When you start a new business, the excitement of developing your idea and building a team often takes centre stage. However, you should not overlook the legal foundations that support your growth.
This road map outlines the key legal steps you should take as a founder planning to scale your business and attract investment. Read on to learn more about the main issues you’ll need to consider as you move from an initial idea to a structured and investor-ready company.
Company Formation
Forming a company in England and Wales is a straightforward process, and many founders handle it themselves online through Companies House to keep costs down. Incorporation gives you limited liability protection, which separates your personal finances from those of the company. This is often the first formal step towards building a business structure that investors will recognise and trust.
When you incorporate, you will also need to think carefully about your company’s governing documents, how ownership is recorded, and how important decisions will be taken. Below, we discuss these points in a bit more detail:
Memorandum and Articles of Association
Every company must have a Memorandum of Association and Articles of Association. The Memorandum records the initial shareholders and confirms their decision to form the company. The Articles set out how the company is managed, including shareholder rights and director responsibilities.
Most startups adopt the Model Articles, which are suitable for businesses with a single share class. If your company plans to issue more than one class of share, or if investors require additional protections, you may need to consider changes, which are often made after incorporation with the Model Articles.
Articles of Association vs Shareholders’ Agreement
The Articles are public documents filed at Companies House. By contrast, a Shareholders Agreement is private and can cover more detailed matters such as what happens if a founder leaves, how shares can be transferred, or how disputes are resolved.
We generally advise startups not to make extensive amendments to their Articles, if any at all, at an early stage. Instead, you can rely on a Shareholders Agreement, including a clause that states it overrides the Articles if there is any conflict. This gives you some flexibility while keeping sensitive arrangements confidential.
Amending Articles of Association
There may come a time when you need to amend the Articles, particularly if you:
- Introduce more than one class of share; or
- Take on investors who require specific rights.
Amendments need shareholder approval and must be filed with Companies House. You should be prepared for this possibility as the company develops.
Share Ownership and Cap Table Creation
From the outset, you should agree on who owns what percentage of the company and then ensure that the shares are issued to the shareholders as agreed. Often, one founder incorporates the company, and shares are issued to other shareholders after incorporation. The shareholdings in the company are recorded in the company’s register of members and also filed at Companies House. Founders usually also use a cap table, which sets out all shareholders, the type of shares they hold, and their percentage ownership. Your cap table is not only important for avoiding disputes between founders but also provides clarity when planning issuing new shares to investors or options to team members. It helps potential investors quickly see how the company is structured and what percentage of the post funding round capital of the Company they will own.
You can read about this in more detail in our article: How to Split Equity in a Startup
Vesting, Leaver Provisions and Sweat Equity
Startups also need to manage how ownership is affected when circumstances change. Here are some situations you will need to think about:
- Vesting: You may want shares to vest gradually over a set period, rather than being allocated in full at the outset. This means that if a founder leaves early, any unvested shares can be returned to the company or reallocated to those still involved. Vesting helps protect the business and make sure that long-term commitment is rewarded.
You may want to read Understanding the Vesting Agreement and Reverse Vesting
- Good leaver and bad leaver provisions: These rules set out what happens to a founder’s shares when they leave the company. A good leaver, such as someone retiring or leaving due to illness, might keep their shares or be able to sell them at fair market value. A bad leaver, such as someone dismissed for misconduct or breaching the Shareholders’ Agreement, may have to give up their shares for a nominal payment.
- Sweat equity: If a founder provides their time, skills, or expertise instead of investing cash, you should agree on how this contribution translates into ownership. This is known as sweat equity. You should record these arrangements clearly, as they can affect both the shareholding structure and future investment discussions. It is important to consider the tax consequences of sweat equity agreements.
All these arrangements give stability to the ownership structure and reassurance to investors.
You can explore this further in our article Sweat Equity in Startups
Share Transfer Rules and Investor Protections
Investors usually expect rules that cover how shares can be transferred or sold. These often include:
- Rights of first refusal: These provisions give existing shareholders the first chance to buy any shares that another shareholder wants to sell. If the current shareholders choose not to buy, only then can the shares be offered to someone outside the company. This helps maintain control of ownership within the group and prevents unwanted third parties from becoming shareholders.
- Drag-along rights: These allow majority shareholders or main investors to require minority shareholders to sell their shares if the majority agrees to a sale of the company. Without drag-along rights, a minority shareholder could block a deal by refusing to sell. Including this clause will make it much easier to complete a sale further down the road. It is important because most purchasers are only interested in buying all the shares in a company, not just a majority of them.
- Tag-along rights: These give minority shareholders the option to sell their shares on the same terms if the majority decides to sell. This protects minority shareholders from being left behind with a new majority owner they did not choose, and also makes sure that they benefit equally from an exit.
You may want to read: Funding Rounds and Drag-Along and Tag-Along Rights: What They Mean in Practice
These rights balance the interests of different shareholders and make the company more attractive to outside investors.
Who Gets to Make Key Decisions?
It is important to set out clearly how decisions will be made within the company. Some matters, such as day-to-day management, can usually be handled by the directors at board level. Others, such as issuing new shares, changing the Articles of Association, or approving the sale of the business, normally require shareholder approval.
You should also decide whether certain major decisions need a higher level of consent, such as a unanimous vote or a special majority. This can cover issues like taking on debt, hiring or removing senior management, or entering into significant contracts.
Other Legal Considerations
In addition to company structure and shareholding arrangements, there are two other key issues you should resolve early:
- Intellectual property (IP) ownership: If any founder has created IP before incorporation (such as software, designs, or brand assets), you should formally assign this to the company. Investors expect the company to own its IP, not the individuals, and failing to deal with this can block future funding or a sale.
- Data protection compliance: From the beginning, your company must comply with the UK GDPR and the Data Protection Act 2018. This includes adopting processes that protect personal data and demonstrate accountability. You should always aim to build compliance into your business model from the get-go to make it easier to scale later.
More information is available in our article: Data Protection by Design in Startups.
Legal Documentation to Consider from the Outset
When you set up a company, certain documents give structure to your business and define how it operates. They provide clarity for founders, employees, customers, and investors. Here are the main documents to think about from the start:
Shareholders Agreement
A Shareholders Agreement is a private contract between the shareholders that sets out how the company is managed and how decisions are made. It usually covers voting rights, the issue and transfer of shares, dividend policies, leaver provisions, and dispute resolution processes.
This agreement is particularly useful for startups because it can include detailed arrangements that are not suitable for the Articles of Association, which are public documents filed at Companies House. Investors also expect to see a Shareholders Agreement in place as part of a company’s governance. It is better for founders to have a Shareholders Agreement that they are happy with in place before seeking outside investment.
You may want to read: What is a Shareholders Agreement?
Terms and Conditions (T&Cs)
Your Terms and Conditions (T&Cs) govern the relationship between your business and its customers. They typically cover payment terms, delivery timelines, cancellation rights, liability limits, and procedures for handling complaints or disputes.
The goal of your T&Cs is to give customers a clear understanding of their rights and obligations while protecting you in commercial transactions. As your products or services naturally change or expand over time, you should review and update your T&Cs to keep them relevant. You should integrate the T&Cs with your procedures for making contracts with your clients and customers as there is no point in having great T&Cs if they do not become part of your contracts.
Non-Disclosure Agreements (NDAs)
A Non-Disclosure Agreement (NDA) protects confidential information when you share it with outside parties such as investors, contractors, or suppliers. An NDA sets clear rules about how the information can be used and prohibits disclosure without permission.
NDAs are especially important when your business relies on proprietary technology, research, or sensitive commercial information. They allow you to have open discussions with third parties while keeping control over your data and ideas.
You may want to read: Does a non-disclosure agreement offer any protection?
Building a Workforce
As your company grows, you will need to think carefully about how you hire, contract, and reward the people who work for you. These agreements will help you manage relationships with employees, contractors, and early team members who may receive shares.
Employment Contracts and Policies
Every employee in England and Wales is entitled to a written statement of employment particulars, and in practice, most companies issue a full employment contract. This should set out terms such as job title, duties, pay, hours of work, holiday entitlement, and notice periods. It can also include restrictions on competing with the business or soliciting clients after leaving.
Alongside contracts, you should prepare core employment policies. These often cover disciplinary and grievance procedures, health and safety, equality and diversity, and data protection. This makes expectations clear for both the business and employees from the beginning.
Contractor Agreements
Many startups rely on independent contractors or consultants, especially in the early stages. A contractor agreement sets out the scope of work, payment terms, deadlines, and who owns any intellectual property created during the engagement.
