How to Issue Shares to Co-Founders and Early Employees

Share issuance is where the cap table that you and every future investor will look at gets built. The decisions made in the first three months of a company's life set up the equity structure for years. They are reversible but the cost of reversal grows with every new shareholder added. This guide covers the founder split, vesting structure, advisor equity, the option pool, and the share-class decisions that keep the table clean.

The founder split

How equity is divided between co-founders is the most discussed and most overthought decision in startup formation. The split itself matters less than founders assume. What matters more is that whatever split you pick, it is paired with vesting and a written agreement.

Common splits:

The 50/50 split is more popular than is structurally optimal. It can lead to deadlock when founders disagree on direction. A 51/49 or 55/45 split with one founder formally in the CEO role is usually cleaner, even when the work split feels equal.

Vesting: the structural override on the split

Whatever split you pick, vesting overrides it dynamically. Founders own shares only as they earn them through continued involvement in the company. The standard structure is four-year vesting with a one-year cliff:

1. 1Year 0: shares are issued to the founder but are restricted (subject to vesting).
2. 2Year 1 (cliff): if the founder is still with the company on the one-year anniversary, 25% of the shares vest in one go. If they leave before the cliff, no shares vest.
3. 3Years 2 to 4: the remaining 75% vests monthly, in equal portions, until fully vested at the four-year mark.
4. 4Departure at any point: unvested shares revert to the company; vested shares are kept (subject to good-leaver/bad-leaver provisions).

This protects the company from the most common founder failure mode: a co-founder leaves early but retains a large slice of equity. Without vesting, a 50/50 split where one founder departs three months in leaves them with 50% of the company forever. With vesting and a one-year cliff, that same departure leaves them with zero.

Documenting the share issuance correctly

When the company issues shares to founders at incorporation, the legal mechanics need to be done correctly:

• The articles of association need to authorise the share class and class rights.
• A board resolution or shareholder resolution allocates the shares.
• A form SH01 is filed at Companies House within one month, recording the new shares issued.
• The company's register of members is updated to record each shareholder.
• Share certificates are issued to each founder.
• The PSC register is updated where the issuance changes who has significant control.

Skipping any of these steps creates artefacts that show up in due diligence and either delay the deal or trigger structural fixes. Standard formation packages from accountants handle all of this; if you do it yourself, follow the checklist.

Advisor and early-employee equity

Once formation is done, the next equity decisions are about advisors, early employees, and the option pool. The right structure depends on whether the recipient is a true advisor (limited time commitment, no executive role) or an early employee (substantial time commitment, operational role).

Advisors

Standard structure: 0.25% to 1% of equity, vesting over one to two years. Issued as options rather than shares, to give the advisor tax flexibility. Documented through an advisor agreement that defines what the advisor will do (specific time commitment, deliverables, expectations) in exchange.

Early employees

Use an EMI (Enterprise Management Incentive) option scheme. EMI options are HMRC-approved tax-advantaged options designed specifically for UK startup hires. Recipients pay no income tax on grant, no NI on exercise (in most cases), and are taxed only at capital gains rates on eventual sale (often qualifying for Business Asset Disposal Relief at 18% from April 2026 rather than the standard CGT rate).

Standard option pool size: 10% to 15% of fully diluted equity for the first 10 to 15 hires. Larger pools (15% to 20%) are common in deeper-tech startups where senior technical hires command meaningful equity.

Share classes for incoming investment

When SEIS, EIS, or seed investors come in, they typically receive a different share class from the founders. Founders hold ordinary shares; investors hold preference shares (with rights to specific dividends, liquidation preference, anti-dilution, and so on). The articles of association need to support this multi-class structure.

If you incorporate with a single class of ordinary shares and adopt model articles, your first investor round will require article amendments to introduce a preference class. This is routine but adds time and cost to the round. If investment is on the horizon at formation, drafting bespoke articles that anticipate multi-class structure is cheaper.

Common questions

Can I retroactively add vesting to founder shares?

Yes, by mutual agreement of the founders. The shares are restructured: founders surrender their existing shares and receive new shares subject to vesting. The retroactive period (the period during which they were already engaged) typically counts toward vested time, so a founder with 18 months of involvement would already have approximately 18/48 of their new shares vested. Doable but easier to do right at formation.

How do I value the shares for tax purposes when issuing them?

At formation, founder shares are typically issued at par value (the nominal value, e.g., £0.01 per share). This is consistent with the company having no significant value at incorporation. Once the company has external investment or measurable revenue, share valuation becomes more complex; for option grants, HMRC offers a valuation pre-clearance through the Share & Asset Valuation team.

What is the difference between options and shares?

Shares are immediately owned (subject to vesting). Options are the right to acquire shares in the future at a fixed price. Options have tax advantages for the recipient (no tax until exercise) and flexibility for the company (can be cancelled if the recipient leaves). Most early-employee equity is options; founder equity is direct shares with vesting.

How big should the option pool be?

10% to 15% pre-investment is standard. Investors often require the pool to be expanded to 12% to 15% post-investment, with the dilution coming from existing shareholders rather than the new investors. Sizing the pool generously at formation reduces the dilution shock during the first investor round.