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Launching a startup in the UK is a thrilling adventure – and one of the most critical choices you’ll make early on is how to divide equity shares among your team. Whether you’re working with co-founders, seeking early investment, or building your founding team, making the right decisions around share in equity is essential for fairness, business growth, and future success.
In this guide, we’ll unpack everything you need to know about allocating equity in a UK startup – from understanding what equity really means, to practical steps for splitting shares, navigating vesting schedules, planning for investors, and getting your legal documents set up properly.
Getting these details right from day one isn’t just about avoiding disputes down the track – it’s about setting your business up to thrive as you grow, raise capital, and attract top talent.
Let’s dive into the essential guide on dividing equity shares in your new venture.
What Is Equity in a Startup?
Equity is at the heart of any startup – it represents a real ownership stake in the company. When we talk about equity, we’re talking about shares: units of ownership that each founder, team member or investor may hold.
In simple terms, your share in equity determines:
- How much of the company you own
- Your say in major company decisions (voting rights)
- Your right to a share in future profits or dividends
- What you stand to gain if the business is sold
In the UK, every limited company must have at least one issued share, but most startups issue a round number (such as 100 or 1,000) to make splitting ownership easy. For example, if you start with 100 shares, each one represents 1% of your company.
Like the sound of turning your idea into a business? Check out our Startup Checklist for getting your legal foundations right.
Why Is Early Equity Allocation So Important?
Equity is more than a number – it’s the foundation of trust, motivation, and protection between the people building your business. Deciding who owns what from the outset isn’t just a box-ticking exercise. It’s absolutely crucial for:
- Setting clear expectations among founders and early joiners
- Avoiding costly disputes or misunderstandings down the track
- Attracting investors and new hires who want clarity on what they’re joining
- Protecting the company if someone leaves unexpectedly
- Laying the groundwork for future fundraising and growth
We’ve seen more than a few promising startups nearly derailed by unclear or unfair splits. Sorting out share in equity early can save headaches (and hefty legal bills) later on.
How Are Founder Shares Typically Divided?
Most UK startups begin with co-founders holding all the initial shares, split according to how much each person is contributing.
Contributions that affect equity may include:
- Initial cash invested
- Business idea or intellectual property
- Time, effort, or sweat equity
- Skills, specialist expertise or industry contacts
- Previous experience launching a business or raising funds
The simplest example? One founder invests £100,000 and owns all 100 issued shares – each share is worth £1,000. If there are two founders and you agree on a 60/40 split (reflecting contribution or risk), one holds 60 shares and the other holds 40. Easy, right?
But as your business grows, it pays to get more sophisticated – especially to keep the company safe and leave room for new investors or employees. That’s where more advanced approaches and tools like vesting come in.
What Methods Should You Use to Split Equity?
There’s no “one size fits all” formula, but the methods below are common in the UK:
- Equal Split: Frequently used when all founders contribute similarly. But beware – if one person is working full-time and another part-time, is that really fair?
- Contribution-Based: You estimate each founder’s total input (money, skills, IP, time) and allocate shares proportionally.
- Vesting-Backed Split: Everyone’s promised a certain equity share, but they have to “earn it” over time – reducing risk if someone leaves early. We’ll explain more about vesting next.
- Dynamic Equity Tools: Special calculators or frameworks (such as the Slicing Pie model) adjust equity based on up-to-date contributions. These are less common in the UK, but worth considering for fast-moving tech teams.
Whatever method you use, honesty and openness are key. All founders should talk through their expectations and commitments before shares are issued.
What Are Vesting Schedules (and Why Should You Care)?
Vesting schedules are a vital legal tool to protect startups from founders who leave early with a big chunk of equity.
Here’s how vesting works in a nutshell:
- Founders “earn” their shares over a period of time (commonly 3–4 years) rather than owning them outright on day one.
- If a founder leaves early, unvested shares are typically returned to the company (or available to be re-issued to a replacement).
- This keeps everyone focused and incentivised to stick around and build real value.
For example, let’s say you agree to a four-year vesting term, with a one-year “cliff” (meaning no shares vest until you hit one year, then they vest monthly or quarterly). If a founder walks away after six months, they forfeit all unvested shares.
This can help avoid “dead equity” tied up with someone who’s no longer contributing. It’s also strongly recommended by investors and a standard term you’ll see in most venture capital deals.
What Should You Consider Before Finalising Your Equity Split?
Take the time to discuss (and document) the following with your co-founders before issuing any equity:
- Roles and responsibilities: What exactly will each founder do, and how critical is each role?
- Time commitment: Are you all “all in”, or is anyone contributing part-time while juggling other jobs?
- Risk taken: Who is giving up other opportunities, using personal savings, or going without salary?
- Intellectual property and ideas: Who originated the business idea, brand, or product designs? Who brings unique contacts, distribution, or skills?
- Future plans: Will more co-founders join? Do you want to set aside an employee share option pool for future hires?
- Investor requirements: Most investors will expect a significant slice of equity to be reserved for them in future rounds. Allocating too much to founders now can make fundraising harder later.
