Invest in a UK Startup: 10 essential legal docs you need

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: key terms of your agreement📝

Think of a Term Sheet as the map 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.

2. 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.

3. SeedFAST/Advance Subscription Agreements (ASA): investment now, shares later ⏳

A SeedFAST, also known as an Advance Subscription Agreement (ASA) is an increasingly popular way to invest in UK startups. With a SeedFAST, 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 SeedFASTs:

• Simple and SEIS/EIS-friendly – SeedFASTs are straightforward to use and can include terms for SEIS/EIS tax relief.
• 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 SeedFASTs include a discount, meaning your investment converts into shares at a lower price than future investors will pay.

SeedFASTs 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. SeedNOTE/ Convertible Notes: The loan that turns into equity 💸➡️📈

Convertible Notes ( called a SeedNOTE at SeedLegals) 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. SeedNOTEs can be advantageous in fast-growing startups or when both the company and investors want flexibility. However, they’re not SEIS/EIS-friendly.

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 – Convertible notes can 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.

5. Shareholders Agreement (SHA): The rules of the relationship 🤝

The SHA lays out the rights and responsibilities between the founders and shareholders.

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 key employees.

6. Articles of Association: The startup’s constitution 📜

This document dictates how the company is governed, what powers the board has, and how shareholders can exercise their rights.

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.

7. SEIS/EIS Advance Assurance: eligibility for a tax break🌴

Advance Assurance is approval from HMRC that a company meets the requirements for investors to receive SEIS/EIS tax relief on their investment.

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.

If you want to benefit from SEIS/EIS tax relief, ask the founders for their Advance Assurance approval from HMRC.

8. SEIS/EIS Compliance: The tax break 🌴

After you’ve invested in an SEIS/EIS compliant company, ask the founders for your SEIS3/EIS3 certificate so you can claim tax relief.

9. Share Certificates: Proof of your slice of the pie 📄

Once your investment is complete, the startup will issue a share certificate—a 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. And if you ever sell your shares, you’ll need to hand it over to the new owner as part of the transaction.

10. Cap Table: The equity tracker📊

Technically not a legal document, the cap table (short for “capitalisation table”)  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. If your investment company uses SeedLegals, they can grant you access to view their cap table right on the platform.

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.

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