Two angels put the same £25,000 into the same company. It sells three years later for less than the founders hoped. One angel gets their money back and a small profit; the other gets a fraction of their cheque. Same company, same exit, same day. The difference is the class of shares each of them holds.
That is the whole reason share classes exist - and the reason they're worth understanding before you sign anything. Equity looks like a single number on a cap table: a percentage, a count of shares. Underneath, those shares can carry wildly different rights. Knowing which rights attach to your shares is the difference between owning a slice of a company and owning a slice of an argument.
What is startup equity, really?
Equity is ownership of the company, divided into shares. If a company has issued one million shares and you hold fifty thousand, you own 5% - for now. That "for now" matters, because new shares get issued at every funding round and your slice gets diluted unless you put in more. (We've a separate piece on dilution if that's the bit you want.)
A UK company limited by shares records all of this in two places. Its articles of association set out the rights of each share class - the constitutional rulebook, filed at Companies House. The shareholders' agreement is the private contract between the company and its investors, and it's usually where the sharper teeth are. When the two conflict, which one wins is itself negotiated. The point for an angel: the headline percentage tells you almost nothing on its own.
What are share classes, and how do they differ?
A share class is simply a named group of shares that all carry the same rights. Companies create different classes so that different shareholders can have different deals. You'll usually see them labelled "Ordinary", "A Ordinary", "Preferred", "Seed Preferred", "Series A Preferred", and so on. The labels are conventions, not law - the rights are whatever the articles say they are. Three rights do most of the work:
- Voting. Who gets to decide things - board appointments, future fundraises, a sale. Some classes vote; some don't.
- Dividends. Whether the class is entitled to a share of profits paid out, and in what order. Early-stage startups rarely pay dividends, so this matters less here than it does in mature companies.
- Liquidation - the exit queue. The big one. When the company is sold or wound up, who gets paid, in what order, and how much before anyone else sees a penny.
Ordinary shares: the base layer
Ordinary shares are the plain-vanilla unit of ownership. Founders hold them. Employees who exercise options end up with them. Many early-stage angels - especially in SEIS and pre-seed rounds - hold them too. They carry votes and a share of the upside, and that's roughly it.
The catch is the downside. Ordinary shareholders sit at the back of the queue. On a sale, lenders are paid first, then any preference shares take their cut, and ordinary holders split whatever is left. In a strong exit there's plenty left and everyone's happy. In a soft exit - the company sells for less than was invested - "whatever's left" can be very little, or nothing.
Preference shares: the front of the queue
Preference shares (often called "preferred") are ordinary shares with priority bolted on. The priority that matters most at exit is the liquidation preference: a contractual right to be repaid a set amount before ordinary shareholders get anything.
The standard, founder-friendly version is a 1x non-participating preference. It means: take back the amount you put in, or convert to ordinary and take your percentage - whichever is larger - but not both. Reasonable, and common in UK seed rounds.
The versions to read carefully are participating preferences (get your money back and a percentage of the rest) and multiple preferences (2x, 3x your money back before anyone else). Stack a couple of participating multiples through successive rounds and a mediocre exit can pay the later investors handsomely while the founders and early ordinary holders are left with the crumbs. This is exactly the scenario in the opening of this piece. We dig into the mechanics in our liquidation-preferences explainer.
A percentage tells you how much of the upside you own. The share class tells you whether you'll ever see it.
Growth shares, options and the pool
Two more things you'll meet on a cap table.
Growth shares are a class designed to capture only the value created above a set hurdle - the company's value on the day they're issued. Below the hurdle they pay nothing; above it they behave like ordinary shares. Founders and employees use them for tax reasons. As an angel you'll rarely be offered them, but you'll see them sitting in the stack.
The option pool is a reserved block of (usually ordinary) shares set aside for employees who haven't been hired yet. It's not a class so much as a ring-fenced allocation, but it matters to you because it's almost always carved out of the pre-money valuation - meaning the existing shareholders, not the new investors, absorb the dilution. Our piece on the option pool walks through how that shifts the maths.
Where SAFEs and convertibles fit
Plenty of early UK angels invest through a convertible instrument - a SAFE or an advance subscription agreement - rather than buying shares outright. You're not getting a share class on day one; you're getting the right to shares later, at the next priced round, usually at a discount or a capped valuation. The class you eventually receive is whatever that round issues. Worth flagging: a plain SAFE generally doesn't qualify for SEIS or EIS relief, whereas a properly drafted advance subscription agreement can - another reason the structure isn't a detail.
Why SEIS and EIS pin you to ordinary shares
If the relief is part of why you're investing, the share class isn't optional. HMRC requires SEIS and EIS shares to be full-risk ordinary shares that are not redeemable and carry no special rights to the company's assets on a winding up. Limited preferential rights to dividends are allowed, but only within tight conditions - they can't accumulate or be varied at will. In plain terms: you can't take a chunky liquidation preference and keep the relief on those shares. (Source: gov.uk - apply for the Enterprise Investment Scheme.)
That's a real trade-off, and it's deliberate. The schemes reward you for taking genuine risk alongside the founders, so the tax code won't let you hide behind a preference. For reference, the headline investor reliefs are 50% income tax relief on SEIS (on up to £200,000 a tax year) and 30% on EIS (on up to £1,000,000, or £2,000,000 where at least £1,000,000 goes to knowledge-intensive companies), each with a minimum three-year holding period. The company-side rules and qualifying limits are set out in the gov.uk guidance and change from time to time - check the current figures there. We cover the investor side in our EIS explainer.
How an angel should actually read the share structure
When a term sheet lands, the equity question isn't "what percentage am I getting". It's a short list:
- Which class am I being issued, and what does it say in the articles?
- Is there a liquidation preference ahead of me - and is it 1x non-participating, or something heavier?
- Do my shares vote? On what?
- If I'm relying on SEIS or EIS, do these shares actually qualify?
- Where does the option pool come from - my dilution or the new money's?
None of that requires a law degree. It requires reading the two documents and asking the questions out loud. The companies worth backing won't mind the questions. The ones that bristle have just told you something.
Frequently asked questions
What is the difference between ordinary and preference shares?
Ordinary shares are the basic unit of ownership - they carry voting rights and a share of whatever value is left after everyone else is paid. Preference shares sit ahead of them: they typically carry a liquidation preference, so their holders are repaid first when a company is sold or wound up, often before ordinary shareholders see anything.
What share class do angel investors usually get?
It depends on the stage and the round. Many UK seed and pre-seed angels invest in ordinary shares, partly because SEIS and EIS relief requires full-risk ordinary shares with no special rights to assets. Priced rounds led by institutional investors more often use a class of preferred or preference shares with a liquidation preference attached.
Do SEIS and EIS shares have to be a particular class?
Broadly, yes. HMRC requires SEIS and EIS shares to be full-risk ordinary shares that are not redeemable and carry no special rights to the company's assets on a winding up. Limited preferential rights to dividends are allowed within strict conditions. Always check the current gov.uk guidance and take professional advice before relying on relief.
What is a liquidation preference?
A liquidation preference is a contractual right, usually attached to preference shares, to be repaid a set amount when a company is sold or wound up before ordinary shareholders receive anything. A 1x non-participating preference returns the amount invested first; participating or multiple preferences can return more and reduce what is left for everyone else.
Is this article financial advice?
No. The Carry is independent editorial journalism, not financial or investment advice. This piece explains how startup equity and share classes work. It is general information only. Speak to an FCA-regulated adviser, and take legal and tax advice, before making any investment decision.