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This article is written by Shambhavi Singh, from Bharti Vidyapeeth. She is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Here she discusses “How to draft a share subscription agreement”.


The share subscription agreement is one type of share offer document. It is also known as a two-way guarantee, the subscriber agrees to purchase shares at a fixed price while the company agrees to sell those shares. It is an exchange of promises between a shareholder(subscriber) and company. Mostly it is preferred by startups after the terms laid and negotiated on a non-binding document, term sheet.


The core objective of the share subscription agreement is to have a firm commitment with regard to share subscription and to have a clear agreement with shareholders. Share subscription agreement sets out the mechanics of investment, made by the investor into the company. It binds the parties to execute the investment process. The terms in it can be investor-friendly. One of the alternatives of share subscription agreement is share subscription letter, it sets out the principle terms but does not contain the warranties of company or founder. The startups will like to reconsider whether they need this agreement or share a subscription letter will suffice.

How is it different from shareholders and share purchase agreement?  

  • Share purchase agreement (SPA)– An SPA is an agreement executed between the investor and the shareholder particularly for the sale of the existing shares by the shareholder to the new investor (it can be in partial or in full).
  • Share subscription agreement (SSA)- An SSA is not like a SPA where existing shares are purchased by the new investor from an existing shareholder. It is rather a legal document wherein new shares are issued by the company which are then subscribed by the new investor if certain conditions are fulfilled by the company that is called  “Condition Precedent”.
  • Shareholders agreement (SHA)- A SHA contains the key elements of the investment agreed between the investor and the shareholders such as rights over the shares issued/purchased by the investor and other rights for the investor to protect their investments.

Advantages and Disadvantages of the share subscription agreement


  1. The multilateral approach of investment is not taken here, it’s a one-time investment.
  2. With share subscription one can sell stock without registration with the Security and Exchange Commission otherwise it is costly and time-consuming.
  3. Investment of time can be curtailed for silent partners.
  4. Liability is limited as its limited partnership.


  1. There are no voting rights, one has to trust the promoters and directors for its growth.
  2. Invested amount can not be given back to the investor.

Advantage and disadvantage of not using the share subscription agreement


  1. In a case of unsure about the investment then they can invest in a public company with a smaller amount whereas investment with share subscription requires a large sum of amount.


  1. The investor can get the leverage of knowing the management and ask questions from the partner if the investment is made through a subscription agreement; it’s not possible otherwise.

How to draft various parts of the agreement including the following

Recitals: it holds the basic information like the company is engaged in which kind of business, the issued subscribed and paid capital of the company, how the consideration will be paid for the subscription of shares, percentage of acquisition by the investor, the face value of shares, about the term sheet.

Representation and warranties of investors

That the subscriber is not entering into the agreement with the knowledge that has not been publicly disclosed (insider trading), the subscriber has received all the relevant documents of the companies.

The subscriber can ask to meet their financial commitment and fulfil their obligations under the agreement.

Representation and warranties of the company 

The investors in all possible ways will make a specific demand for what they want to be represented, nothing should come as out of blue after the negotiations and term sheet agreement.

The warranties in the share subscription agreement can be wide as it may contain that all the known information to the founders and directors has been delivered to the investor. Promoters are not aware of any excess information except what is being told to the investor that may affect the investment.

The company can enter into agreements, it may also include the warranty that it owns certain license or intellectual property rights.

Condition precedent

Condition precedent can be any terms and conditions laid by either of the parties that need to be fulfilled prior to the agreement coming into force. This can be certain activities that need to be done by the subscriber or on behalf of him before the execution of the agreement or it can be passing of the relevant resolutions by the director of the company.
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Confidentiality clause

This clause is put so that the confidential information is not revealed to any third party without the prior consent of the company in writing as the clause speaks for itself. Both parties agree to be bound by a mutual confidentiality clause.

This clause may have exceptions like revealing the information by a party to any of its representatives or disclosure after obtaining the consent in writing etc.

Setting out details of the term sheet

The inscription laid out in the term sheet is jotted down here to give it the final touch. The terms in the term sheet outline the agreed “conditions” for an investment. The conditions would involve terms like:

Investment amount

Pre-money valuation

Post money valuation

Conversion right: A conversion right is the right to convert shares of preferred stock into shares of common stock. (Optional or mandatory)

Option Pools

Liquidation preference shares: The liquidation preference sets out who gets paid first and how much they get in the event of a liquidation, a bankruptcy or a sale. This is the preference given to investors to get their money back first then to other stakeholders and debt holders at the event of liquidation of the company. This clause should be put in very carefully as to whom the preference is given while liquidation of the company.

Drag along with rights


Dividends: paid on a regular basis or accumulated? 

Investor protection rights: Anti-dilution clause 

Pre-emptive or pro-rata rights

Investors’ Right of the First Refusal- In case founders intend to exit the company due to some event,  then investors should have the right to first purchase the stake of founders. The founders can not exist before the lock-in period if there is a clause to that effect in the term sheet. This clause protects the interest of investors.

Duration of the stake- in this clause the investor will ensure that he ll keep his investment in the company and  he will not revoke it  up to a certain number of years (3 to 5 years) 

No- shop clause 

Exit rights

Tag-along rights- this clause is put to save the interest of minority shareholders so that if majority stakeholders are selling their stake then minority stakeholders can join the deal and sell their stake in the company. It puts the contractual obligation on majority stakeholders to include the minority shareholders. This clause gives a sort of protection to the minority shareholders and it should be there in order to protect the interest of minority shareholders. 

Redemption rights

. Exclusivity

. Confidentiality  


Any of the party will indemnify the other party against any losses, claims, costs, liabilities, damages occurred if any party is in breach or damages occurred because of inaccurate information in the warranties and representation clause .it is a bit time taking process and costly.

Procedure for indemnification is as follows:

  1. A notice is issued to the indemnifying party by the indemnified party.
  2. Change is made in a mutually acceptable manner if required.
  3. The indemnified party should be notified about the claims in the assets within 15 days.
  4. The indemnifying party may apply for set-off if any dispute occurs with the indemnified party.
  5. The indemnifying party can act on behalf half of the indemnified party if the notice made by the indemnified party gets no response by indemnifying party within 30 days.
  6. Indemnification rights are available and other remedies are also there as prescribed by law.


The agreement shall be executed by both the parties from the date of execution. The agreement may be terminated in a few different ways described here:

  1. By the mutual consent of both the parties.
  2. By the company- if the investor fails to pay for the share subscription on the completion date or if an investor breaches any terms and conditions of the agreement.
  3. By the investor- if the company fails to provide condition precedent or any breach committed by the company, any adverse change occurs before the completion date.
  4. Any party willing to terminate the agreement on the ground of the clauses mentioned above shall issue a notice to the other party.
  5. Compromise with creditors
  6. Event of default- the agreement can be terminated with an event of default by the consent of the parties.
  7. Insolvency- if the company becomes bankrupt then the agreement shall be terminated.


The leverage of remedy is given to both the parties but on some considerable facts.

If any non-performance of any obligation occurred by the investor then the company may-

  1. Revoke the agreement, the ownership of the shares shall not be transferred and the consideration if paid shall be refunded to the investor.
  2. Recover liquidated damages, a certain percentage of the consideration shall be deducted for the breach including the expenses, loss incurred by the company.
  3. The company shall be entitled to injunctive and other equitable reliefs.


Company founders representatives: generally the first founder of the company is appointed as agent and attorney for every founder. The first founder can act on behalf of each of the founders in respect of any right, waivers or amendments to be executed by other founders.

Benefits of the agreement: nothing in this clause shall constitute the parties to form a partnership.

Amendments and waivers: validity of amendments will be considered when it is in writing and executed by the party. No waiver shall be effective unless in writing and signed by the party.

Notices: notice or any form of communication in connection with the agreement shall be in writing and personally delivered to their address.

Waiver of the rights/liability: waiver of rights can be given by the company. The liability can be waived, compromised of the parties.

Costs: this clause talks about who will bear the accountancy costs, legal expense and several other expenditures.

Severability: each of the obligation under the share subscription agreement shall be treated as a separate obligation and shall be severally enforceable.

Specific performance:  this is the unique clause as parties in this agreement may have a specific performance with or without damages as a remedy.

Governing Law and Jurisdiction

This clause talks about the jurisdiction of the court and which governing law will prevail.

Any dispute or any question regarding its existence, validity or termination, can be first to be resolved amicably.if the matter remains unsolved then same can be referred to arbitration and the seat of arbitration can be fixed by the parties involved in the agreement. The award shall be binding to both the parties.

There may be n number of the arbitrator and their appointment can be done by done founders, directors, court. The cost of the arbitration can be borne by any party as the agreement says.

Stamp Duty

This clause deals with the expenditure of stamp duty, either of the parties can agree to bear it. Stamp duty differs from state to state.

Common Mistakes in the Share Subscription Agreement

Complicated agreement 

The complexity of any agreement leads to the dubious thought that’s why the agreement should be as simple as possible. Like it can be mentioned about the fact that the investor has read the private placement memorandum rather than repeating it.

Unavailability of legal counsel

A finance expert lawyer is the need of the hour for the parties as they can explain all the legalese of the contract and they make sure you agree with the clauses in it.

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