{"id":179784,"date":"2023-02-24T03:43:12","date_gmt":"2023-02-24T03:43:12","guid":{"rendered":"https:\/\/legalvision.co.uk\/?p=179784"},"modified":"2025-07-02T00:38:34","modified_gmt":"2025-07-01T23:38:34","slug":"allocate-equity-startup","status":"publish","type":"post","link":"https:\/\/legalvision.co.uk\/startups\/allocate-equity-startup\/","title":{"rendered":"How to Allocate Equity in a UK Startup?"},"content":{"rendered":"\n<p>Equity refers to ownership rights in a company. For <a href=\"https:\/\/legalvision.co.uk\/startups\/legal-considerations-edtech-startup\/\">startups<\/a>, equity is one of the most valuable components of your business. This article will examine how your startup can allocate equity to the various stakeholders in your business.<\/p>\n\n\n    <div class=\"my-7 lg:my-10 border-y-2 border-gray-100 py-7 lg:py-10 flex flex-col sm:flex-row items-start gap-10\">\n                    <img decoding=\"async\" class=\"w-52 mx-auto my-0! rounded\" src=\"https:\/\/img.legalvision.com.au\/wp-content\/uploads\/sites\/4\/2022\/09\/06164254\/uk-startup-manual-290x410-1.jpg\" alt=\"Front page of publication\"\n                 loading=\"lazy\" width=\"208\" height=\"298\">\n                <section>\n            <div class=\"text-2xl font-bold\">UK Startup Manual<\/div>\n            <div class=\"body-text\">\n                <p>LegalVision&#8217;s Startup Manual is essential reading material for any startup founder looking to launch and grow a successful startup.<\/p>\n            <\/div>\n            \n\n<a href=\"https:\/\/go.legalvision.co.uk\/uk-startup-manual.html\" class=\" block px-5 py-3.5 max-w-fit bg-orange button__hover transition rounded text-white font-bold text-lg no-underline uppercase leading-tight text-center\" target=\"\" rel=\"\">Download Now<\/a>        <\/section>\n    <\/div>\n\n\n\n\n<h2 class=\"wp-block-heading\">Founders\u2019 Equity<\/h2>\n\n\n\n<p>Shares are a proxy for equity in a company. That is to say, you can value your equity in the startup by looking at how many shares you own. More specifically, the value of any one person\u2019s equity in your business, be they founders, investors, or employees, is determined&nbsp;by the:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>number of shares they own;&nbsp;<\/li>\n\n\n\n<li><a href=\"https:\/\/legalvision.co.uk\/corporations\/shareholder-vote\/\">rights attached to the shares<\/a>; and<\/li>\n\n\n\n<li>value of the company.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>All companies must have at least one issued share held by a shareholder, though, in practice, most companies have multiples of 100 shares. In startups, the founders hold the shares.&nbsp;<\/p>\n\n\n\n<p>For companies with only founders as shareholders, the value of the share reflects the value of the founders\u2019 investment in the business. For example, if you invested \u00a3100,000 in the business, the equity is worth \u00a3100,000. To determine the equity value per share, you divide the total number of shares your startup has issued by the total equity. Hence, if you have 100 shares, each charge would be worth \u00a31,000.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Equity Investors<\/h2>\n\n\n\n<p>As businesses grow, they often need access to additional cash. There are two primary ways of raising cash:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>equity; and&nbsp;<\/li>\n\n\n\n<li>debt financing.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>Equity financing refers to issuing new shares in your startup to outside investors. In exchange for these shares, these investors will give your business cash. Your startup\u2019s equity will increase by the amount of money the outside investors pay. For instance, if you raise \u00a3100,000 from your business network, not accounting for any profits or loss, the company&#8217;s equity value will double.&nbsp;<\/p>\n\n\n\n<p>Because shares are a proxy measure of equity, these investors will expect a proportionate number of shares. This will, in turn, dilute your equity value in the company. To continue the example, if you give equity investors 100 more shares, the founders now only own half the shares in the company.&nbsp;<\/p>\n\n\n\n<div  class=\"box box--icon box--info\">\n    <p>As a founder, you want to maintain as much equity as possible in your business. But your investors also want to maximise the shares they obtain in your startup. Hence, the number of shares your business will offer investors in exchange for their investment depends on your business&#8217;s value.<\/p>\n<\/div>\n\n\n\n<h3 class=\"wp-block-heading\">Valuation&nbsp;<\/h3>\n\n\n\n<p>Valuation refers to identifying the underlying value of your business. In raising equity finance, valuation is how the investors determine how much to invest and how many shares they receive in exchange.&nbsp;<\/p>\n\n\n\n<p>Valuation is a complex and often a hotly-negotiated aspect of raising equity capital. There are several different ways to value a startup:<\/p>\n\n\n\n<figure class=\"wp-block-table is-style-stripes\"><table><tbody><tr><td><strong>Asset-based valuation<\/strong><\/td><td>This looks at the net value of all your business assets. For instance, if your business owns \u00a3200,000 worth of assets and has \u00a3100,000 of liabilities (i.e., debts), its net asset value is \u00a3100,000.&nbsp;<br><br>Asset-based valuations are simplistic. They do not account for your business being worth more as a going concern than if you were to sell its assets piecemeal.