Share Classes In The UK: A Guide For Startups And SMEs

If you’re building a UK startup or growing an SME, you’ll probably reach a point where issuing only ordinary shares stops being enough.

Maybe you’re bringing in an investor who wants some extra protections. Maybe you want to reward key team members without giving away control. Or maybe you’ve got co-founders who aren’t all contributing in the same way (or at the same time).

This is where having different classes of shares can help. Done properly, different share classes can support fundraising, motivate your team, and protect the long-term direction of the business.

But this is also an area where shortcuts (like copying a generic template) can create expensive problems later - especially when you try to raise money, sell the business, or manage a founder exit.

What Are Different Classes Of Shares (And Why Do They Matter)?

In simple terms, different classes of shares are different “types” of shares in the same company, each with its own rights and restrictions.

Share rights usually sit in two places:

• Your company’s articles of association (your company’s rulebook)
• Any shareholders’ agreement (the private deal between shareholders about how the company will be run)

When you create different share classes, you’re saying:

• Shareholders in Class A will have these rights (eg voting rights, dividend rights, rights on a sale), and
• Shareholders in Class B (or another class) will have different rights.

So instead of treating every shareholder the same, you can tailor the deal to match reality - for example, investors may want protections, while founders may want to keep control.

What Rights Can Be Different Between Share Classes?

Most share class structures play with one or more of these levers:

• Voting rights (eg 1 vote per share vs no votes, or “weighted” votes)
• Dividend rights (eg entitlement to dividends, or preference dividends)
• Capital rights (what happens if the company is wound up or sold)
• Transfer rights (restrictions on selling shares, or who gets first refusal)
• Conversion rights (eg preference shares converting into ordinary shares on an exit)
• Redemption rights (in limited cases, shares that can be bought back under set rules)

The key thing to remember is that “different class of shares” isn’t just a label. If the rights aren’t properly drafted (and consistent across your documents), the label won’t save you.

Why Startups And SMEs Use Different Share Classes

There’s no one-size-fits-all structure, but different share classes are very common in high-growth businesses and in SMEs with multiple stakeholders.

Here are some practical reasons you might create different share classes.

1) Keeping Founder Control While Raising Investment

Let’s say you’ve built a business with strong revenue, and an investor offers funding - but they want equity. You might be comfortable giving away some ownership, but not comfortable giving away control over big decisions.

Different share classes can be used to separate:

• economic ownership (who benefits financially), and
• decision-making control (who votes on key matters).

This can be done in various ways (eg non-voting shares for some holders, or enhanced voting rights for others). Whether it’s appropriate depends heavily on your company’s goals, investor expectations, and governance.

2) Making Investment Deals Cleaner

Investors often want their investment to come with specific protections and deal terms - especially if they’re investing meaningful sums or taking on significant risk.

It’s common for investors to request preference shares (a separate class) that might include features like:

• a priority return on an exit (often called a liquidation preference)
• anti-dilution protections (in some cases)
• additional approval or veto rights for major company actions (these are often documented in a shareholders’ agreement and/or investment documents, rather than being inherent “class rights” on their own)

If you’re raising capital, a properly drafted Share Subscription Agreement is usually part of the paperwork, alongside updated company documents.

3) Rewarding Key People Without Handing Over the Steering Wheel

You may want to give equity to:

• senior hires
• advisers
• strategic partners

But you might not want them voting on major strategic decisions.

Different share classes (or carefully structured arrangements like options) can help you strike that balance - rewarding contribution while protecting governance.

4) Managing Unequal Founder Contributions (Fairly)

In the real world, founders contribute differently. One founder might invest cash. Another might build the product. Another might bring customers.

You can reflect this through share structures - but in many cases, you’ll also want to consider vesting (so someone doesn’t walk away early with a large stake). A Share Vesting Agreement is a common way to do this cleanly.

Common Different Share Classes In The UK (With Practical Examples)

UK companies can create lots of variations, but there are a few patterns we see regularly.

Ordinary Shares

Ordinary shares are the “default” share type in many private limited companies. They typically carry:

• voting rights
• dividend rights (when declared)
• rights to share in capital on a winding up or sale

If your company only has ordinary shares, then (usually) all shareholders of the same class are treated equally.

Non-Voting Shares

Non-voting shares are shares that (as the name suggests) don’t carry voting rights, or only carry voting rights in limited circumstances.

They can be useful where you want to:

• share economic upside (dividends / sale proceeds), but
• keep decision-making power with founders or a smaller group.

Be careful here: “non-voting” doesn’t mean “no rights”. You still need to document dividend entitlements, transfer restrictions, and what happens on an exit.

Preference Shares

Preference shares usually give the holder some form of priority over ordinary shareholders - often relating to:

• dividends (eg a fixed dividend before ordinary shareholders receive anything), and/or
• return of capital on a sale or winding up.

Preference shares are common in fundraising rounds because they can protect investors if the company is sold for less than expected, or if there’s a downside outcome.

Alphabet Share Classes (A, B, C Shares)

A very common way to structure different share classes is to use “alphabet shares” - such as Class A, Class B, and Class C.

These can be set up to have different rights. For example:

• Class A shares: full voting rights
• Class B shares: no voting rights but rights to dividends
• Class C shares: a special class reserved for future incentives

If you’re thinking about this route, it’s worth reading up on Class A vs Class B Shares, because the practical pros/cons often come down to control, simplicity, and what future investors will accept.

Growth Shares (Sometimes Used For Management Incentives)

Growth shares are sometimes used to incentivise management by giving them a right to share in future growth in value, rather than existing value.

