FounderCatalyst

Before allocating equity, it's crucial to define who is receiving the equity.

These may include:

Founder (statutory director)
Co-founder (non-statutory director)
Advisor (or external contractor)
UK-based employee
Foreign employee
Investor

We will deep dive into allocating equity to co-founders and advisors, but the graphic below provides an overview of how equity is typically awarded to different stakeholders.

This article covers the following—jump to the needed section:

UK Employees
Foreign Employees
Investors (UK and Foreign)
Co-Founders
Timing of Share Issuance
- Scenario 1: Adding a Co-Founder Before a Funding Round
- Scenario 2: Co-Founder as Part of a Funding Round
Advisors
Example Scenarios
- Scenarios for Investors
- Scenarios for Advisors

UK employees

If you want to incentivise UK employees the best method is through an EMI option scheme which we offer here. This is the most tax efficient method as your employees pay no tax when the option is granted and no tax when the options are exercised even if the shares have increased significantly in value since the option was granted. They only pay tax when they sell the shares. This Capital Gains Tax (CGT) is on the gain and the rate can be reduced by Business Asset Disposal Relief (BADR) if shares are held for 2 years or more. This reduces CGT, currently 24%, to 10%. The BADR rate will rise to 14% from 6 April 2025, followed by a further increase to 18% from 6 April 2026.

Foreign employees

If you want to incentivise foreign employees the best method is through an unapproved option scheme which we offer here. EMI is not eligible as your employees do not have a UK tax residency and may not pay UK taxes through the employer’s payroll (Pay As You Earn [PAYE] employees). With unapproved options there is no tax when the option is granted but tax is payable immediately when exercised as the employee is deemed to have received taxable earnings even though they have not received any cash (from a sale). This is deemed a Benefit In Kind (BIK) and income tax is payable at the marginal income tax rate. Similar to EMI, CGT is payable on the gain but not at a reduced rate - no BADR relief.

Investors (UK and foreign)

Getting shares into investors hands is very straightforward. You do this via a funding round. See our guide

Co-Founders

In startups, ‘founders’ are typically statutory directors and on the FounderCatalyst platform, a “Founder” is required to be a statutory director (more on platform roles here). This means that while you might have three founders in title, only two may officially be directors on Companies House. The third founder should be listed as a “Shareholder” on the platform.

To ensure proper legal protections for all involved, the non-director founder should:

Sign an IP assignment (the same IP assignment directors sign)
Sign an employment or advisor contract (both can be found in our Free Stuff)

Issuing Shares to Co-Founders

Startups often incorporate with multiple founders who receive subscriber shares; for example, two co-founders each owning 50% of the business. As the business grows, the founder(s) may wish to bring on another co-founder, such as a CTO. However, allocating shares to a new co-founder without legal safeguards presents a risk to existing shareholders.

Imagine this scenario: the founders collaborate with a CTO on a contractor basis for six months, build trust, agree to bring them on full-time, and decide on a 10% shareholding. The shares are issued, but two months later, the CTO leaves after a disagreement. In such a case, the business has no mechanism to reclaim the shares.

To mitigate this risk, founders have several methods to allocate equity.

Methods of Allocating Equity

1. Issue Options

A share option gives the recipient the right, but not the obligation, to purchase company shares at a pre-set price (known as the "exercise" or "strike” price) after a certain period and/or when specific conditions are met. The options only convert to equity (shares) when these milestones or conditions have been fulfilled, as agreed in the option agreement.

For a co-founder, an EMI option scheme may be suitable, as your co-founder should qualify as a director or PAYE employee (see more information on EMI options here).

However, it is unusual to grant options to co-founders since they generally expect to be treated as equal peers to the other co-founders. Additionally, option schemes come with extra costs, making them an expensive method of awarding equity. You can find more details about option schemes here: FounderCatalyst Share Options.

2. Issue Shares

A key decision is whether the co-founder will purchase their shares or receive them for free. If they buy the shares, it can inject some working capital into the business. Alternatively, they could purchase the shares at nominal value which wouldn’t necessarily inject much capital for the business but could make the co-founders shares eligible for SEIS meaning they could pay no capital gains tax on an exit. This would require the co-founder to own less than 30% of the company. More on SEIS below.

You should avoid issuing shares after a funding round, as this will dilute existing investors and shareholders. So, if you want your co-founder to receive X% after year 1, X% after year 2, and so on, you need to be very careful. The three options below (2.1, 2.2, 2.3) address this issue in different ways.

2.1. Standard reverse vesting

This is the most straightforward method. The co-founder gets all the shares upfront and if they leave they are subject to the ‘standard’ leavers provisions in the FounderCatalyst Articles of Association.

