Companies will commonly raise seed capital in the UK by way of advance subscriptions agreements ("ASAs"), Simple Agreements for Future Equity ("SAFEs") and/or convertible loan notes ("CLNs"). These structures allow a company to receive a quick injection of capital without needing to issue shares until a later date. The intention of these instruments is to convert into equity of the company on advantageous terms when the company does its next financing round as an incentive for the earlier advancing of funds.
ASAs and SAFEs are usually simple to negotiate, as it is often only the amount of the ASA / SAFE, the valuation cap and the discount (in each case, if any) that are negotiated. Under the terms of an ASA / SAFE, shares will usually be issued either on (i) a financing round, (ii) a longstop date, (iii) a sale, or (iv) an insolvency event. The ASAs and SAFEs are not redeemable and due to being equity instruments, do not usually accrue interest.
Similarly to ASAs and SAFEs, CLNs will convert automatically or at the election of an investor. Although, CLNs can be liable to repayment in certain circumstances and, as debt instruments they commonly accrue interest from the date funds are provided.
A company may choose to issue shares to raise seed capital but this often takes more time and incurs greater legal costs, both of which are in short supply for most startup founders.
In the tenth instalment of our Founder Series, Raising Bridge Financing, we provide guidance for UK founders of these alternative financing options, their key terms and any implications they may have on EIS / SEIS.
Learn More: UK Founder Series: Raising Bridge Financing