A subscription agreement has great importance in analyzing business partnerships and being an employee, early owner, or investor. It is a formal agreement between a company and an investor, offered at earlier stages with the start-up companies.
This agreement is a promise to sell a given amount of shares to the investor at a defined price. A subscription agreement is used when an individual has a private company and seeks to raise capital from private investors by selling shares. It outlines all the details of the transaction, price, and the agreed amount of shares.
What is a Subscription Agreement?
The subscription agreements are signed between a company and an investor where they outline the terms to buy shares of a company at the defined price. It contains all the details including, shares ownership and payouts.
The working of these agreements depends on the company they go along with. Subscription agreements are usually offered with start-up companies before they can get business finances or go public. A well-designed and well-structured agreement will include details about the transaction and the number of shares sold. It also covers the price per share, as well as any legally binding confidentiality agreements and clauses.
There are few different reasons to choose a subscription contract. This is done mainly because the company has not yet reached the point where they can attract investment funds to invest in their organization. These agreements are also made to collect money from private investors without registering with the respective authority.
It is necessary for a private investor to follow all the terms and conditions of any restriction in the contract and to keep the confidentiality of the company's information.
The Typical Format of a Subscription Agreement Include
A well-organized and maintained subscription agreement template contains all the information related to the company, investor, agreed on shares, and the payment. The following points are the standard format to design a subscription agreement that the contract must need to keep in mind.
- Names of the Parties: Every subscription agreement contains the names of the persons included in the agreement form. It displays the name of the company, investor, address of the company, and the security number of the subscriber.
- Investor's Representative Information: It is a good practice to consult any professional representative in evaluating an investment while signing the subscription agreement. Therefore, add all the possible information such as date or any questionnaire related to the representative.
- Payment: All the payment details of the agreed number of shares are mentioned in this section and include the entire subscription amount.
- Confidentiality Clause: This clause is put into the agreement not to reveal confidential information to any third party. Both parties are bound to follow this by a mutual confidential clause.
- Special Instructions : Any extra or special information regarding the company, investor, representative, or payment must be included in the agreement.
Tips for Writing a Subscription Agreement
The subscription contract template should be effective and clear enough to be understandable by both parties. This part lists out some tips for drafting a good subscription agreement.
- Get the Agreement in Writing: Although many oral agreements are legal and binding in many circumstances; however, in the world of investment, written agreements have huge demand. It clearly spells out the rights, obligations, and terms with the signatures of both parties.
- Deal with a Representative: Try to consult with any investment representative who has enough information to guide on drafting the subscription contract. Such persons have the knowledge of the shares, payments, and other terms.
- Spell Out All of the Details: The agreement body must specify the rights and obligations of each party in detail. If an individual forgets to add something, then it can always be added by short written amendment.
- Disputes Resolution: Mention in the agreement that what will do if something goes wrong. Both parties can decide to resolve the dispute by mediation instead of going to court, which takes a lot of time and money.
Common Mistakes to Avoid When Drafting a Subscription Agreement
For the drafting of the subscription agreement, it is highly recommended to consult any professional individual to make the error and ambiguous-free agreement. Below are some of the common mistakes to avoid when drafting a subscription agreement template.
- Drafting Vague Arrangements: Considering the importance of such agreements, it is very important to draft the subscription agreement clear. All the vague or ambiguous provisions will lead to disputes over the agreement.
- Unclear Determination of the Company: For the shares of the company, a proper determination regarding the company's policy must be mentioned.
- No Proofreading and Formatting: Another most common mistake is related to not proofreading the final version of the agreement. Try to check the spelling and clarity of the terms and clauses.
- Adding Last-minute Clauses: Last-minute additions in the agreement always create a messy situation because there is a chance for the occurrence of mistakes.
This article has explained the use and importance of the subscription agreement in various aspects. These agreements play a vital role in any company, which sells the defined shares to any private investor. The article also lists out the tips and common mistakes that should be kept in mind while drafting the agreement.