Reverse vesting is an obligation on founders and employee shareholders to either resell a part or all of their shares to the other shareholders in the event of them leaving the company, and/or to convert them into worthless ‘deferred’ shares (which addresses any tax issues). More on reverse vesting and leavers provisions here.

2.2. Customised reverse vesting

If the standard vesting provisions do not suit your needs, you can create a specific, customised vesting schedule for the co-founder.

A lawyer will be required to draft the customised vesting schedule, which will be included in the Shareholders’ Agreement and override the vesting provisions in the Articles of Association.

You will need to raise a support ticket for us to be able to make these changes.

2.3. Create an unallocated option pool

Another approach is to create an unallocated option pool to account for the future shareholding percentage. For example, if you agree that the co-founder will receive 2% now and 2% annually for the next four years, you can create an unallocated option pool for the full 10% to reflect their future shareholding.

When they reach a milestone (such as a year-end), you can reduce the option pool and allocate the shares. Note that this does not mean issuing options from the pool—it simply ensures that the cap table calculations (dilution) work pre-funding round. You will also need to disclose this arrangement to investors (who otherwise won’t know what the option pool is allocated for). More on disclosures can be found here.

One significant challenge with this approach is tax implications. If future shares (e.g. those issued in year four) are not issued at their unrestricted market value, your co-founder will need to pay income tax and the company NICs on the difference between what was paid and the UMV. For instance, if the company is valued at £4m now and £40m in four years, the co-founder will need to pay a substantial amount for those shares; otherwise, they will face a heavy tax charge. Ultimately, they should seek independent tax advice.

Further considerations

Share classes: You should give your co-founder ordinary shares. Ordinary shares are the only default share class in existence. If you wish to create a new share class in your paperwork, you can do so at the bottom of this page

In most cases different share classes is overcomplicating your structure - see here

SEIS shares: If eligible (e.g., with less than 30% shareholding), a co-founder will likely prefer SEIS-compatible shares. These shares are exempt from Capital Gains Tax (CGT) after three years, potentially resulting in significant savings—possibly millions—following a successful business exit. As a result, it is advantageous for the founder to purchase the shares rather than simply being issued them and the purchase can be made at a large discount.

Timing of Share Issuance

The timing of issuing shares to a co-founder is extremely important. Below we’ve split out two scenarios:

Scenario 1: Co-founder before a funding round

Firstly, you’ll need a board meeting and the Board Minutes to document that the board approves the issuing of new shares. You also need a Shareholders Resolution where existing shareholders authorise the company to issue new shares. It will generally need to be signed by at least 75% (by number of shares held) of voting shareholders. These are required any time you want to issue shares.

The next step is to download the IP Assignment, Founder Service Agreement, and Articles from the platform and get the founder to sign these. These become accessible as soon as the funding round service is paid for, even if the funding round hasn’t yet closed.

If the founder was to leave, the business is protected by the leavers provisions in the articles. You can see more on reverse vesting provisions here.

The IP Assignment and Founder Service Agreement are important because the articles do not provide full protection such as restrictive covenants which are detailed in the Shareholder Agreement that the co-founder has not signed.

Note: If you want your co-founder to have SEIS shares they need to pay something. You could apply a 99.9% or whatever discount that means they are paying at least nominal value.

See the process to follow below;

Scenario 2: Co-founder as part of funding round

As above, you will need a board meeting (minutes) and shareholder resolution.

In this scenario, timing is extremely important. You don’t want to issue shares after a funding round as it will dilute your new investors – not a good start! This means you will need to issue the shares before the funding round, but as we’ve highlighted, there are risks in doing that…so how do you do it?

You add the co-founder to the platform in the People section and add them to the cap table - this ensures they will be diluted and the cap table maths will be correct. You then add your investors to the funding round and close the round. As part of the process, the platform will require the founders to sign the relevant documentation (IP assignment, Founder Service Agreement, Articles of Association, Subscription & Shareholder Agreement). This means the existing shareholders are protected by the leaver provisions in the articles and provisions in the shareholders agreement.

You then file the SH01, backdated to show that the shares were allotted the day before the funding round closed. This approach ensures that, in the unfortunate event the co-founder does not sign the documents, they do not yet own the shares since the SH01 has not been filed.

Note: If you want your co-founder to have SEIS shares they need to pay something. You could apply a 99.9% or whatever discount that means they are paying at least nominal value.

Advisors

Many businesses bring on advisors who typically work part-time, often just 1-2 days per week. While the process of granting shares to advisors is similar to that of co-founders, advisors are not classified as “Founders” on the platform. This distinction means they do not sign key agreements such as the IP Assignment or Founder Service Agreement, leaving gaps in confidentiality, IP provisions, and other protections (more on addressing this later).

