Get the share structure right while it is still cheap to change.

Most founders we speak to incorporated through a web form, and most of them ended up with a company limited by shares holding exactly one £1 ordinary share. That company is valid, but with one share you cannot express a percentage, bring in a co-founder cleanly, or issue shares to an investor without first subdividing it.

This is straightforward while the company is worth almost nothing. It becomes difficult, and occasionally expensive, once there is value in the shares, a second founder with an expectation, or an investor reading your register. After that, changes to the share structure have to be negotiated.

This example is illustrative. A company was incorporated last December with one £1 ordinary share held by a single founder. A second founder has since joined, they have agreed a 51/49 split, both want vesting, and there is an investor conversation starting in the spring.

First, subdivide the single share into 10,000 shares of 0.01p, so the existing founder holds 10,000 and nothing has changed economically. Then allot further shares so the two founders hold 51% and 49% of the enlarged number. For example, allotting 200 more to the first founder and 9,800 to the second gives them 10,200 and 9,800 of 20,000 shares. Put the vesting terms into a founders’ agreement, and file the section 431 elections within 14 days of the restricted shares being acquired, while the shares are worth almost nothing and the tax on them is small.

Then update the register of members and the register of people with significant control, because on a two-founder company both of them will now be people with significant control, and each of them has an identity verification duty of their own. The whole job takes a few days and is done for a fixed fee. The same restructure is considerably harder once the company has a valuation.

A company can have several classes of share with different rights set out in the articles, such as non-voting shares, preference shares paid out before ordinary shares on a sale or winding up, or redeemable shares. The statement of capital filed with each SH01 includes the rights of each class. A single class of ordinary shares keeps an early-stage company simple, so add a class when a round or another specific need calls for it.

The share rights SEIS and EIS allow

SEIS and EIS relief is only available on ordinary shares that, for the three-year qualifying period, carry no preferential right to assets on a winding up and no right to be redeemed. A preferential dividend is allowed only if nobody can vary its amount or dates and unpaid dividends do not accumulate (VCM33020). HMRC's guidance calls these full risk ordinary shares. A preference share that repays investors first on a winding up therefore cannot be an SEIS or EIS share. If some investors are claiming the reliefs and others want preference rights, issue a different class to each, and check any change to the articles or shareholders' agreement during the three years. Our SEIS and EIS page explains the scheme conditions.

Shares a company makes available to its directors and employees are treated for tax as acquired because of their employment. HMRC's manual says this rule was introduced to stop directors treating their shares as founders' shares outside the employment tax rules (ERSM20210). Shares that must be sold back below market value if the holder leaves are restricted securities.

Without an election, there is usually no income tax on acquiring restricted shares if the restriction ends within five years. Instead, when the restriction is lifted or varied, or the shares are sold while restricted, part of their value at that point can be taxed as employment income.

A section 431 election, made jointly by the company and the founder, treats the shares as unrestricted when acquired. If the founder paid the full unrestricted market value, there is no tax at that point and later growth falls outside these rules. If they paid less, tax is due on the difference at acquisition. The election must be in a form approved by HMRC, cannot be revoked and cannot be made more than 14 days after the acquisition (Income Tax (Earnings and Pensions) Act 2003, section 431). There is no provision for a late election, so sign one for each acquisition of restricted shares and keep it with the company's records.

HMRC's guidance says these rules apply only to shares that are restricted when acquired, so restrictions added later to shares already owned outright fall outside them (ERSM30300). Take advice on your own facts before relying on that.

Keep one cap table and update it on the day anything changes. For each holding, record these details.

• Holder, share class and number of shares
• Date acquired, price paid and nominal value
• Vesting terms and the date of any section 431 election
• SEIS or EIS status and certificate references
• Options, with grant date, number, exercise price, vesting and HMRC notification date
• Advance subscription agreements and loan notes, with their conversion terms

Show totals in issue and fully diluted, and reconcile them with the register of members, the statements of capital on each SH01 and SH02 and the latest confirmation statement.

Under section 561 of the Companies Act 2006, a company allotting new ordinary shares for cash, or rights to subscribe for them, must first offer them to existing ordinary shareholders in proportion to their holdings, on the same or better terms, for at least 14 days. The right does not apply to non-cash issues or employee share schemes. A private company can exclude it in its articles, or the directors can be given power by the articles or a special resolution to allot as if it did not apply. The model articles for private companies do not exclude it, so shareholders usually waive or disapply it before a round.

Pre-emption on transfers, which gives shareholders first refusal when another shareholder sells, exists only if the articles or a shareholders' agreement provide for it. Investors often ask for pre-emption on new issues so they can keep their percentage in later rounds.

AD Solicitors, a separate SRA-regulated law firm, has a guide to how the articles and a shareholders' agreement work together.