Most tech founders incorporate within weeks of deciding to build a business. The decision itself is rarely the problem. Investment requires shares, shares require a company, and most founders know this before they write their first line of code.
The problem is what happens in those first few weeks. Founders register a company through an online formation agent, accept the defaults, and move on to building the product. The company exists, but the structure underneath it is wrong. Six months later, when they want to grant share options, bring on a co-founder, or raise a funding round, they discover that the decisions they made (or did not make) at incorporation are now costing them time and money to fix.
Getting the structure right from day one is not about bureaucracy. It is about making sure your company can do the things it will need to do as it grows, without expensive legal and accounting work to unpick early mistakes.
Share capital: getting the numbers right
The most common structural mistake happens at incorporation, and it costs founders money before they have made any.
A typical online formation creates 100 ordinary shares at GBP 1 each, split between the founders. This feels simple. It is also the wrong starting point for a company that intends to grant share options or raise investment.
The issue is granularity. If the company has 100 shares in total and wants to grant an employee options over 0.5% of the company, the maths does not work in whole shares. The company needs to do a share split before it can set up an EMI scheme or offer equity to early hires. That means legal fees, board resolutions, and Companies House filings, all to fix something that could have been avoided at formation.
A better starting point is a larger number of shares at a low nominal value. For example, 10,000 ordinary shares at GBP 0.01 each gives the same GBP 100 of share capital but with far more flexibility. The company can allocate fractional percentages, grant options in meaningful blocks, and bring in investors without needing to restructure first.
The nominal value also matters. It is the minimum price per share and cannot easily be changed after incorporation; setting it too high limits flexibility on future option grants. Equally, if the nominal value is too granular, it can cause issues with electronic filing at Companies House.
Articles of association: do not accept the defaults
Most companies incorporate with Model Articles, the standard template provided by Companies House. Model Articles are designed to cover the broadest possible range of companies. They are not designed for a tech start-up that expects to raise investment, create multiple share classes, or grant equity to employees.
The gaps become apparent quickly. Model Articles do not provide for different share classes with different rights, which investors will almost certainly require. They do not accommodate the kind of drag-along, tag-along, and pre-emption provisions that feature in most investment rounds. They do not address what happens to shares when an employee or co-founder leaves.
Amending the articles after the fact is possible but creates a specific problem for Employment Related Securities. If the rights attaching to shares change after they have been issued, HMRC may treat that change as a taxable event. Where founders hold shares that were issued under one set of articles and later become subject to different rights (for example, the introduction of deferred shares and their shares are subsequently deferred), the tax consequences can be material and difficult to unwind.
Getting bespoke articles in place before the first shares are issued avoids this entirely. It is one of the areas where spending money on legal advice early saves considerably more later.
Shareholder agreements
A shareholder agreement governs the relationship between the people who own the company. It sits alongside the articles but covers the commercial arrangements that articles typically do not: what happens if a founder wants to leave, how decisions are made, how disputes are resolved, what restrictions apply to transferring shares.
Many founders skip this step entirely. The relationship between co-founders feels strong, the business is exciting, and a legal document feels premature (and expensive!), especially when cashflows are tight. The difficulty is that shareholder agreements are much harder to negotiate once a disagreement has already started. By that point, the founders have competing interests and no framework to resolve them.
A shareholder agreement should be in place before any co-founder receives shares. It should cover, at a minimum, vesting arrangements (so that a founder who leaves early does not walk away with a full equity stake), good leaver and bad leaver provisions, non-compete and non-solicitation clauses, and the process for resolving deadlock. Wilson Partners’ Technology page makes the same point: however good your relationships are, getting this on paper early avoids difficult conversations later.
Corporate structure and IP
Tech founders often start building a product as a personal project, months or even years before they incorporate. By the time the company exists, the intellectual property may already be substantially developed. This creates two problems.
First, IP developed outside a company belongs to the individual who created it, not to the company. Transferring it into the company requires a formal assignment. If the IP has material value at the point of transfer, there may be tax implications, and the terms of the transfer need to be documented properly.
Second, IP that was substantially developed before incorporation may not qualify for R&D tax relief. The relief is based on expenditure incurred by the company on qualifying R&D activities. Work done before the company existed, or costs borne personally by the founder, fall outside the scope of a claim.
For some businesses, the right structure may involve a holding company with a trading subsidiary, or a separate entity to hold IP. This is particularly relevant where the company expects to operate across multiple jurisdictions, or where the founders want to separate the commercial risk of trading from the value of the IP. Getting the corporate structure right at the outset is significantly cheaper than restructuring later, particularly once investors are involved and consent is needed from multiple shareholders.
R&D tax relief: set up to claim from day one
Most early-stage tech businesses are spending heavily on product development. Some of that expenditure may qualify for R&D tax relief, which can provide a meaningful cash benefit even before the company is profitable.
For accounting periods beginning on or after 1 April 2024, the merged R&D expenditure credit scheme applies to all companies. This provides an above-the-line credit on qualifying R&D expenditure that benefits both profit-making and loss-making companies.
For R&D-intensive SMEs, where qualifying R&D spend represents at least 30% of total expenditure, the enhanced R&D intensive support scheme (ERIS) may apply. This is particularly relevant for early-stage tech businesses, where the majority of expenditure is on innovation. Under ERIS, a loss-making company can receive a more generous payable credit, and even after that credit is received, the company retains additional losses that can be carried forward to offset against future profits. For a business that expects to run at a loss for several years while building its product, this combination of immediate cash benefit and future tax savings is significant.