It is important to distinguish clearly between contractors and employees, as employment law gives employees additional rights such as redundancy pay and unfair dismissal protection. If you don’t do this properly, you could expose your company to disputes and liabilities.
Share Option Schemes
A share option scheme allows employees and sometimes contractors to acquire shares in the company at a later date, usually at a fixed price. For startups that cannot always compete on salary, offering options is a way to attract and retain talent.
There are different types of schemes available in the UK, including the government-backed Enterprise Management Incentive (EMI) scheme, which offers tax advantages for both the company and the employee. Designing a scheme involves deciding who will be eligible, how many shares will be set aside, and when options can be exercised.
You may want to read: What are EMI share schemes and how do they work?
Funding and Investment
Securing finance is a major step for most startups. You will need to understand the different funding options available, how each stage of investment works, and what investors will expect in return for their money.
Types of Funding
Startups in England and Wales can raise money in several ways:
- Private investment: This often comes from friends and family in the earliest stages or from professional investors later on.
- Angel investors: These are individuals who invest their own money, usually in exchange for equity and sometimes with the added benefit of mentoring or introductions to their networks.
- Crowdfunding: This involves raising money from a large number of people, either by offering equity through online platforms or by taking advance payments for products or services.
You may want to read: UK Startup Funding Options and the Associated Legal Considerations
Each method involves giving up some control or committing to certain obligations. The route you choose will largely depend on your company’s stage of development and your long-term growth plans.
Managing shareholder dilution is also a key part of this process. Each time you issue new shares to investors, the percentage owned by existing shareholders decreases. Your cap table should help you see how different funding rounds affect ownership.
You may want to read: Managing Equity Investment and Shareholder Dilution
The Stages of Funding
Funding usually follows a sequence of stages, although not every startup will go through all of them:
- Seed funding: The first external capital used to test the concept and begin trading.
- Series A: A larger round aimed at scaling the business model and attracting institutional investors.
- Series B and beyond: Later rounds used to expand further, enter new markets, or prepare for exit.
Each stage typically involves raising a larger amount of capital and meeting stricter investor requirements.
You may want to read: The Four Stages of Funding Rounds
Funding Round Overview
When you run a funding round, you will need to agree with investors how much money is being raised, what percentage of equity they will receive, and the rights that attach to those shares. Funding rounds can be complex and usually involve legal, financial, and tax considerations. You’ll need to make sure your investment agreements, Articles of Association, and Shareholders Agreement reflect the terms of the round and any new rights granted to investors.
Investor Due Diligence
Before investing, most investors will carry out due diligence on your company. This involves reviewing your legal documents, financial records, intellectual property, and compliance with regulations such as data protection and employment law.
Due diligence helps investors confirm that the company is sound and that there are no hidden risks. For founders, being organised and having the right legal structures in place makes the process faster and can build investor confidence.
Managing Your Exit
At some point, you may want to sell your company or step back from day-to-day involvement. Planning for exit does not mean you are giving up early; it means you are thinking ahead about the options available when the time comes.
You may want to read: Legal Steps to Take when Building a Business to Sell
Preparation for Sale
If you are considering selling the company, preparation is key. Buyers will look closely at your legal documents, financial records, and intellectual property. Any gaps or irregularities can delay the process or reduce the valuation. Assigning intellectual property to the company, keeping your contracts up to date, and maintaining accurate accounts are all important for a smooth transaction.
You may want to read: How to Sell a Company
Exit Strategies and Options
There are several possible exit routes for founders:
- Trade sale: Selling the company to another business, often a competitor or a larger firm in the same sector.
- Management buy-out: Selling the company to your management team.
- Public listing (IPO): Offering shares to the public on a stock exchange, usually only suitable for larger, more established companies.
- Passing ownership: In some cases, founders may transfer ownership to family members or long-term employees.
The best option depends on the company’s size, growth prospects, and the goals of the founders and investors.
You may want to read: Five Common UK Business Exit Strategies and Their Pros and Cons
Need Legal Support for Your Startup?
At JPP Law, we work with founders at every stage of their journey. We help with setting up companies, drafting shareholder agreements, employment contracts, and NDAs, advising on funding rounds, and preparing businesses for sale.
If you are building a startup and want legal advice that is practical and straightforward, contact JPP Law today.
