UK Share Classes and Cap Table Structure: A Practical Guide for Founders

An Introduction to the Types of Shares in UK Startups

Setting up your company's equity structure can feel like navigating a minefield. The initial decisions you make about UK share classes will have long-term consequences for your control, your team's incentives, and your ability to raise capital. For many early-stage founders, the terminology alone is a barrier. A misunderstanding of preference shares vs ordinary shares or a failure to structure equity for crucial UK tax schemes can lead to painful dilution and damage investor relationships.

This guide provides a pragmatic walkthrough of the types of shares in UK startups, how they fit into your capitalisation table, and how to build a clean UK startup equity structure from day one. Before diving in, it helps to be familiar with your cap table.

Founder Shares UK: Your Starting Point with Ordinary Shares

When you first incorporate your company, you and your co-founders will almost certainly be issued ordinary shares. Think of these as the default starting block for your company's ownership. They represent the fundamental equity in the business and are the simplest form of startup share allocation.

What Rights Do Ordinary Shares Have?

The rights attached to ordinary shares are typically straightforward. As a holder, you receive voting rights, which give you a say in major company decisions, and a proportional claim on the company's value upon an exit. However, that claim comes last in the queue.

A key fact to remember is that ordinary shares typically grant one vote per share and a proportional share of proceeds after all other stakeholders (investors, lenders) are paid in an exit. This "last in line" position means that in a sale or liquidation, your payout only happens after investors with preference shares have received what they are contractually owed. For founders, this is your initial stake and your skin in the game, but its final value depends entirely on the terms you agree with future investors.

Investor Share Classes UK: Preference Shares vs Ordinary Shares

When you take on your first external investment, you will likely issue a new class of shares known as preference shares. These are designed to give investors downside protection and preferential rights over ordinary shareholders. The most important of these rights is the liquidation preference, which dictates the payout order in an exit scenario. Understanding the two main types is vital for any founder.

The Founder-Friendly Standard: 1x Non-Participating Preference

A '1x non-participating' liquidation preference is considered a founder-friendly standard. It allows an investor to choose between getting their investment amount back OR converting to ordinary shares to receive their pro-rata share of proceeds, but not both. This structure provides a fair arrangement that protects the investor's capital while allowing them to share in the upside if the company performs well. In a successful exit, they will almost always choose to convert and share in the proceeds.

The Investor-Friendly Term: 1x Participating Preference

In contrast, 'participating' preference shares allow an investor to receive their investment amount back AND also receive their pro-rata share of the remaining proceeds. This "double-dipping" can significantly erode the payout for founders and other ordinary shareholders. It is generally considered an investor-friendly term that you should negotiate carefully, as it has a major impact on your eventual return.

Let's consider a SaaS startup that took £500,000 for 20% of the company and exits for £5 million:

• Scenario A: 1x Non-Participating Preference. The investor can choose between getting their £500,000 back OR converting to their 20% ordinary shareholding, which is worth £1 million (20% of £5 million). They will logically choose the £1 million payout. The remaining £4 million is distributed among the ordinary shareholders (the founders).
• Scenario B: 1x Participating Preference. The investor first gets their £500,000 investment back. Then, they also get 20% of the remaining £4.5 million, which is £900,000. Their total return is £1.4 million. The remaining £3.6 million is left for the founders.

The distinction is crucial, reducing the founders' collective payout by £400,000 in this example. This is where the negotiation lies.

The UK Advantage: Structuring Shares for SEIS & EIS

The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) offer powerful tax incentives for UK investors, making them a fundamental part of early-stage funding. However, they add a UK-specific layer of complexity to your share structure. To qualify, investments must meet strict HMRC rules, which can directly conflict with standard investor demands.

The HMRC Compliance Hurdle

A critical rule is that to qualify for SEIS/EIS, shares issued must be 'new qualifying shares', defined as full-risk ordinary shares. You can find this detailed in the HMRC Technical Manual VCM12020. The guidance is clear that SEIS/EIS qualifying shares cannot have any preferential rights to the company's assets on winding up. A standard liquidation preference is considered a preferential right and would make an investment ineligible.

So, how do you give UK investors the security they want without voiding their tax relief? The solution is a well-established legal workaround. The common solution for SEIS/EIS compliance is to issue a new class of shares (e.g., 'A Ordinary Shares') that rank equally with founder shares on winding up, with investor protections defined in the Shareholders' Agreement instead of the share rights.

These 'A Ordinary Shares' are technically ordinary shares with no preferential payout rights, satisfying HMRC. The protections investors seek, like consent rights over an exit decision or major company spending, are then handled contractually in a separate legal document. This structure satisfies both parties: the investors get their valuable tax relief and their contractual protections, and the company secures vital funding. To implement this, you will need to amend your articles of association.

Maintaining Clarity: Your Cap Table Structure

A capitalisation table, or cap table, is the master ledger of who owns what in your company. At its simplest, it is a spreadsheet listing all shareholders, the number and types of shares they own (Ordinary, A Ordinary, etc.), and their resulting ownership percentage. While a spreadsheet is fine at the pre-seed stage, its limitations quickly become apparent as you grow.

From Spreadsheet to Software

As you issue options to employees and raise subsequent funding rounds, the complexity of your cap table grows exponentially. This is where your cap table becomes more than a historical ledger. It must become a critical tool for forecasting founder dilution. Failing to model the impact of a new investment round or an option pool increase can lead to surprise equity erosion, one of the most common pain points for founders.

The reality for most scaling startups is that by the Seed or Series A round, they migrate to dedicated cap table software like Capdesk, Ledgy, or Carta. These platforms help manage the complexities of option pools, vesting schedules, and different share classes, providing a clear and accurate picture of your cap table structure. Accurate maintenance is essential for investor due diligence, strategic planning, and avoiding costly mistakes.

Building a Scalable UK Startup Equity Structure

Navigating your UK startup equity structure requires careful planning, especially when balancing founder interests with investor expectations and regulatory requirements. The key is to understand the function of each share class. Start with simple ordinary shares for the founding team, but be prepared to create more sophisticated structures as you grow.

When a term sheet arrives, scrutinise the liquidation preference, as the difference between non-participating and participating rights has a material impact on your exit payout. For UK-based fundraising, understanding SEIS and EIS compliance is non-negotiable; plan for this structure early to avoid delays. Finally, treat your cap table as a dynamic forecasting tool, not just a static record. By managing these elements proactively, you can build a clean, scalable equity structure that supports your company’s long-term growth.

The cap table is your single source of truth.

Frequently Asked Questions

Q: What is the difference between authorised shares and issued shares?
A: Authorised share capital is the total number of shares a company is legally permitted to issue, as stated in its constitutional documents. Issued shares are the number of shares that have actually been allocated to shareholders. You will typically authorise more shares than you initially issue to have a reserve for future funding rounds and employee options.

Q: How do employee share options (ESOP) affect the cap table?
A: An employee share option pool is a percentage of company equity reserved for future hires. These options are not yet issued shares, but they are tracked on the cap table on a fully diluted basis. This means you calculate ownership percentages as if all options have been exercised, which is crucial for accurately modelling dilution.

Q: Can a UK company have multiple classes of preference shares?
A: Yes, it is common for startups to issue different classes of preference shares in subsequent funding rounds. For example, Series A investors might hold 'A Preference Shares' and Series B investors might hold 'B Preference Shares', each with its own specific rights, liquidation preferences, and terms negotiated at the time of investment.