Legal risks for founders as a business grows: What to address before problems arise
- Christopher Eddison-Cogan
- Apr 27
- 7 min read
Updated: Apr 30
As a business develops, differences in contribution, expectations and control can become more pronounced. This article examines how those pressures translate into legal risk, and why addressing structure early can make a significant difference.
Growth is often seen as a purely positive development in a business. Increased revenue, expanding teams and new opportunities tend to signal success.
In practice, however, growth also introduces pressure - particularly in founder-led businesses where early decisions have been made informally. What works at the outset can become increasingly difficult to sustain as the business evolves.
Across the South West, Bristol and London, many of the more complex commercial issues I encounter do not arise suddenly. They develop gradually, often from arrangements that were never fully defined at the outset.
Where pressure develops in growing businesses
In the early stages, businesses are often driven by energy and alignment. Founders work closely together, decisions are made quickly and roles evolve naturally. As the business grows, several recurring pressure points tend to emerge.
Unequal contribution
Differences in contribution - whether financial, operational or strategic - can become more visible over time.
A founder who was less involved initially may retain a significant shareholding, while another may feel they are carrying the business forward. What may once have felt fair begins to feel misaligned.
Decision-making without structure
Informal decision-making can become increasingly difficult as the business becomes more complex. Without agreed processes, disagreements can slow progress or lead to decisions being made without full alignment. Over time, this can erode trust between founders.
Financial expectations
Questions around remuneration, dividends and reinvestment often arise once a business becomes profitable. Without clear agreement, these discussions can quickly become contentious, particularly where founders have different personal financial priorities.
Changing priorities
Founders’ circumstances change. One may wish to step back, another may wish to scale more aggressively, and another may seek to exit entirely. Without a framework for managing these changes, tensions can develop gradually but persistently.
The legal framework: clarity beneath informal arrangements
However informal a business relationship may feel, the legal framework is not.
In UK companies, the distinction between shareholders, directors, employees and consultants is fundamental. The term “founder” has no formal legal meaning. Rights and obligations arise from the role an individual holds, not from their perceived status within the business.
Most companies are governed by the Companies Act 2006, which sets out directors’ duties and provides mechanisms for addressing unfair or prejudicial conduct. In practice, these duties require directors to act in the best interests of the company, to avoid conflicts of interest and to exercise independent judgement.
Where relationships begin to break down, these duties can come into sharper focus. Decisions that may once have been taken informally can later be scrutinised more closely, particularly where one party feels excluded or disadvantaged.
Minority shareholders may also have statutory protections, including the ability to bring claims for unfair prejudice where the company’s affairs have been conducted in a way that is unfairly harmful to their interests. However, by the time these remedies are considered, relationships are often already strained and positions have hardened.
Common scenarios in practice
In many cases, issues emerge in recognisable patterns.
A founder reduces their involvement but retains their shareholding, leading to disagreement about value and entitlement
Founders disagree on whether profits should be reinvested or distributed
Key decisions are made informally, leading to disputes about authority or process
A founder wishes to exit, but there is no agreed method for valuing their shares
Personal relationships influence commercial decisions in ways that are not acknowledged openly
These situations rarely arise from bad faith. More often, they reflect a lack of structure at a point where structure becomes necessary.
A simple example illustrates the point. Two founders build a business together. One gradually steps back from day-to-day involvement, while the other continues to grow the business. Several years later, the business is more valuable, and the founder who stepped back seeks to realise that value. Without an agreed mechanism for valuation or exit, what might have been a straightforward transition can become a point of dispute.
What happens if these issues are not addressed
Where these issues are left unresolved, they tend not to remain static.
Over time, a lack of clarity can lead to:
Erosion of trust between founders
Delayed or avoided decision-making, affecting the business itself
Disputes over financial entitlements, particularly as value increases
Breakdown in communication, making resolution more difficult
Escalation into formal legal disputes, often at significant cost
Perhaps most importantly, unresolved issues can begin to affect the operation of the business. Opportunities may be missed, decisions delayed and key relationships strained.
Addressing these issues early does not eliminate risk entirely, but it significantly reduces the likelihood of disputes becoming entrenched.
Shareholder arrangements: aligning expectations early
One of the most effective ways to address these risks is through clear, structured shareholder arrangements.
