This post is the first part of a series on the legal aspects of running a startup in the UK. This section covers the fundamentals with subsequent sections addressing more complex issues. These documents are only to be used as a guide to give you background information to enhance your understanding of the issues. You should always seek direct professional advise on all matters legal since the law is continually being updated and subject to case law in practice.
A business set up as a company is an independent legal entity under UK company law and registered at Companies House. The Companies Act and associated revisions provide the legal framework for companies registered in the UK and these provide a default structure for the rules by which the company operated. These are described in the Model Articles which apply to any company registered at Companies House. These rules are generally modified as the company matures and the shareholder structure and their respective rights become more complex.
The Model Articles are through necessity, very general in nature and designed to accommodate a wide range of company circumstances. Most companies replace this agreement with two custom documents known as The Articles of Association which deals with the operating rules of the company and The Subscription and Shareholders Agreement which deals with investment round specific issues. Typically, the Models Articles are used in early rounds but as more institutional investors become involved a dedicated set of company documents are negotiated as part of each round with the lead investor. These terms are usually summarised in a term sheet as part of the negotiation process so giving a short and clear statement to all parties. However, as the legal documents are drafted there by be a re-negotiation of terms and so the term sheet should not be considered as final or definitive.
All parties to the agreement (founders, management, existing investors and new investors) should be familiar with the details of these documents since the specific terms are likely to influence both the path the company takes as it grows and the eventual outcome for all parties.
