What is a Subscription Agreement?

Investment opportunities come in many shapes and sizes, but the subscription agreement possibly is the most customizable of them all. This agreement sells stocks of a business to individual investors. This important legal document serves two purposes for the stock-selling company because it protects them and solicits valuable investor data. In addition, this document serves as a financial limit for the investor. Subscription agreements differ depending on the situation, but each one generally contains the names of the parties to the agreement, the number of shares and their price as well as the expectations of the parties involved.

A subscription agreement is a popular form of soliciting funding for smaller businesses and start-ups. When entrepreneurs do not have the resources to go public or work with venture capitalists, they often seek out individual investors. This is a binding contract that exchanges a one-time trade of money for a specific number of shares in a company.

For investors, this agreement is advantageous because it acts as a limited partnership. Also known as a silent partner, this person is not expected to provide financing beyond the one-time investment. This lowers the risk significantly for the investor. One important aspect to keep in mind in this type of partnership is that the investor usually has no say in company decisions, as a full partner would.

The subscription agreement is equally advantageous for entrepreneurs because it serves the same purpose of a handshake agreement, but with the legal strength of laying out warranties for the investor. Warranties are stated expectations on the return of the investment, such as a particular percentage of income or a predetermined lump sum on a certain date. Many subscription agreements also require a great deal of information from the investor, thus helping the entrepreneur. Requesting an investor's financial status and investing history helps determine if an individual is likely to be able to provide payment.

A subscription agreement does not follow a simple template like many other legal investment documents and usually is written up specifically for each investor's situation. This does not mean that the agreements are all drastically different, and in fact, they tend to share four common traits. The names of the investor and the entrepreneurs are always featured in the document. Another important aspect of these documents is listing how many shares will be provided for what price. The most important aspect, legally, for any subscription is listing warranties and expectations of both parties.