provide any additional funding.
This lowers the risk for the investor in exchange for them having no influence in company decisions. For the business, it solidifies any verbal agreement made with the investor such as a percentage of net income or a lump sum payout on a particular date. With any type of funding arrangement, it’s smart to have an attorney draft or review your subscription agreement to assure its long lasting effectiveness.
The lawyers on LawTrades are experienced with fundraising so they can assess if a subscription agreement is indeed the best route for your company.
Helps investigate the other party
Entering into a subscription agreement requires a thorough vetting of each side to the agreement. An experienced attorney will help you with this process.
You’ll save money in the long run
Hiring an attorney for issues involving fundraising is smart as any mess ups with equity can be costly. Equity needs to be coveted and a lawyer will help you do just that.
Can my company use a template found online?
Although there are some templates floating around the Internet, it is highly advised that a lawyer be retained for such a complex and important process.
What kind of businesses typically use a subscription agreement?
Closely-held businesses, private businesses, and startups utilize subscription agreements often.
What terms / provisions are usually in a subscription agreements?
This agreement typically contains the names and details of the parties involves, the number of shares, the price, and the roles and responsibilities of the parties involved.
Must a subscription agreement be registered with the U.S. Securities and Exchange Commission?
No, which is one of the advantages for private businesses looking for funding.
How do businesses and subscribers investigate each other before entering into a subscription agreement?
Subscription agreements often require a large amount of detailed information about the investor which helps establish credibility. The subscription agreement essentially serves as a screening process for the investor as it reveals their financial status and history.
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