A subscription agreement is a legal contract between an investor and a company that formalizes the investor's commitment to purchase a specific number of shares or ownership units at a predetermined price. This binding document outlines the terms of the investment, including the amount invested, the type of securities received, representations and warranties from both parties, and any conditions that must be met before the transaction closes.
Why It Matters
Subscription agreements protect both investors and companies by establishing clear expectations and legal obligations before money changes hands. For angel investors, these documents provide critical protections through representations about the company's legal status, intellectual property ownership, and financial condition. The agreement also typically includes investor representations confirming accredited investor status and acknowledgment of investment risks, which helps companies comply with securities regulations. Without a properly executed subscription agreement, investments can face regulatory challenges or disputes about ownership percentages and terms.
Example
An angel investor decides to invest $100,000 in a Series A round of a SaaS startup valued at $5 million pre-money. The subscription agreement specifies that the investor will receive 285,714 shares of Series A preferred stock at $0.35 per share. The document includes the company's representation that it owns all its software code and has no pending litigation. It also contains the investor's representation that she is an accredited investor with sufficient net worth and understands the illiquid nature of the investment. The agreement states that the transaction will close within 30 days, contingent on the company raising at least $500,000 total in the round. Once both parties sign and the investor wires the funds, the company issues the shares and updates its cap table accordingly.
Related Terms
Understanding subscription agreements becomes clearer when viewed alongside term sheet, which outlines the preliminary terms before the subscription agreement is drafted, and shareholders' agreement, which governs ongoing relationships between investors and founders after the investment closes. The accredited investor concept is also essential, as subscription agreements typically require investors to confirm their accredited status.