Remember: it’s often easier to adjust equity allocations early on than to fix problems after your business takes off.
How Does Equity Affect Investors and Future Funding?
It’s normal for founding teams to hold almost 100% of shares at the very beginning. But as new investors come on board, you’ll be issuing more shares in exchange for capital. This is known as equity dilution – and it’s vital to plan for it from day one.
- If founders own 100% initially but immediately give 40% to the first investor, subsequent investors may find little “room” left for them – and historical founders’ shares may no longer motivate ongoing effort.
- Most UK startups set aside an “option pool” of 10-20% for employees, and expect to run multiple funding rounds as the business grows.
- Legal documents such as a Share Subscription Agreement or a SAFE Note can be used during investment to formalise these arrangements and outline how new shares are issued.
Not sure which route is best for your startup? It’s wise to get tailored legal advice on the structure and documentation for investment rounds. Our capital raising tips are a great place to start.
What Type of Shares Should You Issue?
Not all shares are created equal. In the UK, different classes of shares can grant different rights – some may have voting rights, others may not; some may come with the right to dividends, others might have priority in the event of a sale.
Common share classes include:
- Ordinary Shares: The default class – typically carry voting rights and entitlement to dividends.
- Preference Shares: Often used for investors, these might have a right to receive first payouts in a sale or liquidation.
- Non-Voting Shares: Sometimes allocated to employees or silent partners, these do not give a right to vote on company matters.
- Employee Share Options: Rights to buy shares at a future date (at a set price), often used to attract and motivate team members.
Which share types you use will depend on your plans for fundraising, control, and company growth. For more on business structures and how they affect equity, see our guide to business structures.
What Legal Documents Should You Put in Place?
Equity allocation isn’t just about numbers – you need the right legal paperwork to make it official and to protect everyone’s interests over the long term.
Key legal documents include:
- Shareholders’ Agreement: Sets the rules about share ownership, decision-making, transferring shares, and what happens if someone leaves. This is critical for avoiding disputes and ensuring fairness amongst founders. Learn more about Shareholders’ Agreements here.
- Articles of Association: The company’s “rulebook”. Required by law, these outline how shares are handled, director powers, and much more.
- Vesting Agreements: Often built into the shareholders’ agreement or as separate deeds, these ensure that founders’ shares vest over time (not all at once).
- Cap Table: A spreadsheet (or software tool) keeping an up-to-date record of who owns what shares and when they were issued.
- Option Agreements: If you offer share options to employees, these spell out the terms and vesting rules.
Cutting corners on these documents can expose your business to risk and make it harder to secure funding later. We strongly recommend having all agreements professionally drafted or reviewed. Read why a lawyer’s review is so valuable.
What Common Mistakes Should You Avoid When Dividing Equity?
Dividing equity can feel tricky – but steering clear of these pitfalls will put your startup ahead of the pack:
- Delaying the conversation: Waiting too long to talk about equity can lead to resentment and legal disputes.
- Splitting on a handshake: Verbal promises aren’t enough – always put your equity arrangements in writing.
- Over-allocating equity: Giving away too much, too soon (especially to founders who might leave quickly) limits future flexibility.
- Ignoring dilution: Failing to understand how fundraising and new hires dilute ownership can leave founders with less control and less reward.
- Forgetting vesting: Not using vesting schedules means you risk “dead equity” and less incentive for team members to stick around.
If you avoid these traps and use equity as a tool to reward real contributions, attract talent, and foster collaboration, you’re on the path to a healthy and investable business.
How Do You Adjust Equity as Your Startup Grows?
Startups are dynamic – the equity landscape often changes as you:
- Bring on new founders or team members
- Raise external capital from investors (each round usually means new shares issued)
- Set up employee option pools for attracting top talent
- Re-negotiate contributions if someone’s role or input changes drastically
Every change in share allocation should be documented formally – with updates to your cap table and noticed to Companies House where required. For more on compliance, see our guide to ongoing requirements.
Key Takeaways: Equity Splitting in Your UK Startup
- Start the equity conversation early and document everything clearly in writing.
- Consider more than cash – reward contributions of time, skills, ideas, and risk.
- Use vesting schedules to protect your business from early exits and “dead equity”.
- Leave room in your equity allocation for future hires and fundraising rounds (plan for dilution).
- Issue the right types of shares and understand what rights each class carries.
- Always have a professionally drafted shareholders’ agreement and related legal documents in place.
- Regularly update your cap table and filings as things change.
- Get tailored legal advice – especially before handing out shares or raising investment!
Need Help Dividing Equity in Your Startup?
Getting your share in equity right is one of the most important foundations for your UK startup’s long-term success. Whether you need help drafting a shareholders’ agreement, advice on vesting, or guidance through your first funding round, we’re here to make the process clear and stress-free.
If you’d like specialist advice on allocating equity shares, or if you want your documents reviewed by expert UK startup lawyers, call us on 08081347754 or email [email protected] for a free, no-obligations chat. We’re ready to help you set up for success from day one.
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