Shareholders' Agreement Basics for UK Startups
What a shareholders' agreement does, how it sits beside your articles, and the clauses to understand before an investor sends a draft.
What a shareholders' agreement is
A shareholders' agreement is a contract between the people who own a company. Sprintlaw describes it as a private contract between some or all of a company's shareholders, while the articles are the company's constitutional rules and are publicly filed.
No law requires you to have one. Founders usually sign one when a co-founder joins or when outside investors arrive, because it records how decisions are made, what happens when someone leaves and how shares can change hands.
This is general information, not legal advice. A shareholders' agreement for a funded company should be drafted or reviewed by a solicitor who does startup deals.
How it sits beside the articles
Every limited company must have articles of association. GOV.UK explains that model articles are the standard default articles a company can use, prescribed by the Companies Act 2006, and that the latest version applies automatically to companies incorporated on or after 28 April 2013.
The model articles are short and written for a simple company. They say little about investor rights, leavers or the sale of the company. A funding round usually replaces them with bespoke articles and adds a shareholders' agreement alongside.
Sprintlaw's advice is that the two documents should work together, because a conflict between them creates uncertainty about which one governs. It also notes a practical advantage of the agreement: it can hold commercially sensitive arrangements that shareholders may prefer to keep off the public record.
What the law gives you without one
Company law sets default voting thresholds. GOV.UK says most resolutions need a majority to agree, called an ordinary resolution, and some need a 75% majority, called a special resolution. Section 283 of the Companies Act 2006 defines a special resolution as one passed by a majority of not less than 75%. Votes are counted by shares, so a founder with 60% of the voting shares can pass an ordinary resolution alone.
GOV.UK lists changing the company name, removing a director and changing the articles among the decisions that may need a shareholder vote. Because a special resolution needs 75%, a shareholder with more than 25% of the votes can block one. That is why percentages on the cap table matter as much as the headline valuation.
The Act also gives existing shareholders a first right to new shares. Under section 561, a company must first offer new equity securities to holders of ordinary shares in proportion to their existing holdings. Funding rounds routinely disapply or reshape this right, and the agreement and articles record how.
Reserved matters
Reserved matters are decisions that need special approval. Sprintlaw describes them as decisions requiring consent from all shareholders, a percentage majority or a specific investor.
A typical investor list covers issuing new shares, changing the articles, taking on debt above a limit, selling the business or its main assets, changing the nature of the business, and hiring or paying senior people above a threshold. Each item is a decision you can no longer take alone.
I'd read this list line by line and ask two questions of each item: how often will this come up, and who exactly has to say yes? A consent right held by an investor majority is easier to live with than one held by each investor individually. Thresholds for spending and borrowing should be high enough that normal trading never triggers them.
Share transfers: pre-emption, drag and tag
Pre-emption rights on transfer give existing shareholders the first chance to buy shares before they are offered to an outsider, in Sprintlaw's wording. They keep the cap table in known hands.
Drag-along lets majority shareholders require minority shareholders to sell on the same terms. It exists so that a buyer can acquire the whole company without one small holder blocking the sale. Check what majority triggers it and whether the founders' consent is part of that majority.
Tag-along works in the other direction. It lets minority shareholders join a sale by the majority, on the same terms. If you become a minority holder after later rounds, this is the clause that protects you.
Founder terms: leavers, vesting and covenants
Investors back people, so the agreement deals with what happens if a founder leaves. Sprintlaw notes that agreements often distinguish between good leavers and bad leavers. The definitions decide whether a departing founder keeps their shares, and at what price any are bought back.
Vesting sets how founders earn their shares over time. Read the schedule, what counts as a good leaver, and who decides. I'd push for clear definitions that cover illness and dismissal without cause, because these are the cases where vague wording hurts.
Expect restrictive covenants and confidentiality obligations as well. They limit competing with the company or recruiting its staff for a period after leaving. Make sure the scope and duration are ones you could live with if things went wrong.
Board, information and deadlock
The agreement usually says who can appoint directors or observers, how often the board meets and what information investors receive. Sprintlaw describes information rights as regular financial and KPI reporting. Our guide to investor update cadence covers how to plan for those dates.
Where two founders hold equal shares, add a deadlock mechanism. Sprintlaw lists the common options: escalation to named individuals, mediation, expert determination for valuation issues and buy-sell mechanisms.
New shareholders should join the agreement when they receive shares. Sprintlaw notes that a new shareholder is usually required to sign a deed of adherence or similar joining document. Keep signed copies with your register of members.
Before you sign
Sprintlaw's view on timing is that the best moment to agree the rules is when everyone is still aligned. For co-founders that means now, before a disagreement. For a funding round, the term sheet sets the outline and the agreement fills it in.
For reference, UK Private Capital, formerly the BVCA, publishes a model shareholders' agreement in its early-stage document set, last revised in February 2025. The set is drafted for Series A and its page says it is not suitable for seed investment, so a seed agreement should be shorter. Reading the model still teaches you the vocabulary.
If your investors expect SEIS or EIS relief, ask your adviser to check the share rights in the articles and agreement against the scheme rules. HMRC's EIS guidance requires full-risk ordinary shares that are not redeemable and carry no special rights to the company's assets.
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- Sprintlaw: UK shareholders' agreement, what it is, why you need one and key terms
- Sprintlaw: Lead investor, what to know before raising a round
- GOV.UK: Model articles of association for limited companies
- GOV.UK: Company changes you must report
- Companies Act 2006, section 283
- Companies Act 2006, section 561
- UK Private Capital (formerly the BVCA): Model documents for early stage investments
- HMRC: Apply for the Enterprise Investment Scheme