When involving advisors, it’s important to allocate their shares before a funding round to avoid diluting investors. There are several ways to structure this allocation, outlined below.

1. Unapproved options

An unapproved option scheme allows you to tie share allocation to specific milestones, such as time-based or performance-based achievements. For example:

"For every month you work with us, you earn 0.1% of a share."
"If you bring in a specific client, we will release X shares."

You can read more about unapproved options here.

Important: Are they a consultant or just providing services under a supplier agreement? It’s very important that it’s clear they are a consultant, so set up an advisor agreement / consultancy agreement between you and the consultant so it’s clear. This means when the options convert to shares you are protected by the leavers provision in the articles.

Shareholder protection: Options only convert to shares once milestones are achieved.

2. Issuing Shares to Advisors

Shares can be issued directly to advisors. This approach might be appropriate if the advisor has already completed the work required, and you’re not concerned with vesting or incentivising them through SEIS shares to reduce their Capital Gains Tax (CGT).

Shareholder protection: Reverse Vesting (via Articles of Association). Advisors providing "consultancy services" are typically covered under the company’s Articles of Association (“An ‘employee’ is broadly defined as; “an individual (excluding any Investor) who is a director of, employed by or who provides consultancy services to the Company or any other member of the Group”.)

If the advisor leaves they are subject to the reverse vesting provision in the articles - see here

The potential issue is this applies a one-size-fits-all approach to vesting, which may not align with the founders’ preferences for advisors. Additionally, the articles don’t address confidentiality, intellectual property, data protection or other considerations in a Shareholders agreement.

Therefore, founders can create a separate advisor agreement with a tailored vesting schedule that supersedes the Articles. It can also cover provisions for confidentiality, data protection, intellectual property, and other protections. You can download our advisor agreement here

Platform process depending on fundraising stage

Pre-funding round:

As part of funding round:

Post funding round:

3. Selling Shares to Advisors

Advisors can purchase shares, either at nominal value or a higher price. This approach ensures SEIS qualification, provided the advisor meets the criteria, such as holding less than 30%. SEIS-compatible shares are exempt from Capital Gains Tax (CGT) after three years, potentially saving advisors significant amounts during a business exit.

Shareholder protection: See above (same as “Issue all shares”)

4. Issuing Shares as They Are Earned

An alternative approach is to issue shares only after they are earned. In this case, the Advisors sign an advisor agreement, and shares are issued incrementally upon meeting agreed milestones.

Shareholder protection: Only issued shares once a milestone has been met.

Example scenarios

Scenarios for Investors

Question:

I want to issue an investor X% equity in return for X shares now, but then also another c.5% that vests over the next 4 years, with a 1 year cliff.

Answer:

You can't allocate vesting shares during a funding round. You can do this in a couple ways:

Using an EMI or unapproved option scheme to allocate these shares over time - you can read more here.
Use an advisor agreement to either offer vesting or reverse vesting

Scenarios for Advisors

Question 1:

We have an advisor agreement in place with an individual which provides for them receiving shares against a set of performance metrics. They have met some of those metrics so are due some shares. Please could you lay out the process I should follow to allocate and issue them the shares they are due?

Answer 1:

You need to do a few things:

Seek board and shareholder approval to allot the shares
File an SH01 to acknowledge the allotment of shares
Get the investor to sign an adherence agreement, to adhere to the relevant investment paperwork. The attached template is not for purpose but gives you an indication of the purpose of the document.

Question 2:

Can I offer a NED 2% equity with a 1 year cliff as part of the funding round?

Answer 2:

Your investors will want that 2% allocated before you do the funding round otherwise his shares will dilute everyone else. So, get him to sign the advisor agreement, then you file an SH01 to formalise the allotment of shares with companies house.

Question 3:

I have an advisor that I will issue shares to - will I be covered by the reverse vesting?

Answer 3:

Are they a consultant or just providing services under a supplier agreement? It’s very important that it’s clear they are a consultant, so set up a consultancy agreement between you and the advisor so it’s clear. Doesn’t need a lawyer to create it - it can be a one pager agreement.

Question 4:

How do I give my advisor / investor sweat equity and also take investment monies?

Answer 4:

Add ‘shareholder’ to the platform and pre-funding round cap table
File an SH01 for the shares already earnt (Sweat equity)
Add existing shareholder to the funding round
Close round

Note: in this scenario only the shares paid for in cash would be eligible for SEIS/EIS. Therefore, you could get the investor to pay a nominal amount for the shares already earnt pre-funding round so that they are also SEIS/EIS shares.

Knowledge Base: Safely issuing shares to co-founders & advisors