Founders' agreement: what to lock down before your UK startup ships

A founders' agreement is the first contract your company signs with itself. Three documents do the actual work in a UK startup: the articles of association filed at Companies House, a private shareholders' agreement between the founders, and the share-issuance paperwork that allocates the initial equity. Skip them in month one and everything still feels fine; skip them in month twelve and the cap table is a renegotiation instead of a record.

The Companies Act 2006 gives you defaults, not answers. Model articles (Schedule 1, Companies (Model Articles) Regulations 2008) ship with every new private limited company, but they assume a friendly two-person business that does not raise outside capital. Real founders override those defaults from day one with bespoke articles plus a shareholders' agreement that no third party ever sees.

The five things that actually matter

Almost every founder dispute reduces to the same handful of questions. Answer them on paper and the rest of the document is plumbing.

• Equity split with the exact percentages and a one-paragraph rationale you can defend in two years (past contributions, future commitment, opportunity cost).
• Reverse vesting over four years with a one-year cliff, dated from incorporation rather than from signature. UK startups run this through a compulsory-transfer mechanism in the articles plus leaver provisions in the shareholders' agreement.
• Full IP assignment from each founder to the company, including pre-incorporation code, designs and brand. The Copyright, Designs and Patents Act 1988 s.11(2) only assigns work to an employer for things made by employees in the course of employment, which a pre-incorporation founder is not.
• Decision rights: which calls need 75 percent (special resolutions under CA 2006 s.283), which need a bare majority (ordinary resolutions under s.282), which the board makes alone, and which require unanimity in the shareholders' agreement (issuing new shares, taking on debt above a stated amount, removing a founder under s.168).
• Leaver mechanics: good leaver keeps vested shares at fair value; bad leaver sells everything (including vested) at par value, typically 0.0001 pence. Triggered through the share buy-back machinery in CA 2006 ss.690-708.

Vesting in a UK shell looks different from US TechCrunch lore

Founders read US blogs and assume direct vesting, where shares are issued on a schedule. UK companies almost never do that, because issuing shares involves a board resolution, a share-allotment filing at Companies House (form SH01 within a month under CA 2006 s.555), and stamp duty paperwork each time. The UK pattern is reverse vesting: all founder shares are issued up-front, and the company has a contractual right to buy them back at par if the founder leaves before the schedule completes. The schedule is four years with a one-year cliff, mirroring the US convention. The mechanism is the difference.

What happens if a co-founder leaves before the cliff?

If your articles and shareholders' agreement run a clean compulsory-transfer machinery, the company exercises its buy-back right (CA 2006 ss.690-708) at par value and the leaver walks with nothing. The buy-back must come from distributable profits or a fresh share issue, and the directors must file form SH03 within 28 days. If the documents are silent, the leaver keeps the full stake and you spend a year buying them out at a number you cannot afford. The pre-cliff period is the most common exit moment, design for it as the default, not the exception.

EMI vesting for everyone else, equity for the founders

Founders take equity directly. Everyone else who joins early gets options under HMRC's Enterprise Management Incentive scheme, the only meaningful tax break HMRC gives UK startups. EMI options vest on the same four-year schedule, are granted at the share's HMRC-agreed actual market value (AMV), and pay only 10 percent business asset disposal relief at exit instead of full income tax. Keep one EMI pool of around 10 to 15 percent of fully-diluted shares carved out before you raise, so the dilution shows up against the founder cap table rather than the next investor's stake.

Do I really need a solicitor for this, or can I copy a template?

A template gets you 70 percent of the way; an SRA-regulated startup solicitor charges 250 to 450 pounds an hour and finishes the bespoke articles plus shareholders' agreement in six to ten hours, so budget 2,500 to 5,000 pounds for the first version. That is cheaper than the same solicitor unpicking a broken cap table after a dispute, which starts at 15,000 pounds. SeedLegals, Capdesk and the British Business Bank publish unbranded templates that are a sensible starting point if your budget is genuinely zero, but you will rewrite them at your seed round either way.

What this document is not

A founders' agreement is not the articles of association you file at Companies House, and it does not replace the investment agreement that lands at your seed round. It is a bridge document for the period between incorporation and the first priced round, typically 12 to 24 months. Keep it under 15 pages. The day you sign a term sheet, the BVCA-style investment agreement supersedes most of it and the founders' agreement becomes a historical artefact.

Does the shareholders' agreement get filed at Companies House?

No. Only the articles of association, the directors' details and the confirmation statement (CS01) are public. The shareholders' agreement stays private, which is exactly why it can carry the candid clauses on vesting, leaver mechanics, drag-along, tag-along and decision rights without broadcasting your cap table strategy. Each founder keeps a signed counterpart, store one PDF in the data room, and that is the entire filing protocol.

The conversation that produces it

Block half a day, write the answers down, then ask a third party (a UK startup solicitor, an experienced operator, or a board adviser) to read the draft before you sign. The third party catches the assumption you all share but none of you have said out loud. Sign in the same room on the same day. A founders' agreement that drifts unsigned for a month is worse than no agreement at all, because it tells everyone in the room that the team does not finish what it starts.