What is an ASA? (or SAFE?)

So you’ve decided you like the start-up and you want to invest… they send you the term sheet…. wait it’s Andvanced Subscription Agreement…

…what the hell is an ASA?

An ASA is a UK version of a SAFE (Simple Agreement for Future Equity), so let’s first start at exploring what a SAFE is and why it is used?

Typically in a startup funding round a lead investor is needed, as they are the one that agrees the terms in term sheet, as well as the valuation, that everyone else then follows. This causes issues in early stage investing, where the round has no funds, or is a small round, making high legal costs prohibitive.

SAFEs were first released by Y Combinator (the most famous early stage investor / accelerator) in 2013. They were released as an alternative to convertible debt (a loan to a startup that converts into equity in the startup). SAFEs are now very common in the US for pre-seed / seed stage investing, as they are associated with low legal costs and do not need a lead investor.

An ASA is a UK law and SEIS / EIS eligilbe equivalent of a SAFE, so only used by UK based start-ups. To be SEIS / EIS sligible it is only open for 6 months.

So what’s different between a SAFE and a term sheet based funding round?

In a SEIS eligible term sheet round, you know all the terms upfront, you know the exact amount being raised and the valuation. Then everyone signs the agreement and all the funding is done on the same day.

With an ASA, there is no valuation, a 6 month window in which the startup can raise (upto the amount agreed in the ASA) in individual tickets and (generally) a year for them to raise a full round and the final terms of the ASA decided.

Wait, how can there be no valuation? How does that work?

In it’s most basic form, an ASA gives investors a discount (typcially 20%) in the next formal funding round, as a reward for investing in advance.

So a startup that wants to raise £1m in 6 months time, may issue a £200k ASA that rolls into that later round. Investors in the ASA get a 20% discount on the valaution of the £1m round, for taking the risk of investing 6 months earlier.

Is that it?

Well no, like everything investing it has a few more nuances… ASAs usually also include a:

Cap - The investment round that the ASA will roll into, can not be valued more than the ‘cap.’ So if it becomes an incredibly hot round and suddenly 10x in valaution, the advance investors are protected.

Floor - If they are not able to raise a round by the deadline (usually a year after the ASA is created) set, the amount raised in the ASA, becomes the total round and the valaution of the startup is set as the agreed ‘floor.

So using the same example, startup wants to:

1. Raise £1m in 6 months time

2. Issue a £200k ASA that rolls into that later round.

3. ASA offers 20% discount on round

4. ASA has a floor of £6m

5. ASA has a cap of £15m

Let’s now play this out in multiple scenarios

1. Hot round. Startup fills the £200k ASA. Startup then raised additional £800k at a £25m valuation. Advance investor shares convert at cap of £15m, so a 40% discount.

2. Hoped for round. Startup fills the £200k ASA. Startup then raised additional £800k at a £15m valuation. Advance investor shares convert at a discount of 20% on £15m, so £12m.

3. Bad round. Startup raised £200k against ASA. Startup then fails to fill full round. Advance investor shares convert at floor of £6m.

Now intuitively, your greed would say, I hope they do a bad round, so my investment gets me more equity…. but let’s be honest, you never want to invest in a dying startup and you never ever want to be the “last money in a startup”. i.e. always check if you are confident they will be able to raise again after you. Otherwise your money is lost or you will be reinvesting good money after bad…

In a hot round, the investor is given a lot of protection, but the startup is hit with a lot of extra dilution from the advance investors. This has become a major criticism of Y Combinator.

This is why we, generally try to avoid ASAs (or SAFEs) outside of for a specific reason (i.e. angel being allowed into a round while a VC is doing DD - on equal terms). We feel it leads to unneccessary complications and TBH one of the most important roles of a startup CEO, is to be able to raise funds.

BTW if you are a founder in the UK looking to raise via an ASA. SeedLegals have made it very easy via their SeedFAST framework.

Note: Image generated using DeepAI with the text “reading an Advanced Subscription Agreement”