Ready to back a UK startup? Exciting! But surprise, surprise – there’s paperwork involved. Luckily, we’re here to make it straightforward and understandable.
In this guide, we’ll walk you through the essential legal docs you need to invest in a UK startup. From Term Sheets to Shareholders’ Agreements, we’ll explain what each document is for and key information to know about them.
1. The Term Sheet: Your investment blueprint 📝
Think of a Term Sheet as the blueprint of your investment deal. It’s a non-binding document that sketches out the main terms and conditions of your investment. It gives you a snapshot of what’s being offered, like the company’s valuation, the amount you’re putting in, and what you get in return (typically, a slice of equity pie). Key terms to pay attention to include:
- Pre-money valuation – what the startup’s worth before you add funds.
- Amount raised – how much capital the startup’s after.
- Equity share – the percentage of the company you’ll own post-investment.
- Board structure – who’s on the board, making decisions for the company? Is there someone sitting on the board or an observer, who’ll look out for your interests?
- Consents – which give investors the right to approve decisions the founders make before they go ahead
The Term Sheet often includes any extra perks or rights investors like you might enjoy, such as voting rights or anti-dilution protection. It’s like a mini road map before you dive into the serious documents.
It’s crucial to understand your Term Sheet. This is something we help investors and founders with a lot at SeedLegals, and is included in our Investors services. So please do get in touch if you have any questions about a Term Sheet.
2. Subscription Agreement: Put your money where your mouth is 💰
The Subscription Agreement is a binding contract between you and the startup, confirming that you’re putting X amount into this venture and you’ll receive X shares in return.
It usually recaps the key terms in the Term Sheet but adds that formal “I’m in” to make it official.
What you’ll want to look for in the Subscription Agreement:
- Price per share – This tells you how much each share costs, helping you calculate your total equity.
- Investor obligations – Details on when and how much you’ll pay and any particular requirements you must fulfil.
It’s the document that seals the deal, so read it with eagle eyes.
3. Advance Subscription Agreements (ASA): investment now, shares later ⏳
You can invest ahead of a round too, via an Advanced Subscription Agreement. At SeedLegals, we call it a SeedFAST. This allows you to put your money in earlier and take on a bit more risk but you’ll be rewarded with a discount on the round. So you might get more shares for the amount you invest.
An Advance Subscription Agreement (ASA) is an increasingly popular way to invest in UK startups. With an ASA, you commit funds now, but rather than receiving shares right away, your investment converts into shares during the next funding round. It’s a flexible approach that lets the startup get the cash it needs early on while deferring the issuance of shares until a pre-determined “trigger event,” like a major funding round.
Here’s why investors like ASAs:
- Simple and SEIS/EIS-friendly – ASAs are straightforward to use and may qualify for SEIS/EIS tax relief, which makes them attractive to investors. ASA do not automatically qualify for SEIS/EIS tax relief. Certain conditions have to be met. If you want SEIS/EIS-friendly ASAs, you can use a SeedFAST.
- No immediate valuation – Instead of setting a valuation today, your investment converts based on the valuation at the next funding round. If the round happens soon and the company grows in value, it’s a win for you!
- Discounts – Many ASAs include a discount, meaning your investment converts into shares at a lower price than future investors will pay.
ASAs are an excellent choice if you want to invest in a startup without immediately getting bogged down in valuations. They’re essentially a “you’re in, let’s grow together” approach to investing.
4. Convertible Notes: The loan that turns into equity 💸➡️📈
Convertible notes are a unique type of investment that starts as a loan and is either repaid, or converted into equity later. You lend money to the startup, and instead of being repaid , the note can convert into shares when the startup raises its next funding round. Convertible notes can be advantageous in fast-growing startups or when both the company and investors want flexibility. At SeedLegals, we call it a SeedNOTE.
Here’s why investors like convertible notes:
- Flexibility on valuation – You’re supporting the startup without setting a fixed valuation from day one, with your investment converting at a pre-set “conversion event.”
- Interest – Some convertible notes include an interest rate, so your investment grows in value even before it converts to equity.
- Discount on conversion – Like ASAs, convertible notes often come with a discount on the future valuation, giving you a head start in equity when the round arrives.