These arrangements typically deal with:
How key decisions are made
How shares can be transferred or sold
How shares are to be valued in different scenarios
How profits are to be distributed
What happens in the event of disagreement
In practice, well-drafted arrangements often include provisions such as:
Pre-emption rights, controlling how shares can be sold
Drag-along and tag-along provisions, dealing with third-party sales
Deadlock mechanisms, allowing disputes to be resolved without paralysis
Valuation clauses, providing clarity where a shareholder exits
The purpose of these arrangements is not to anticipate conflict in a negative sense, but to provide clarity while relationships are still working well. They allow founders to agree in advance how difficult situations will be handled, rather than attempting to negotiate those issues at a point of tension.
Without such structure, businesses may find themselves relying on statutory remedies that are more rigid and often more costly to pursue.
Dispute resolution: timing matters
Where tensions have already begun to emerge, the timing of intervention can make a significant difference.
Structured negotiation and mediation are often effective in allowing parties to reset communication and explore practical solutions. This is particularly valuable where there is an ongoing business relationship that the parties wish to preserve.
Early-stage mediation tends to be more flexible and solution-focused. At this stage, parties are often still able to consider a range of outcomes and maintain a degree of cooperation.
By contrast, where issues are left to develop, positions may become more entrenched. At that point, resolution becomes more difficult and may require more formal intervention.
Litigation remains an option where necessary, but in many cases a measured, earlier approach allows issues to be addressed more constructively.
When business and personal relationships overlap
In some businesses, particularly family-led enterprises, the distinction between personal and commercial relationships is less clear.
In these situations, decisions may carry emotional as well as financial significance. Expectations may be shaped by family dynamics, history or perceived fairness, rather than purely commercial considerations.
Legal structure remains important, but it needs to reflect the underlying reality of the relationships involved. A purely technical solution is unlikely to be effective without an understanding of those dynamics.
This is often where careful, structured conversations - supported by legal clarity - can make a meaningful difference.
Recognising the early signs
A useful step is recognising when a business is approaching a point where structure needs to evolve.
Indicators may include:
Decisions taking longer or becoming more difficult
Reduced transparency in financial matters
Founders operating independently rather than collaboratively
Informal discussions that do not lead to resolution
Increasing reliance on assumptions rather than agreed processes
These are not necessarily signs of failure. They often indicate that the business has reached a stage where its underlying arrangements need to be clarified.
A different kind of legal work
There is a perception that legal advice is only required once a problem has arisen.
In practice, much of the most effective legal work takes place earlier. By clarifying roles, expectations and processes, businesses can reduce the likelihood of disputes and create a more stable foundation for growth.
This approach is often preventative rather than reactive. It is also, in many cases, more cost-effective than resolving disputes once they have developed.
For founder-led businesses, this can make a significant difference- not only in avoiding disputes, but in preserving the working relationships that often sit at the heart of the business.
Frequently asked questions
Do small businesses need a shareholder agreement?
In many cases, yes. Even where there is a high level of trust between founders, a shareholder agreement provides clarity on key issues that may become more significant as the business grows.
What happens if founders fall out in a UK company?
The outcome depends on the company’s structure and any agreements in place. Without clear arrangements, disputes may need to be resolved through negotiation, mediation or, in some cases, formal legal proceedings.
Can a director be removed by other founders?
Yes, subject to the company’s constitution and statutory provisions. The process must follow the requirements set out in company law.
What rights does a minority shareholder have?
Minority shareholders may have protections under company law, including the ability to bring claims where conduct is unfairly prejudicial. However, these remedies can be complex and are often used as a last resort.
What happens if there is no agreement in place?
Without a shareholder agreement, the company will rely on its articles of association and statutory provisions. These may not adequately address more complex or evolving situations, particularly where relationships have changed over time.
Discussing your situation
If your business is growing and some of these dynamics are beginning to surface, taking early advice can often make a meaningful difference to how matters unfold.
Eddison Cogan Lawyers works with founders and business owners across the South West, Bristol and London, bringing clarity, sound judgement and a structured approach to resolving issues constructively.
About the author
Christopher Eddison-Cogan
Managing Partner | Eddison Cogan Lawyers
Christopher is a dual-qualified solicitor (England & Wales and Australia) with over twenty years’ experience in commercial and family law. He advises founders, business owners and families on structuring, negotiation and dispute resolution, with a particular focus on situations where commercial and personal interests overlap.
The following note is included for clarity and completeness.
This article is intended to provide general information about legal issues that may arise in growing businesses in England and Wales. It does not constitute legal advice and should not be relied upon as such. The law may change over time, and the application of legal principles will vary depending on the specific circumstances of each case. Reading this article does not create a solicitor-client relationship.
