At some point during a priced round, after the term sheet is signed and the due diligence is underway, your lawyer will produce a document called a share subscription agreement. For many Australian founders, this is the first time they see one — and the temptation is to treat it as boilerplate. It is not. The subscription agreement is the document that actually governs the issue of shares to your investors, and the terms it contains will bind you, your company, and potentially your co-founders for years.
This article explains what a subscription agreement does, how it fits into the broader fundraising process, and the key clauses founders need to understand before they sign.
What a Subscription Agreement Is — and What It Is Not
A share subscription agreement (SSA) is a contract between a company and one or more investors under which the company agrees to issue new shares and the investor agrees to pay the subscription price. The critical word is new. Unlike a share purchase agreement, which transfers existing shares from one holder to another, a subscription agreement creates fresh equity. The money goes to the company, not to a selling shareholder.
In an Australian startup fundraise, the subscription agreement typically sits alongside two other documents: the shareholders’ agreement (which governs the ongoing relationship between all shareholders) and the company’s constitution. The subscription agreement handles the transaction — the mechanics of getting money in and shares out. The shareholders’ agreement handles the relationship — the rights, obligations, and protections that apply once the investor is on the register.
Some rounds roll all of this into a single investment agreement. Others keep them separate. Either approach works, but founders should understand which terms sit where, because the negotiation dynamics are different for each.
When You Need One
Not every capital raise requires a subscription agreement. If you are raising on a SAFE or convertible note, the investment instrument itself governs the transaction and no SSA is needed until the conversion event. But once you are doing a priced round — seed, Series A, or later — where shares are being issued at a defined price per share, a subscription agreement is standard.
You will also encounter subscription agreements when issuing shares to employees under an employee share scheme (where the shares are purchased rather than granted as options), when bringing on a strategic investor outside a formal round, or when a founder is subscribing for additional shares as part of a restructure.
The common thread is that the company is issuing new shares in exchange for consideration, and both sides want the terms of that issue documented.
The Key Terms
1. Subscription Details
The starting point is straightforward: how many shares, what class, and at what price. The agreement will specify the number and class of shares being issued (typically ordinary shares for early rounds, or a class of preference shares for VC-led rounds), the price per share, and the total subscription amount.
Get this right. Errors in share numbers or pricing can create cap table headaches that are expensive to fix after completion, and may require shareholder approval to correct.
2. Conditions Precedent
Conditions precedent (CPs) are the things that must happen before the company is obliged to issue shares and the investor is obliged to pay. Common CPs in Australian startup rounds include:
- Board and shareholder approval. The directors must resolve to issue the shares, and if the company’s constitution or the Corporations Act 2001 (Cth) requires it, shareholders must approve the issue — particularly where the placement exceeds the company’s capacity under s 708 or where related-party issues arise.
- Execution of ancillary documents. The investor signs the shareholders’ agreement, deed of accession, or any side letter before completion.
- No material adverse change. The company has not suffered a material adverse event between signing and completion. This protects the investor from being locked into a deal where the business has deteriorated.
- Satisfactory due diligence. In larger rounds, the investor may reserve the right to complete due diligence as a condition, though in practice most due diligence is done before signing.
- Regulatory approvals. If the investor is a foreign person, Foreign Investment Review Board (FIRB) approval may be required under the Foreign Acquisitions and Takeovers Act 1975 (Cth), depending on the size and nature of the investment.
Founders should push for a short, specific list of CPs with a defined deadline (a “sunset date”) after which either party can walk away if the conditions have not been satisfied. Open-ended conditions give the investor an option to delay or withdraw without consequence.
3. Representations and Warranties
This is where most of the negotiation happens. Representations and warranties are statements of fact made by the company (and sometimes by the founders personally) that the investor relies on in deciding to invest. If a representation turns out to be false, the investor may have a claim for breach of contract — and potentially a right to unwind the investment or claim damages.
Company warranties in a typical Australian startup SSA include:
- The company is validly incorporated and in good standing.
- The company has authority to issue the shares and enter into the agreement.
- The cap table is accurate and complete, with no undisclosed options, convertible instruments, or encumbrances over shares.
- There is no material litigation pending or threatened.
- The company is compliant with all material laws, including tax obligations.
- The intellectual property used in the business is owned by or properly licensed to the company.
- The company’s financial statements (if any) are accurate and not misleading.
- There has been no material adverse change since the last accounts date.
Investor warranties are typically lighter. The investor will warrant that it has authority to enter the agreement, that the subscription funds are not the proceeds of money laundering, and — critically for disclosure purposes — that it qualifies under one of the exemptions in s 708 of the Corporations Act (for example, as a sophisticated investor under s 708(8) or a professional investor under s 708(11)).
