Subscription Agreements: What Irish Founders Must Know Before Signing When you close a funding round, the subscription agreement is the document that makes it happen. It is the contract between the investor, the company, and often the founders personally, that sets out exactly what shares are being issued, at what price, on what terms, and subject to what conditions. Getting it wrong, or signing without understanding what you are agreeing to, can create problems that follows the company .
This guide explains what a subscription agreement is, the key clauses Irish founders need to understand, and the most common mistakes to avoid.
What Is a Subscription Agreement? A subscription agreement is a legal contract under which an investor agrees to subscribe for (invest for) newly issued shares in a company, and the company agrees to allot and issue those shares . It governs the primary issuance of shares, meaning the newly created shares come directly from the company, not from an existing shareholder or the founders.
This distinguishes it from a share purchase agreement (SPA) , which governs the transfer of existing shares from one shareholder to another. In a typical startup funding round, the investor is buying new shares from the company, so the subscription agreement is the relevant form of agreement.
The subscription agreement sits alongside two other key documents in a funding round:
The shareholders' agreement , which governs the ongoing relationship between all shareholders (including the new investor and the founders), covering matters like board composition, consent rights , share transfer restrictions, and exit provisions. Sometimes the subscription agreement is combined with the shareholders' agreement , often referred to as a 'subscription and shareholders agreement' or 'investment agreement'. The company's constitution All three documents must work together consistently. The subscription agreement gets the investor in; the shareholders' agreement and constitution govern what happens next. An agreement is a private document, whereas the constitution is publicly available through the Companies Registration Office . For this reason, more sensitive provisions may be contained in an agreement, and kept out of the constitution, to keep them confidential.
Key Clauses in a Subscription Agreement While every subscription agreement is different, certain clauses appear in virtually every deal. Understanding these clauses is essential before you sign.
Shares Being Subscribed The agreement specifies the exact number of shares, the class (typically a new class of preference shares ), and the nominal value. For Irish companies, shares must have a nominal value under the Companies Act 2014 . The share class rights such asliquidation preference, dividend entitlements, conversion terms are usually defined in the amended constitution and cross-referenced in the subscription agreement.
Subscription Price and Payment Terms The agreement states the total price and number of shares the investor will receive. It specifies when payment is due, typically on completion, though some deals provide for staged payments or escrow arrangements.
The price per share is derived from the pre-money valuation agreed in the term sheet divided by the fully diluted share capital. Ensure the subscription agreement reflects the same valuation methodology used in the term sheet to avoid discrepancies.
Representations and Warranties This is where founders need to pay the most attention. The subscription agreement will contain representations and warranties from both sides:
Company warranties - Statements of fact about the company's business, finances, legal compliance, intellectual property, contracts, employees, and tax affairs. If any warranty turns out to be untrue, the investor may have a claim for damages against the company and often the founders themselves.Investor warranties - Typically limited to confirming that the investor has the authority and funds to complete the investment, and that they qualify as a sophisticated or professional investor.The scope and detail of company warranties varies significantly between deals. Early-stage rounds tend to have lighter warranties; later rounds with institutional investors tend to have extensive warranty schedules.
Indemnities and Liability Caps An indemnity is a promise to compensate the investor for specific losses for example, losses arising from a breach of a specific warranty or an undisclosed tax liability. Indemnities are more direct than warranty claims and can be triggered without proving the investor relied on the warranty.
Founders should negotiate liability caps that limit total exposure under the warranties and indemnities. Common structures include:
A cap equal to the subscription price (the investor cannot recover more than they invested). A de minimis threshold (small claims below a specified amount cannot be brought). A basket or aggregate threshold (claims must collectively exceed a specified amount before any claim can be made). A time limit (warranty claims must be brought within 12–24 months of completion, except for tax warranties which typically have a longer window). Warranties and Disclosures The warranty and disclosure process is where much of the negotiation happens in an Irish funding round.
What Company Warranties Typically Cover A comprehensive warranty schedule may include statements about:
Corporate status : The company is validly incorporated, in good standing, and has the authority to enter into the transaction.Accounts : The company's financial statements give a true and fair view of its financial position.Tax : The company has filed all required tax returns, paid all taxes due, and is not subject to any tax disputes or investigations.Intellectual property : The company owns or has valid licence agreements for all IP used in its business, and is not infringing third-party IP rights.Contracts : There are no material contracts that have not been disclosed, and no contracts contain change-of-control provisions triggered by the investment.Employment : All employees are on proper contracts, there are no pending disputes, and the company complies with employment law.Litigation : The company is not involved in any material litigation or regulatory proceedings.Data protection : The company complies with GDPR and has appropriate data processing agreements in place.The Disclosure Letter The disclosure letter is the company's opportunity to qualify the warranties. If a warranty states that the company has no outstanding litigation, but the company is in fact involved in a minor dispute, the disclosure letter discloses that dispute. A properly disclosed matter is excluded from the warranty, meaning the investor cannot later claim for it.
The disclosure letter is critical. An incomplete disclosure letter leaves the company (and potentially the founders, if personal warranties are given) exposed to warranty claims on matters that should have been disclosed.