<br><br>Accountants describe the added value of the business\u2019 assets as \u201cgoodwill\u201d. Accountants tend to value goodwill using earnings-based valuations.&nbsp;<\/td><\/tr><tr><td><strong>Earnings-based valuation<\/strong><\/td><td>Investors invest in startups on the premise that the business\u2019s profitability will increase. Earnings-based valuations analyse how much revenue your business converts to profits after expenses to arrive at an underlying value of the business.&nbsp;<br><br>For equity investors, earning-based valuations are helpful because they can predict if a business will generate a minimum rate of return in the future. Investors can use these forecasts to value the underlying business in the future. This is important because most equity investors seek to sell their shares in the future to make a return on their investment.&nbsp;<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p>The valuation method used to price your business depends on several factors, including the:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>negotiating power between the investors and your business;&nbsp;<\/li>\n\n\n\n<li>market your business operates in;&nbsp;<\/li>\n\n\n\n<li>amount of capital your business intends to raise; and&nbsp;<\/li>\n\n\n\n<li>outcome of the due diligence process.&nbsp;<\/li>\n<\/ul>\n\n\n\n\n<a href=\"#content-next\"\n   class=\"block p-4 mt-10 text-xl font-bold text-center text-white no-underline bg-gray-800 rounded-t-xl\">\n    Continue reading this article below the form\n    <i class=\"text-xl fa-regular fa-arrow-down\"><\/i>\n<\/a>\n<div class=\"px-6 pt-10 pb-12 mb-10 text-center bg-gray-100 rounded-b-xl sm:px-12 test\">\n    <div class=\"mb-8 text-2xl font-bold 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The three most important rights that shares govern are the right to:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>receive a dividend;&nbsp;<\/li>\n\n\n\n<li>a return of capital when the business is wound up; and&nbsp;<\/li>\n\n\n\n<li>vote at shareholder meetings.&nbsp;<\/li>\n<\/ul>\n\n\n\n<div  class=\"box box--icon box--info\">\n    <p>Where one class of shares has different rights compared to another, the law says these are different classes of shares.<\/p>\n<\/div>\n\n\n\n<p>When you incorporated your startup and received your shares, all founders received the same <a href=\"https:\/\/legalvision.co.uk\/corporations\/classes-company-shares\/\">class of shares<\/a> unless you created different classes from the outset. These ordinary shares entitle the shareholder to the same right to dividends, capital, and voting as any other shareholder.&nbsp;<\/p>\n\n\n\n<p>When you raise equity, your investors often want shares that grant them preferable rights compared to the founders. This is to compensate them for the risk of investing in your business. Most commonly, investors seek shares that grant them preferential rights to receive dividends ahead of other investors. For instance, your business may issue investors preference shares that entitle them to \u00a30.10 (10p) in dividends for each share held, which your company will pay before it pays the founders a dividend.&nbsp;<\/p>\n\n\n\n<div  class=\"box box--icon box--info\">\n    <p>These preferential rights can make preferred shares more valuable or attractive.<\/p>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\">Employee Equity&nbsp;<\/h2>\n\n\n\n<p>Some businesses create schemes for their employees to receive shares in the company. The law grants businesses a great deal of flexibility in drafting the exact terms of the arrangement. But typically, such <a href=\"https:\/\/legalvision.co.uk\/startups\/esop-offer\/\">employee share schemes (ESS)<\/a> take the form of share options where eligible employees receive an option to acquire shares at a later date. This later date may be conditional upon a specific outcome, such as your business raising a later fundraising round. Or the later date may be a specific point in time, such as five years from when your business implements the plan.&nbsp;<\/p>\n\n\n\n<p>Providing your employees with equity aligns their compensation incentives with your company&#8217;s. If they are interested in your business performing well (because their shares will increase in value), they are more likely to work towards increasing the business\u2019s value.&nbsp;<\/p>\n\n\n\n<p>Similar issues arise with valuations when creating ESSs as with raising equity finance. Likewise, as with equity investors, you may wish to vary the rights attached to employee shares. For instance, most employee share schemes do not entitle employee shareholders to any shareholding votes.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Key Takeaways&nbsp;<\/h2>\n\n\n\n<p>Equity refers to ownership rights in your startup. A company\u2019s founders typically own all the equity in the company until they raise outside financing. In exchange for cash, your business will issue the investors additional shares. You may also wish to give your employees shares in the business to align their incentives with your business. In all cases, determining how many shares and how to allocate equity in a startup requires a team of lawyers and accountants.&nbsp;<\/p>\n\n\n\n<p>If you need help with your startup, our experienced <a href=\"https:\/\/legalvision.co.uk\/startup-lawyers-lp\/\">startup lawyers<\/a> can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on <a href=\"tel:+448081968584\" class=\"AVANSERnumber dynamic-number\">0808 196 8584<\/a> or visit our <a href=\"https:\/\/legalvision.co.uk\/membership\/\">membership page<\/a>.