Articles of Association, a Founders Agreement and a Shareholders Agreement can sound like three versions of the same thing, and many founders aren’t sure which one they actually need. The answer is that they’re not alternatives: each plays a different role, and together they form the legal foundations of a growing business. In this video, we explain what each document does and when you might need it. We cover why the standard model articles may stop being enough as you raise investment, why sensitive commercial arrangements are usually kept out of the Articles (which anyone can view at Companies House), and how private Founders and Shareholders Agreements set out everything from vesting and leaver terms to voting rights and investor protections. We also look at which document should come first, and how getting them working together can make your startup more attractive to investors.
A note on our presenter: the Mark Glenister presenting this video isn’t quite the real Mark Glenister. He’s an AI-generated version of Mark: same face, same voice but never needs a coffee break. The real Mark (and the rest of the JPP Law team) put together the legal content, so you’re in good hands, whether they’re human or digital.
No Sound? Here’s the transcript…..
Articles of Association, Founders Agreement or Shareholders Agreement? Which Does Your Startup Need?
If you’re starting a business, you’ve probably come across three different legal documents.
They sound similar.
They’re often confused.
And many founders wonder which one they actually need.
The answer is that they all serve different purposes.
For an ambitious startup, they’re not alternatives. They work together to create the legal foundations your business needs as it grows.
In this video, we’ll look at the role each document plays and when you might need it. If you’d like to explore Founders Agreements or Shareholders Agreements in more detail, we’ve also created dedicated videos covering each of those topics.
Let’s start with the Articles of Association.
Every limited company has them.
They’re the company’s constitutional document and set out the basic rules for how the company is run.
They cover things like how directors are appointed, how decisions are made, how shares can be issued and transferred, and how shareholder meetings are conducted.
Many startups simply adopt the standard model articles when they incorporate.
That’s often perfectly adequate in the early days.
However, as the business grows, raises investment or introduces different classes of shares, those standard articles may no longer provide the protection or flexibility the business needs.
One important point to remember is that the Articles of Association are a public document.
Anyone can obtain a copy from Companies House.
For that reason, many founders prefer not to include detailed commercial arrangements or sensitive agreements within the Articles themselves.
Instead, those matters are often dealt with in private agreements between the founders or shareholders.
That brings us to the Founders Agreement.
A Founders Agreement is usually one of the first legal documents an ambitious startup should consider putting in place.
Unlike the Articles of Association, it’s a private agreement between the founders.
It governs the relationship between them and sets out how they’ll work together as they build the business.
A Founders Agreement can cover each founder’s roles and responsibilities, how decisions will be made, how equity has been divided, ownership of intellectual property, vesting arrangements and what happens if a founder decides to leave the business.
It’s really about making sure everyone starts with the same expectations before problems arise.
Because it’s a private document, it allows founders to agree detailed commercial arrangements without making those arrangements publicly available.
A Founders Agreements is often put in place at the same time as the Shareholders Agreement, although the Founders Agreement is sometimes the first step. All companies with more than one shareholder should have a Shareholders Agreement .
Like a Founders Agreement, a Shareholders Agreement is a private document.
But instead of focusing only on the founders, it governs the relationship between all the shareholders who sign it and the company.
That could include founders, investors, employee shareholders and anybody who has invested in the company.
A Shareholders Agreement will often deal with matters such as voting rights, transferring shares, investor protections, reserved matters, restrictive covenants, which are non-compete obligations, and exit arrangements.
It provides a framework for managing the company’s ownership as it becomes more established and brings new shareholders on board.
Because both Founders Agreements and Shareholders Agreements are private documents, they often contain much greater detail than the Articles of Association.
They usually include provisions stating that, as between the parties to the agreement, the terms of the agreement will take precedence if there is ever any inconsistency with the Articles of Association. They often also refer to the company’s business plan.
This gives founders and shareholders greater flexibility and means that detailed commercial arrangements can often be updated without having to amend the company’s public constitutional document every time the business evolves.
So, which document should come first?
Every company has Articles of Association because they’re required when the company is incorporated, so the Articles are always first. They function as a kind of statutory contract between all shareholders and the company.
Ideally, the Shareholders Agreement would come next. However, it often makes sense to put in place a Founders Agreement if the founding team have started to work on the business before incorporation of the company or to document the vesting and good and bad leaver terms separately from the Shareholders Agreement. The Shareholders Agreement and any Founders Agreement should be put in place as early as possible to document the relationship between the founders and avoid misunderstandings later.
As the company grows, raises investment or introduces additional shareholders, the Shareholders Agreement provides the framework for managing the ownership of the business. It may refer to a Founders Agreement in relation to arrangements that apply only between the founders.
The important thing to remember is that these documents aren’t alternatives.
They complement one another.
The Articles of Association set out how the company is governed and functions as a kind of rule book.
The Founders Agreement sets out how the founders hold their shares, how the shares vest and how they work together.
Getting these legal foundations right from the beginning can help avoid disputes, protect your ownership structure and make your business far more attractive to future investors.
If you’re building a startup with ambitious growth plans, taking advice early can ensure these documents work together and support your long-term objectives.
The team at JPP Law regularly advises startups and scale-ups on Shareholders Agreements, Founders Agreements and Articles of Association, helping founders build businesses on strong legal foundations from day one.
If you’re starting a new venture, it’s worth getting legal advice early.
This is why at JPP Law, we offer an initial complimentary consultation. We can guide you through the legal decisions you need to make, and provide a fixed fee quote for any legal documents you may need.
On our website you will find an online booking system where you can arrange that complimentary legal consultation, and you will find a link to our website in the comments below.
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