Equity Investment Instruments. Should I raise investment via an ASA, CLN, or SAFE Note or sell ordinary equity shares?

Equity investment instruments are popular for startups and early-stage businesses looking to raise funds. There are several types of equity investment instruments, each with its own unique characteristics and benefits.

One type is the Advance Subscription Agreement (ASA). This allows a company to receive investment in advance without issuing any equity shares immediately. The actual shares are issued later, during a substantial investment round or after a specified longstop date. ASA investments do not have a set valuation at the time of investment, but a tentative valuation ceiling may be agreed upon for future conversion to equity. These investments cannot be repaid and are not considered debt instruments. ASA shares can be offered at a discount to incentivize early-stage investors.

Another option is the Convertible Loan Note (CLN). A CLN is a short-term loan that is converted into equity at a later date. It can be used to raise finance between capital investment rounds and may be suitable for undervalued companies with projected growth. CLNs can be secured or unsecured, depending on whether the loan is backed by business assets or tied to the business itself. Interest on CLNs may be low or nil and can be rolled up and converted into shares later. Unlike ASAs, CLNs do not qualify for tax relief in the UK.

SAFE Notes (Simple Agreement for Future Equity) offer flexibility and simplicity compared to other instruments. They allow investors to convert their investment into equity in the future without determining a specific share price at the time of investment. The conversion occurs when a pre-agreed trigger event, usually the next funding round, takes place. Like ASAs and CLNs, the valuation of the business is deferred until this trigger event occurs.

Finally, ordinary equity shares are the most common route for raising investment. Investors buy shares in the company, and the pre-investment valuation determines the share of the business they own. Setting an appropriate valuation is important to ensure both parties are satisfied with their ownership stakes.

In conclusion, understanding the characteristics and benefits of different equity investment instruments can help businesses choose the most suitable option for their fundraising needs.

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As well as accessing special resources like example investor decks and investor lists, you'll learn?how to find, approach, and engage with potential investors, create a compelling pitch, handle challenging questions, negotiate fair deals, and manage post-investment relationships. You'll also gain valuable insights on navigating special scenarios like raising funds during economic downturns.?