Subscription Agreement

A Subscription Agreement is the contract by which an individual investor commits to purchase securities in a financing. Sometimes called a Purchase Agreement or Securities Purchase Agreement, depending on transaction structure, it includes representations and warranties about the investor (accreditation status, investment authority), the company's representations and warranties to the investor (company information, capitalization, financial condition), the specific terms of the securities being purchased, the closing conditions, and the mechanics of payment and share issuance. Unlike the Investor Rights Agreement and Voting Agreement which are collective documents binding multiple parties together, the Subscription Agreement is signed by each investor individually, making it the document founders sign many times during a multi-investor financing round.

The major sections of a typical Subscription Agreement:

• Subscription terms: how many shares the investor is purchasing, at what price, what class of securities.
• Company representations and warranties: similar to those in an M&A definitive agreement but typically lighter (organizational, capitalization accuracy, financial statement accuracy, no material litigation, IP ownership, compliance with laws). Breach can trigger indemnification by the company.
• Investor representations and warranties: accreditation status (the investor certifies under penalty of misrepresentation), no general solicitation reliance (for Reg D 506(b) rounds), investment intent (not for immediate resale), sophistication and ability to evaluate the investment.
• Closing conditions: what must be true for the investor's purchase to close (legal opinions, certificate of incorporation amendments filed, other documents executed).
• Indemnification: typically capped and survival-period limited, similar to M&A reps and warranties but smaller in scope.

The 2020s reality: most venture financings use the standard NVCA Subscription Agreement form (or a Stock Purchase Agreement, "SPA," for stock purchase transactions specifically). The forms are extensively negotiated for major lead investors but typically signed as-is by smaller follow-on investors. Speed of signing: lead investors typically sign first after extensive negotiation; follow-on investors sign quickly using terms already negotiated by the lead.

Ryan's Take

The Subscription Agreement is the document each investor signs individually, which means founders execute it many times in a typical round. The structure: lead investor negotiates the document with founder's counsel; follow-on investors typically accept the negotiated form as-is. The places where things go wrong: when a follow-on investor wants to negotiate their own changes, slowing the close; or when an investor's accreditation rep turns out to be wrong, creating compliance issues later. Keep the document standardized once negotiated; resist follow-on changes that would create different terms for different investors.

What founders get wrong: Allowing different follow-on investors to negotiate different terms in their Subscription Agreements. Each variation creates administrative complexity and potential MFN clause triggers. Negotiate the document with the lead investor; require follow-on investors to sign the same form. Side letters can handle truly unique investor needs without modifying the main document.

Related: [Investor Rights Agreement] · [Voting Agreement] · [Term Sheet] · [Accredited Investor]

FAQ

What is a Subscription Agreement? The contract by which an individual investor commits to purchase securities in a financing, including representations and warranties about the investor (accreditation status, investment authority) and the company (organizational, capitalization, financial), the specific terms of the securities, closing conditions, and payment mechanics. Signed by each investor individually.

How does it differ from the Investor Rights Agreement? The IRA is collective, binding multiple parties to ongoing rights and obligations (information rights, pro-rata rights, registration rights, board representation). The Subscription Agreement is individual, governing each investor's purchase transaction. Both are part of the same financing closing but serve different functions.

Do all investors negotiate their Subscription Agreement? Lead investors typically negotiate extensively; follow-on investors typically accept the negotiated form as-is. Founders should resist follow-on investors trying to negotiate their own changes because the variations create administrative complexity and potential MFN clause triggers. Side letters can handle unique investor needs.