The key is having accounting systems that track R&D costs properly from the outset. As Bhavika Nesbitt of Wilson Partners’ Technology Team notes, “the majority of early-stage time and investment in tech start-ups goes into innovation. Getting your accounting set up to track R&D costs from the outset means you are ready to make a claim when the time comes, rather than trying to reconstruct records retrospectively”.
R&D relief is only available to limited companies. But for most tech founders, the more practical point is that the company’s structure and record-keeping need to support a claim. If costs are sitting in the wrong entity, or development work was done before incorporation without a proper IP transfer, the qualifying expenditure may be smaller than the founder expects.
Corporation tax and trading losses
The current corporation tax rates are 19% for companies with taxable profits of GBP 50,000 or less (the small profits rate) and 25% for profits above GBP 250,000, with marginal relief for profits between the two thresholds. These rates are confirmed through to the financial year beginning 1 April 2026.
For early-stage tech businesses that are not yet profitable, the more relevant consideration is trading losses. A limited company can carry forward trading losses to offset against future profits, reducing the corporation tax bill when the business becomes profitable. Combined with R&D relief, where losses may generate a payable credit in the short term and additional carried-forward losses for the future, the tax position of an early-stage tech company can be structured to provide both immediate cash and long-term savings.
The timing matters here too. Costs incurred before incorporation, whether on subscriptions, development tools, or contractor time, sit outside the company unless they are properly dealt with. This is one of the reasons that incorporating early, even before the product is generating revenue, can make commercial sense.
Making your company investable
If your business has any ambition to raise external funding, the structure of the company at the point of fundraising matters as much as the pitch deck.
Investors, whether angel investors, venture capital funds, or friends and family, invest by purchasing shares. For SEIS and EIS purposes, both of which offer significant tax reliefs to investors, the company must be a qualifying limited company meeting specific conditions. A company can raise up to GBP 250,000 through SEIS, and investors can claim 50% income tax relief on investments up to GBP 200,000 per tax year. Under EIS, companies can currently raise up to GBP 5 million per year, with annual limits set to increase to GBP 10 million from April 2026.
These reliefs are a powerful incentive for early-stage investors. But they only work if the company’s share structure, articles, and trading activity meet the qualifying conditions. Shares issued under SEIS and EIS must be ordinary shares, fully paid up in cash, with no preferential rights to dividends or repayment. If the company’s articles have been set up with share classes that carry preferential rights, or if the corporate structure means the company is controlled by another entity, the relief may not be available.
Getting SEIS/EIS advance assurance from HMRC before starting a funding round is strongly advisable. This requires submitting the company’s business plan, financial forecasts, and cap table, and it gives investors confidence that their tax relief will be available. If the company’s structure is wrong at this point, fixing it mid-round creates delay and costs that could have been avoided.
Employee share schemes
Hiring good people in a start-up usually means competing against larger companies with bigger salary budgets. Equity is the tool that levels the playing field.
The Enterprise Management Incentive (EMI) scheme allows qualifying companies to grant share options to employees with significant tax advantages. EMI options can be granted with an exercise price agreed with HMRC, and if conditions are met, the employee may pay capital gains tax at a reduced rate on disposal rather than income tax. From April 2026, the qualifying criteria for EMI are being expanded, with the gross asset limit increasing to GBP 120 million and the employee headcount limit rising to 500.
This brings EMI back to the earlier point about share capital. If the company was incorporated with 100 shares at GBP 1 each, it will need a share split before it can grant options in meaningful amounts. That means legal and accounting costs, Companies House filings, and a delay to getting the scheme in place. A company that incorporated with a larger share pool at a lower nominal value can move straight to scheme design.
The scheme design itself matters. Vesting conditions, leaver provisions, and the events that trigger the right to exercise all need to reflect the company’s commercial objectives while staying within the EMI rules. If the scheme rules give the board discretion over when or how options can be exercised, HMRC may treat that discretion itself as a disqualifying event if it is not built into the scheme correctly from the outset. This is specialist territory and worth getting proper advice on before granting any options.
Factors to consider
Every tech start-up is different, and the right structure depends on the specific circumstances. But there are common patterns that Wilson Partners sees regularly in companies that did not get the right advice at the outset:
- Share capital that is too coarse-grained for option grants or investment rounds, requiring an expensive share split
- Model Articles that do not support the share classes investors need, requiring a full rewrite of the company’s constitutional documents
- No shareholder agreement between co-founders, leading to difficult and costly disputes when circumstances change
- IP developed before incorporation that has not been properly assigned, weakening R&D claims and creating risk in due diligence
- No corporate structure planning, meaning the company needs to bolt on a holding company or subsidiary later when the costs and complexity are much higher
- Accounting systems that are not set up to track R&D expenditure, meaning the first claim is based on reconstructed records rather than contemporaneous data
None of these are fatal. All of them cost more to fix later than they would have cost to get right at the start.
Talk to a specialist
Wilson Partners works with tech start-ups from incorporation through to exit. Our dedicated technology team understands the specific challenges of building a product-led business, from structuring your first share capital to making sure your R&D claims stand up to scrutiny. If you are about to incorporate, or if you have already incorporated and want to check whether your structure is set up for what comes next, talk to us and we will give you a clear, practical view based on where your business actually is.