One note of caution: convertible notes can be more complex than direct equity investments, so always review the terms carefully. That said, they’re a smart option if you’re backing a high-potential startup and want to grow your equity over time without immediately setting share values.
5. Shareholders’ Agreement (SHA): The rules of the relationship 🤝
The SHA is where things get serious. It lays out the rights and responsibilities between the founders and shareholders. It’s your playbook on everything from decision-making powers to what happens if someone wants out.
Some key clauses to watch out for:
- Information rights – The types of financial records and reports the company will provide to shareholders. These serve as a pulse-check on the financial health of the company.
- Investor majority consent matters – There may be matters the company can’t proceed with, until it has approval by a certain percentage of investors (the “Investor Majority”). This could be taking out loans, or hiring new employees.
By setting the rules of the relationship early, the SHA keeps everyone on the same page.
6. Articles of Association: The startup’s constitution 📜
This is the granddaddy of all corporate docs. It’s like the company’s DNA, dictating how it’s governed, what powers the board has, and how shareholders can exercise their rights. When you invest, you’re agreeing to abide by these rules, so it’s important you read this carefully.
Key points to look out for include:
- Share classes – Understanding if there are different share classes (e.g., A shares, B shares) and the rights attaching to each class (for example: liquidation preference or voting rights)
- Dividends – Who gets paid, when, and how much.
- Tag-along rights – So if a majority shareholder decides to sell, you could have the option to sell your shares too.
- Drag-along rights – So if the majority decides to sell, they can compel you to sell as well.
- Pre-emption rights – Your right to buy new shares before outsiders, letting you keep your ownership percentage steady.
While the Term Sheet might be two or three pages of high-level bullet points, the Shareholders’ Agreement and Articles of Association tend to contain the full legalese to run through all the key terms in legal writing. You want to make sure everything matches up and what you agreed has been put in place.
7. SEIS/EIS Compliance: The tax break 🌴
The SEIS (Seed Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme) are designed to make investing in early-stage UK startups that much sweeter. These schemes offer significant tax relief for investors—up to 50% for SEIS and 30% for EIS.
While not a single document, compliance with these schemes is crucial. Check if the startup has SEIS/EIS approval or is in the process of applying, so you can enjoy those juicy tax relief benefits. SEIS and EIS are two of the best ways the UK supports startup investments, so ask founders you’re thinking about investing in if they have SEIS/EIS Advance Assurance.
Understand SEIS/EIS eligibility, read:
SEIS rules and benefits for investors
EIS rules and benefits for investors
8. Share Certificates: Proof of your slice of the pie 📄
Once your investment is complete, the startup will issue a share certificate—a physical or digital document as evidence that, yes, you officially own shares in the company. Think of it as your membership card in the startup’s exclusive club. The share certificate includes key details like:
- Your name – Showing that the shares are indeed yours.
Number and class of shares – Confirming exactly what you own (e.g., 100 ordinary shares). - Company details – Including the company’s name and incorporation number, so there’s no ambiguity.
- Director’s signature – Adding the official stamp of legitimacy
Share certificates are more than a keepsake—they’re a record of your ownership. While these are usually straightforward, it’s always worth checking that everything aligns with the Shareholders’ Agreement, Subscription Agreement and the cap table to avoid any surprises down the line.
Keep your share certificate handy (and securely stored) since it serves as proof of your ownership. And if you ever sell your shares, you’ll need to hand it over to the new owner as part of the transaction.
9. Due Diligence: Time to do your homework 🕵️
While not a document, per se, due diligence is a process that every savvy investor should undertake. It involves thoroughly reviewing the startup’s financials, team, market opportunity, IP, and legal status. Basically, you’re confirming that what the startup claims to be is, in fact, reality.
10. Cap Table: The equity tracker📊
Technically not a legal document, the cap table (short for “capitalisation table”) is essential for any investor. It shows you who owns what and how much after your investment. It’s basically an equity ledger, detailing who’s in, who’s out, and what everyone’s stake looks like.
A quick cap table peek lets you check:
- Current ownership structure – Who the other players are (founders, angels, employees).
- Post-investment ownership – What the ownership percentages look like once your investment closes.
Knowing your spot in the lineup is vital for understanding your influence and future payout potential.
When you manage your portfolio on SeedLegals, you can easily monitor your capital on the platform.
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