Founder warranties are less common in early-stage rounds but do appear in larger raises. Where they exist, founders may be asked to warrant the accuracy of the company’s warranties on a personal basis, or to give specific warranties about their own conduct (for example, that they have not breached any restraint of trade or taken company property). Founders should resist open-ended personal warranty exposure wherever possible and negotiate caps and time limits on any personal liability.
4. Disclosure
The company’s warranties are almost always qualified by a disclosure letter or disclosure schedule — a document that sets out known exceptions to the warranties. If the company has pending litigation, for example, it discloses that fact against the “no litigation” warranty, and the investor cannot later claim breach on the basis of something it already knew about.
The quality of the disclosure process matters. Vague or incomplete disclosure (“the company may have various contractual disputes from time to time”) is likely to be treated as no disclosure at all. Be specific. Attach the relevant documents. The disclosure letter is your defence if a warranty claim arises.
5. Completion Mechanics
The agreement will set out what happens on completion day: the investor pays the subscription amount (usually by bank transfer), the company passes a board resolution to allot and issue the shares, the shares are entered on the company’s share register, and the company lodges a Form 484 with ASIC notifying the change in share structure. In practice, all of this is usually coordinated by the lawyers on a single day, with signed documents and funds exchanged simultaneously.
For rounds with multiple investors, completion is typically simultaneous — all investors subscribe at the same time. If one investor’s conditions have not been met, the agreement needs to address whether the remaining investors are still obliged to proceed (a “several” obligation) or whether the entire round falls over (a “joint” obligation). Most startup rounds are structured as several obligations to avoid one lagging investor holding up the whole deal.
6. Restrictive Covenants and Undertakings
Between signing and completion (and sometimes beyond), the company will typically give undertakings about how it will conduct its business. These may include commitments not to issue further shares, not to take on material debt, not to dispose of significant assets, and not to change the nature of the business without the investor’s consent. These protect the investor from the company doing something between signing and completion that would change the value or nature of what they are buying into.
7. Termination Rights
The agreement should specify when either party can walk away. Common termination triggers include failure to satisfy conditions precedent by the sunset date, a material breach of warranty discovered before completion, and insolvency of either party. The consequences of termination — including whether deposits are refundable and whether either party has a claim for costs — should be spelled out clearly.
Disclosure Exemptions — a Note for Founders
Australian securities law requires that an offer of shares be accompanied by a disclosure document (essentially a prospectus) unless an exemption applies. For private startup raises, the most commonly relied-upon exemptions under s 708 of the Corporations Act are the small scale personal offer exemption (no more than 20 issues in 12 months, raising no more than $2 million), the sophisticated investor exemption (where the investor has net assets of at least $2.5 million or gross income of at least $250,000 per annum for the last two years, certified by an accountant), and the professional investor exemption.
The subscription agreement should record which exemption applies to each investor and require the investor to warrant their eligibility. Getting this wrong is not a trivial matter — issuing shares without a valid exemption is a contravention of Chapter 6D of the Corporations Act and can give the investor a right to return the shares and recover their money.
Common Mistakes
A few patterns come up repeatedly in early-stage rounds:
- Using a template from the wrong jurisdiction. US-style subscription agreements reference SEC regulations, Regulation D exemptions, and Delaware corporate law. They do not work in Australia. Make sure your agreement is drafted for the Corporations Act and Australian company law.
- Giving warranties without adequate disclosure. Every warranty is a potential liability. If you know something is not perfectly true, disclose it. Silence is not a strategy.
- Ignoring the interaction with the shareholders’ agreement. The subscription agreement and the shareholders’ agreement need to work together. Inconsistent definitions, conflicting termination rights, or overlapping warranty regimes will cause problems — usually at the worst possible time.
- No cap on warranty liability. Founders should negotiate a cap on the company’s (and any personal) liability for warranty claims, typically limited to the subscription amount. Without a cap, a warranty claim could theoretically exceed the value of the investment.
- Skipping the sunset date. Without a deadline for satisfying conditions precedent, you can end up in limbo — committed to a deal that never completes and unable to approach other investors.
Getting It Right
A well-drafted subscription agreement protects both sides. It gives the investor confidence that they are buying into a company that is what it says it is. It gives the founder certainty about the terms on which capital is coming in, the conditions that need to be met, and the limits on their exposure if something goes wrong.
The document is technical, but the concepts are not. Understand what you are warranting, disclose anything that qualifies those warranties, negotiate sensible caps and time limits on liability, and make sure the conditions and completion mechanics are tight and workable.
If you are raising a priced round and need a subscription agreement drafted or reviewed, or you want a second opinion on terms an investor has proposed, get in touch.
