Startup Legals: Setting up for success

rs1499
9 hours ago
6 min read

CMS × Brighteye

From your very first conversation about splitting equity to the day an investor asks for your cap table, how you structure ownership and funding will shape your company’s future. The earliest legal and financial decisions - often made casually on the back of a napkin or in your phone notes - can become the hardest to fix later.

Clean founder arrangements, smart fundraising tools, and tax-efficient incentives all help you grow faster, raise cleaner rounds, and keep more control.

Together with top law firm, CMS, we pulled together advice for aspiring and early founders to help them set up for success. Some of this is UK-centric but much is relevant internationally through equivalent vehicles and government schemes. First shared in a live session, this summary covers:

How to build and maintain a clean, balanced cap table (led by Ben Wirz - Brighteye)
What to know about fast funding instruments like ASAs and CLNs (Michael Cattell - CMS)
How to reward your team with equity without triggering painful tax surprises (Jaspal Pachu - CMS)
How to navigate SEIS and EIS in order to make your startup more attractive to certain investors (Rebecca Stewart - CMS)

Whether you’re two friends with an idea or a scaling team planning a Series A, these principles are worth locking in early. They’ll save you time, dilution, and legal fees down the road and in the nearer-term, make sure your next investor meeting starts on the right foot.

1) Cap tables that keep ownership simple and clear

Why this matters: Your cap table tells the story of your company - who owns what, how control is shared, and whether your house is in order. Investors glance at it and immediately sense how disciplined (or chaotic) things are. A clean cap table isn’t just admin - it’s a reflection of founder alignment, future flexibility, and your ability to raise smoothly down the line. So what does “clean” mean? It means that everyone knows who owns, what, on what terms, over what time - with clarity.

Do this early:

Get everything on paper. Handshakes turn fuzzy. Even using a simple template now can pain later.
Founder vesting from day 0. Standard: 4 years, 1-year cliff, monthly after. Protects you if someone leaves, including your co-founders. It might seem ridiculous that one of you might choose to leave…but it’s not.
Avoid 50/50 deadlocks. Though it seems counter-intuitive for equal partners, we advise giving one founder a tiny edge (or appoint a neutral tie-breaker in the event of a disagreement – the person with the tiny edge or marginally more ownership will have that final call).
Advisor equity is small. Think 0.1–0.5% (maybe up to 1% if exceptional). Always vest.
Late co-founders: 5–20% depending on timing, traction and importance of their role; the later they join, the smaller their portion will be. Again, be sure to paper it properly.
Lots of tiny cheques? Considering using an SPV/nominee so your cap table stays one line, not 100 (i.e. if you have 20 cheques for $1k, consider rolling them up into a single $20k cheque with an appointed nominee).

Reality check on dilution (a typical dilution model for first-time founders)

Seed: ~15–22% new money, plus a top-up to keep the option pool ~10%+.
Series A: another ~20–25% new money.
A healthy signal: Founders + employees > 50% post-A.

Here are the slides from the session:

2) ASA (Advanced Subscription Agreements) vs CLN (Convertible Loan Notes - CLNs)

Why this matters: Sometimes you need capital before you’re ready for a priced round. That’s where short-form bridge instruments come in. Advanced Subscription Agreements (ASAs) and Convertible Loan Notes (CLNs) are tools to keep you moving when the funding environment is slow or timing is awkward. The trick is knowing which one gives you speed without creating future headaches.

In simplest terms:

Advanced Subscription Agreement (ASA) = cash now, shares later (no debt). 

Convertible Loan Note (CLN) = debt now, may convert later.

When to use what

Use an ASA when: you want speed/flex, lighter controls, and (UK) SEIS/EIS compatibility.
Use a CLN when: investor wants downside protection (maturity, interest, default rights).

Key terms to understand (both)

Triggers: priced round (over a threshold), exit/change of control, or IPO; plus long-stop date.
Economics: valuation cap and/or discount (10–30%) to the next round price.

Founder tips

Model dilution early. Cap × discount × round size = your future ownership, voting power, and exit economics.
Track everything. Note maturity dates, long-stop dates, interest accrual, and maintain both issued and fully-diluted cap tables.
Be wary of low valuation caps. They look harmless early, but if things go well they can create outsized dilution for founders.
Redemption premia add up. CLNs with 1–2× redemption multipliers (or high interest rates) can bite hard — negotiate them down or avoid them entirely.
UK-centric heads-up: ASAs can be SEIS/EIS-friendly if drafted right; CLN conversions don’t qualify.

Here are the slides from the session:

3) Paying people with upside, not cash

Why this matters: Startups rarely win on salary - they win on belief in future value. Equity is how you attract, retain, and motivate people who could earn more elsewhere. But equity needs structure: the wrong setup can lead to dry tax charges, messy exits, or demotivated teams. This section walks through practical ways to share ownership without shooting yourself in the foot.

Shares vs Options (plain English):

Share award: you become a shareholder now → can trigger tax now if the shares have value.
Option: right to buy later → usually no tax at grant; tax hits at exercise. Great for avoiding “dry tax”.

UK quick wins

EMI options (if you qualify) = the gold standard for UK startups.
Agree a valuation with HMRC, set exercise price, handle filings on time.
When EMI/CSOP doesn’t fit: consider growth shares (new class that only participates above a hurdle). Low starting value, upside on exit.

Vesting + exits

Default: 4 years, 1-year cliff, monthly.
UK norm: exit-only exercise (reduces early exercises).
Acceleration on exit = case-by-case (balance retention with reward).

Don’t forget (UK)

Section 431 election within 14 days whenever employees/directors get actual shares.
Contractor vs employee status matters for tax - use HMRC’s CEST tool and get advice.

Here are the slides from the session:

4) SEIS/EIS for UK individual investors

Why this matters: These UK tax reliefs are rocket fuel for early-stage fundraising. They let UK individual investors get major tax breaks for backing risky startups — meaning more willing angels and more money raised. But they’re rule-heavy, and small mistakes can ruin eligibility. Here’s some key points to be aware of.

Why founders care: angels love the reliefs → more (and faster) cheques.

SEIS: 50% income-tax relief. (Company can raise up to £250k through SEIS).
EIS: 30% income-tax relief (Company can raise up to £5m per year/£12m overall, (going up to £10m/£24m from April 2026); higher limits for knowledge-intensive companies).
No CGT for investor, for gains made on disposal of shares, if rules are met.

The big rules (keep it simple)

3-year rule: several conditions must be met for 3 years from investment (company + investor) including:
Qualifying trade: avoid “excluded activities” or investment > 20%.

Staying independent:

Spend the money: EIS funds must be spent on qualifying activities within 2 years (3 years for SEIS). Keep a record of how you spent it.
Timing matters: In most cases, you can’t file EIS1 until ≥4 months after trading starts. This impacts when your investor will receive their tax relief.

Common gotchas

SEIS and EIS on the same day = bad. Issue SEIS first, then EIS later.
CLN → shares ≠ EIS/SEIS. Use ASAs if you need advance funds.
Cash on your balance sheet before share issue can break gross assets limits. Use escrow / third-party holds until completion.
Independence test: agreements that hand control to another company within 3 years can kill relief—even if completion is deferred. Draft carefully.

How to actually do it (UK)

Line up real investor details.
Apply for Advance Assurance from HMRC (not mandatory, but investors prefer it).
Issue the shares.
File SEIS1/EIS1 with HMRC.
If approved, HMRC issues SEIS3/EIS3 to you, enables your investors to claim tax relief.

Here are the slides from the session: