Subscription Agreements: Understanding Minimum and Maximum Offering Amounts

When raising capital, companies often face a critical decision: should the offering include a minimum amount, a maximum amount, or both? The choice, along with determining the specific amounts, needs careful consideration as it greatly affects the fundraising process and investor confidence.

Minimum Offering Amount

A minimum offering amount in a subscription agreement requires the company to reach a specific threshold before accessing investor funds. This structure provides several strategic advantages:

Investor Confidence: By setting a minimum threshold, companies assure initial investors that their investment will not be utilized by the company until enough capital is secured to effectively execute the company’s business plan. This reassurance can be beneficial for attracting hesitant or early-stage investors.
Strategic Momentum: The minimum offering amount serves as an incentive for investors to commit early. Knowing that their investment is pivotal in reaching the threshold can encourage larger and faster commitments.

However, there are also notable risks associated with minimum offering amounts:

Risk of Having to Return Investments: Should the company fail to meet the minimum threshold, the company is generally expected to return the funds to investors, sometimes with interest. This can lead to a loss of time and resources spent on the fundraising efforts without any tangible return.
Determining the Right Threshold: Setting the right minimum amount is crucial. It must be sufficient to implement the business plan but also realistic enough to attract investors. Misjudging this balance can stall or derail fundraising efforts.

Maximum Offering Amount

A maximum offering amount in a subscription agreement caps the total funds a company can raise. This approach can be beneficial in several ways:

Controlled Dilution: By setting a maximum, companies can manage the dilution of ownership of their company, maintaining greater control over their equity structure.
Investor Appeal: A cap can create a sense of urgency among potential investors, encouraging them to commit quickly before the opportunity closes.

Nonetheless, setting a maximum offering amount can also present the following challenges:

Limiting Capital Availability: A maximum offering might restrict the amount of capital a company can access, potentially hindering future growth opportunities or the ability to scale effectively.
Market Perception: Investors might perceive a low maximum as a lack of ambition or confidence in the company’s prospects, potentially deterring investment.

Conclusion

Determining whether to include minimum and maximum offering amounts in a subscription agreement is a critical decision that requires careful consideration of the company’s strategic goals and investor expectations. It is essential to evaluate the purpose of the offering and the required investment. By considering these factors and weighing the pros and cons mentioned above, you can make a more informed decision about whether setting a minimum and/or maximum offering amount is right for your company’s offering.

Let us help.

If you are considering a fundraising round and need guidance on structuring your next offering, our team is here to help. We can provide personalized advice to ensure your offering aligns with your company’s objectives and investor expectations.