\u00a0<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Frequently Asked Questions<\/h2>\n\n\n\n<div class=\"schema-faq wp-block-yoast-faq-block\"><div class=\"schema-faq-section\" id=\"faq-question-1677209645001\"><strong class=\"schema-faq-question\"><strong>What is equity?<\/strong><\/strong> <p class=\"schema-faq-answer\">Equity refers to ownership rights in a business. You can consider it a long-term liability the business owes its owners. Given most businesses are structured as companies, equity is measured by shares.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1677209661335\"><strong class=\"schema-faq-question\"><strong>How do most businesses allocate equity?<\/strong><\/strong> <p class=\"schema-faq-answer\">The founders own all the equity in the business until they raise outside financing or offer shares to employees. The number of shares offered depends on the value of the business and your objectives.<\/p> <\/div> <\/div>\n<div class=\"not-prose m-feedback-prompt\">\n    <!-- Thumbs up\/down bar -->\n    <div class=\"m-feedback-prompt__main\">\n        <div class=\"m-feedback-prompt__title\">Was this article helpful?<\/div>\n        <div>\n            <!--span class=\"m-feedback-prompt__button--text\">Thanks!<\/span-->\n            <button type=\"button\" class=\"m-feedback-prompt__button m-feedback-prompt__button--yes\"\n                    data-analytics-link=\"feedback-prompt:yes\" aria-label=\"Agree\">\n                <i class=\"fa-regular fa-thumbs-up fa-3x\"><\/i>\n            <\/button>\n            <button type=\"button\" class=\"m-feedback-prompt__button m-feedback-prompt__button--no\"\n                    data-analytics-link=\"feedback-prompt:no\" aria-label=\"Disagree\">\n                <i class=\"fa-regular fa-thumbs-down fa-3x\"><\/i>\n            <\/button>\n        <\/div>\n    <\/div>\n\n    <!-- Feedback form -->\n    <div class=\"m-feedback-prompt__form\">\n        <div class=\"m-feedback-prompt__form--thanks \">\n            <div>Thanks!<\/div>\n            <p>\n                We appreciate your feedback \u2013 your submission has been successfully received.            <\/p>\n        <\/div>\n        <form id=\"contact-form\" class=\"m-feedback-prompt__form--form\" action=\"\" method=\"post\">\n            <input type=\"hidden\" id=\"authenticity_token\" name=\"authenticity_token\" value=\"9eb4f72322\" \/><input type=\"hidden\" name=\"_wp_http_referer\" value=\"\/api\/wp\/v2\/posts\/179784\" \/>            <input value=\"https:\/\/legalvision.co.uk\/startups\/allocate-equity-startup\/\" type=\"hidden\" name=\"currenturl\"\n                   id=\"currenturl\">\n            <input value=\"How to Allocate Equity in a UK Startup?\" type=\"hidden\" name=\"currenttitle\"\n                   id=\"currenttitle\">\n            <label>\n                <!-- display on thumbs-up -->\n                <span class=\"m-feedback-prompt__feedback m-feedback-prompt__feedback--yes\">\n                    Can you tell us <span class=\"font-semibold\">why<\/span> you found it helpful?\n                <\/span>\n\n                <!-- display on thumbs-down -->\n                <span class=\"m-feedback-prompt__feedback m-feedback-prompt__feedback--no text-lg\">\n                    How can we better improve this article?\n                <\/span>\n                <textarea name=\"feedbackmessage\" id=\"feedbackmessage\" required><\/textarea>\n            <\/label>\n\n            <div class=\"m-feedback-prompt__form--error\" id=\"form-submit-error\"><\/div>\n            <button id=\"submit-contact-form-button\" type=\"submit\" name=\"commit\" class=\"m-feedback-prompt__form--submit\"\n                    data-analytics-link=\"feedback-prompt:submit\">\n                Submit            <\/button>\n        <\/form>\n    <\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Equity refers to ownership rights in a company. For startups, equity is one of the most valuable components of your business. This article will examine how your startup can allocate equity to the various stakeholders in your business. Founders\u2019 Equity Shares are a proxy for equity in a company. That is to say, you can<a href=\"https:\/\/legalvision.co.uk\/startups\/allocate-equity-startup\/\">Continue reading <span class=\"sr-only\">&#8220;How to Allocate Equity in a UK Startup?&#8221;<\/span><\/a><\/p>\n","protected":false},"author":13522,"featured_media":3256,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_relevanssi_hide_post":"","_relevanssi_hide_content":"","_relevanssi_pin_for_all":"","_relevanssi_pin_keywords":"","_relevanssi_unpin_keywords":"","_relevanssi_related_keywords":"","_relevanssi_related_include_ids":"","_relevanssi_related_exclude_ids":"","_relevanssi_related_no_append":"","_relevanssi_related_not_related":"","_relevanssi_related_posts":"177028,176217,1024,1403,175763,172547","_relevanssi_noindex_reason":"","editor_notices":[],"footnotes":""},"categories":[31],"tags":[20,105,527,646],"class_list":["post-179784","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-startups","tag-small-business","tag-startup-founder","tag-equity","tag-startup-capital"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.1.1 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>How to Allocate Equity in a UK Startup? 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