This can be attractive when:

• the company already has meaningful value, and
• you want to reward someone for growing it further.

However, the legal and tax design can be complex, so it’s important to get tailored advice before you implement anything.

How Do You Set Up Different Classes Of Shares In A UK Company?

Creating different classes of shares is not just an idea - it’s a legal change to your company’s structure. Done properly, it’s documented, approved, and consistent across your company records.

While the exact steps depend on what you’re trying to achieve, the process often looks like this.

1) Check Your Current Articles Of Association

Your articles of association need to allow for the share classes you want to create, and they need to properly describe the rights attached to each class.

If your company is using basic “model articles”, they might not fit what you’re trying to do. This is where an Articles Of Association update can be crucial - especially if you’re fundraising or introducing new stakeholder rights.

2) Decide The Rights For Each Class (Commercial First, Then Legal)

This is the “commercial deal” stage: you work out what you actually want the structure to do.

Questions to work through include:

• Who should control votes on key decisions?
• Should investors have any priority return on an exit?
• Can dividends be paid differently to different holders?
• What happens if someone leaves the business?
• Can shares be transferred freely, or should there be restrictions?

This is also where you need to think a few steps ahead. A structure that feels “fair” today can become a headache later if it scares off future investors or complicates a sale.

3) Update Your Shareholder Arrangements

Different share classes often go hand-in-hand with a Shareholders Agreement, which sets out the rules around governance, transfers, decision-making, and protection mechanisms.

In practice, the articles and shareholders’ agreement should work together. If they contradict each other, you can end up with disputes or a structure that’s hard to enforce.

4) Pass The Right Company Approvals

Depending on the changes, you may need shareholder approvals (often via resolutions). You’ll also want to carefully document board decisions.

This matters because if the process isn’t followed, the share issue or class rights can be challenged later - and that’s the kind of risk that can derail due diligence in a fundraising or acquisition.

5) Issue The Shares And Update Company Records

Once your documents are in place and approvals are obtained, you can issue the relevant shares to the relevant people.

This usually includes:

• updating statutory registers
• issuing share certificates
• making any required filings at Companies House (for example, updated confirmation statement details and, where relevant, returns of allotment)

If shares are being issued to new investors or new team members, you’ll also want to make sure you’ve properly captured the commercial terms in the issue documentation (and not left key points to informal emails).

Key Legal And Commercial Risks To Watch Out For

Different share classes can be a great tool - but they can also create complexity. Here are the issues we often see when businesses move too quickly or don’t get proper advice.

Be Clear On Voting And “Reserved Matters”

It’s easy to assume voting rights are the whole story. They’re not.

Even if someone has non-voting shares, they might still have veto or consent rights under a shareholders’ agreement for key decisions (often called “reserved matters”). That can be totally reasonable - but you should know what you’re agreeing to.

Don’t Accidentally Create A Structure That Blocks Future Funding

Some share structures make sense for a small founder group but can cause issues when you fundraise again.

For example:

• future investors may want a clean cap table
• some investors won’t accept extreme voting imbalances
• overly complex dividend or conversion rights can slow down legal due diligence

The goal is to build something that works now and doesn’t create friction later.

Think About Transfers, Leavers, And Exits Early

One of the most common “we wish we thought of this earlier” problems is a shareholder leaving - and no one knowing what happens next.

At a minimum, you’ll want to think through:

• Can shares be transferred to a third party?
• Do existing shareholders have pre-emption rights (right of first refusal)?
• What happens if a founder stops working in the business?
• What happens on a sale (drag-along and tag-along rights)?

If you need to tidy up ownership over time, or you’re planning for founder transitions, a proper Share Transfer process is a must - because informal arrangements can create tax and legal issues.

Be Careful With Dividends And “Alphabet Shares”

Alphabet shares are sometimes used to pay dividends in a flexible way (for example, to different shareholders in different proportions).

This can be legitimate, but it must be done properly - and it can raise tax considerations. Dividends also require the company to have distributable profits, and directors must follow the correct process when declaring them.

If your goal is flexibility, it’s worth pressure-testing the structure with an adviser before you implement it.

Tax And Incentive Planning Needs Extra Care

If you’re using share classes as part of an incentive plan (eg for key employees or management), the tax treatment can vary significantly depending on how it’s structured.

It’s also important that what you put in place matches your overall employment and incentive strategy - and that you don’t unintentionally trigger tax charges when shares are issued or when restrictions fall away.

Because tax outcomes depend on your exact facts, it’s worth getting legal and tax advice early rather than “fixing it later”. Fixing it later is usually much harder. (This article is general information only and isn’t tax advice.)

Key Takeaways

• Different classes of shares let you tailor voting, dividend, and exit rights so your company structure matches how the business actually operates.
• Startups and SMEs commonly use different share classes to raise investment while maintaining control, reward key people, and manage founder contributions fairly.
• Common different share classes in the UK include ordinary shares, non-voting shares, preference shares, and alphabet shares (Class A, B, C, etc.).
• To implement different share classes properly, you usually need the right articles of association, aligned shareholder arrangements, correct approvals, and clean company records.
• Share structures can create long-term issues if they’re rushed - especially around voting control, future fundraising, dividends, and shareholder exits.
• If you’re using share classes to incentivise people, make sure you consider the tax and legal implications upfront so you don’t build in avoidable costs or disputes.

If you’d like help setting up different classes of shares (or reviewing whether your current structure is fundraising-ready), you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.