Founder Personal Warranties In early-stage rounds, investors sometimes require founders to give personal warranties which are generally the same as the warranties provided by the company. This means founders are personally liable if the warranty is breached, not just the company.
Founders should resist personal warranties where possible, although institutional investors will often require that the founders provide them as well as the company.
Conditions Precedent and Completion Mechanics A subscription agreement may not complete immediately on signing. Conditions precedent are requirements that must be satisfied before completion can occur.
Common Conditions Precedent Board approval - The company's board must formally approve the share allotment.Shareholder approvals - Existing shareholders may need to pass resolutions to create the new share class, amend the constitution, disapply pre-emption rights and consent the the transaction.Regulatory approvals - In some sectors (financial services, healthcare), regulatory consent may be required before a change in ownership.Due diligence completion - The investor may reserve the right to complete due diligence before being bound to invest.Ancillary documents - The shareholders' agreement , amended constitution, and disclosure letter must all be agreed and ready for execution.Simultaneous vs Split Signing and Completion In most Irish startup rounds, signing and completion happen simultaneously, all documents are signed, money is transferred, and shares are issued on or around the same time. In larger or more complex deals, signing and completion may be split, with completion occurring once all conditions are satisfied.
Escrow Arrangements Some deals use escrow. The subscription funds are paid into a solicitor's escrow account on signing, and released to the company on completion. This protects the investor (their money is held safely until all conditions are met) and gives the company certainty that the funds are available.
What Happens If Conditions Are Not Satisfied If a condition precedent is not satisfied by a specified long-stop date , either party may have the right to terminate the subscription agreement without completing the investment. The agreement should specify what happens in this scenario: typically, the investor gets their money back (if paid into escrow) and neither party has further obligations.
Pre-Emption Rights and Existing Shareholders Before new shares can be issued to an outside investor, the company must deal with the pre-emption rights of existing shareholders.
Statutory Pre-Emption Rights Under Section 69 of the Companies Act 2014, when an Irish LTD proposes to allot shares, it must first offer those shares to existing shareholders in proportion to their current holdings. This gives existing shareholders the opportunity to maintain their percentage ownership.
Disapplying Pre-Emption Rights In a funding round, pre-emption rights are typically waived by the shareholders who have such rights to allow the new shares to be issued directly to the incoming investor. Of course in some cases, these shareholders may decide to invest alongside the new investor.
Failure to properly disapply pre-emption rights before issuing shares to a new investor can render the allotment voidable.
Consent Requirements If there is an existing shareholders' agreement , it may contain additional consent requirements beyond the statutory pre-emption rights . For example, it may require unanimous consent for the creation of a new share class or for any issuance above a certain number of shares. Check the existing shareholders' agreement carefully before proceeding with the round.
Post-Completion Obligations Once the subscription agreement completes and shares are issued, the company has several statutory obligations to fulfil.
CRO Filings The company must file a Form B5 (return of allotments) with the Companies Registration Office within 30 days of the share allotment. This form records the number, class, and nominal value of the shares issued, along with the consideration paid. Late filings attract penalties.
Certain other actions linked to the investment round, such as appointing new directors, creating a new class of share and other related matters may also require CRO filings to be made. If the company's constitution was amended as part of the round (which it often is, to create the new share class and include specific investor requirements), the amended constitution must also be filed with the CRO.
Updating the Register of Members The company's register of members must be updated to include the new shareholder, the number and class of shares held, and the date of allotment. The register is a statutory record and must be kept up to date.
Issuing Share Certificates Under the Companies Act 2014, the company must issue share certificates in respect of the new shares issued as part of the investment round. While share certificates are sometimes overlooked in practice, failing to issue them creates a compliance gap that will be flagged in future due diligence.
Beneficial Ownership Register If the new investor holds more than 25% of the company's shares or voting rights , or otherwise exercises control, they must be recorded on the company's register of beneficial owners (RBO) . The company must also file an updated return with the central RBO.
Common Mistakes Founders Make These are the errors that cause the most problems, often not immediately, but when they surface during a later round or exit.
Signing Without Understanding Warranty Exposure Founders sometimes treat the subscription agreement as a formality and sign without fully understanding the warranty schedule. A broad warranty with no cap or time limit exposes the company (and potentially the founders personally) to significant claims Always review the warranty schedule with your solicitor and negotiate appropriate protections.
Incomplete Disclosure Letters The disclosure letter protects from warranty claims on matters you have disclosed. If you fail to disclose a known issue, such as a pending dispute, an incomplete tax filing, an IP licence that is about to expire, you lose the protection. The disclosure process should be thorough and undertaken with legal advice.
Not Disapplying Pre-Emption Rights in Advance If shareholder pre-emption rights are not disapplied before shares are issued to the new investor, the allotment may be challengeable. This is a procedural step that is easy to complete but easy to overlook, particularly in fast-moving rounds where founders are eager to close.
This article is for informational purposes only and does not constitute legal or financial advice. Consult a qualified professional before making decisions about fundraising or investment agreements.
