Keeping It Simple at First, Then Getting It Right for Investors
When you incorporate a UK company, your initial share structure will shape almost every major decision that follows: who controls the business, how investors are protected, and what everyone walks away with on an exit. Start with something clean and straightforward. That is the right approach at incorporation. But as you raise investment, you will need to understand which share classes investors expect and why.
This guide is written for founders building a startup that expects to raise money from external investors through funding rounds in which the company issues shares to – think of the kind of business that pitches for funding on Dragons’ Den, beginning with seed rounds and perhaps a later Series A.
Start Simple: One Class of Ordinary Shares
For most founders, the right starting point is a single class of ordinary shares. Ordinary shares typically carry full voting rights, participate in dividends at the directors’ discretion, and rank equally on a winding up. Every shareholder holds identical rights. The structure is transparent, easy to administer, and entirely appropriate before you bring in outside investment.
Think of it this way: two founders hold ordinary shares in an 80/20 split. Both have one vote per share and a claim on any dividend the directors choose to declare in proportion to their holding. Nothing to untangle, nothing to explain to future investors.
You may want to read: How to Split Equity between Co-Founders
The temptation at this stage is to over-engineer things. Resist it. Introducing multiple share classes before you have investors to accommodate, or complex rights that serve no immediate purpose, adds cost and creates unnecessary confusion. Keep the cap table clean. You will have good reason to add complexity later.
One important structural point even at this early stage: if you are issuing a meaningful stake to a co-founder, a well-drafted shareholders’ agreement is worth having from the outset. It sets out how decisions are made – which is separate from the voting rights attached to your shares.
Many founders assume that owning shares with votes gives them day-to-day control of the company, but that is not how it works: share votes only count on the limited matters the Companies Act or the articles reserve to shareholders. The decision-making powers in a shareholders’ agreement are contractual rights to decide things – in effect a right to vote on a decision – but they are not attached to your shares. The shareholders agreement also sets out what happens if a co-founder leaves. That is not complexity for its own sake; it is basic protection.
As Investment Arrives: Why the Structure Needs to Evolve
Outside investors will generally want something more than a plain ordinary share. They are taking a financial risk on an early-stage business, and they will want the share structure to reflect that. What they want, in practical terms, is priority: the right to get their money back before founders and employees if things do not go to plan.
Under the Companies Act 2006, a company can create different classes of shares, provided the rights of each class are clearly set out in the articles of association. That flexibility is what allows you to accommodate investor requirements without rewriting your entire cap table.
The sections below cover the share types you are most likely to encounter as your startup raises funding.
Alphabet Shares: Probably not for you
You may have heard of alphabet shares – your accountant may even have suggested them. They are usually classes of ordinary shares labelled A, B, C and so on. The usual attraction is dividend flexibility: because each class can receive a different dividend, distributions can be tailored to individual shareholders rather than paying everyone the same amount per share. This means that alphabet shares are attractive if the contributions of individual shareholders need to be rewarded with higher dividends. This usually doesn’t match the business plan of a startup that is planning to grow quickly through funding rounds.
SEIS and EIS: Constraints You Cannot Ignore
If your startup is raising early-stage investment, the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) will directly affect how you structure your shares. Both schemes give investors generous tax relief in return for backing early-stage companies, making them central to how UK startups attract angel and early VC money.
This is one of the strongest reasons to keep your share structure simple. SEIS shares must be new ordinary shares and cannot carry preferential rights to dividends or assets on a winding up. As soon as you start introducing complexity around your share classes, you risk falling outside the schemes and losing reliefs that your earliest investors will be counting on. There is a narrow path through: you can create a preference share with a liquidation preference that applies on a sale or merger, but in a formal winding up those shares must rank equally with ordinary shares. That distinction is subtle but important, and it needs to be reflected precisely in your legal documents.
Both SEIS and EIS, which were originally due to expire in April 2025, have been extended until April 2035. That gives founders and investors a longer window to use these schemes as part of their fundraising strategy.
Liquidation preference
On an exit, such as a sale, or on a formal winding up of the company, classes of shares with a liquidation preference have a priority claim to the proceeds. This is called a liquidation preference, and it guarantees that investors are paid back their initial investment, and sometimes a multiple of it, before any money flows to ordinary shareholders.
Liquidation preferences come in two forms. A non-participating preference entitles the investor to receive back the amount paid ahead of ordinary shareholders only; any surplus then goes to ordinary shareholders. A participating preference entitles the investor to receive back the amount paid first, and then to share further in the remaining proceeds alongside ordinary shareholders on a pro-rata basis.
Getting the Documentation Right
Whatever share classes you issue, the structure is only as strong as the documents that underpin it. Your articles of association set out the rights of each class; your shareholders’ agreement governs how shareholders behave and how disputes are resolved. Both documents need to be aligned and professionally drafted.
Introducing a new share class after incorporation requires passing shareholder resolutions, amending your articles and filing the changes with Companies House. Altering rights that have already been granted also requires the consent of affected shareholders and careful legal process. Changes made informally, or left undocumented, create disputes precisely when you cannot afford them.
The Right Structure for Where You Are Now
The share classes and rights covered here are not all needed at once, and for a startup heading into seed investment rounds the watchword is simplicity. Start with a single class of ordinary shares. Have SEIS and EIS front of mind from the outset, because over-engineering your share classes can cost your earliest investors their tax reliefs. And when investors do require any other rights attached to their shares, make sure you understand the economic terms – particularly any liquidation preference – before you agree to them.
Each new class you introduce adds a layer of complexity. That complexity compounds as you raise further rounds. A clean, well-documented cap table will give you credibility with investors, protect founders from unnecessary dilution, and make a future exit considerably smoother.
If you are planning a first share issue, preparing for a funding round, or want to review what you already have in place, we can help. Book an introductory call with one of our commercial solicitors to discuss your situation.
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