Director service agreement with equity

A director with equity has two relationships with the company, as an employee and as an owner, and the documents that govern them have to agree with each other: the service agreement decides when the employment ends and why, and the shareholders' agreement or the option documents decide what happens to the shares as a result. The service agreement has to be drafted knowing what the equity documents say about leavers, vesting and covenants, and the equity documents have to be drafted knowing what the service agreement says about termination. I draft the service agreement for the company for a fixed fee of £995, delivered in five working days, with the shareholders' agreement and the option documents available separately.

Who this is for

Companies in England and Wales appointing a director who will hold shares, growth shares or options, and founders formalising their own service agreements alongside a shareholders' agreement.

What matters in a director's service agreement with equity

The service agreement, the shareholders' agreement and the option documents as one scheme

The service agreement should refer to the shareholders' agreement and any option or growth share documents, say which document governs which question (the employment and its termination in the service agreement, the shares and their transfer in the shareholders' agreement and the articles, the options in the option agreement), provide that the definitions of good and bad leaver are the same in each, and say which prevails where they conflict; a director dismissed under a service agreement whose leaver provisions are in a shareholders' agreement drafted on different terms is a dispute about which document to read.

Shares, options and growth shares as the equity

The director may hold ordinary shares bought or awarded on appointment, growth shares that participate only in value above a hurdle, or options under the Enterprise Management Incentives scheme in Schedule 5 to the Income Tax (Earnings and Pensions) Act 2003 where the company qualifies, and the service agreement should record which, refer to the documents, and say that the equity is governed by them rather than by the employment terms, so that the service agreement does not promise shares the option scheme does not deliver; the accountants design the equity and the service agreement records it.

Vesting, good and bad leavers and the link to termination

Vesting and the leaver provisions sit in the shareholders' agreement, the articles and the option documents, and the service agreement should state the termination grounds and the notice in terms that map onto the leaver categories: dismissal for gross misconduct and resignation within a stated period as bad leaver events, redundancy, ill health, death and dismissal without cause as good leaver events, with the service agreement's summary termination clause defining the misconduct that the leaver provisions treat as bad; the compulsory transfer provisions must be in the articles under section 33 of the Companies Act 2006 to bind the shares, and the service agreement cannot do that work.

The tax of the equity and the elections

Shares acquired by a director by reason of employment are employment-related securities, with income tax on any undervalue and the restricted securities rules in Chapter 2 of Part 7 of the Income Tax (Earnings and Pensions) Act 2003 applying to shares subject to vesting or leaver provisions, so that the election under section 431 of that Act should be considered within the time limit; the service agreement should record that the director has been advised to take their own tax advice, should provide for the company to recover any employment taxes it must account for on the equity, and should leave the tax structuring to the accountants.

Covenants in both documents

A director with equity should give restrictive covenants in the service agreement (as an employee) and in the shareholders' agreement (as a shareholder), because covenants given by a seller or holder of shares to protect the goodwill they own are enforced more readily than employment covenants, and the two sets should be consistent in scope and duration, with the garden leave period set off against the employment covenants and the shareholder covenants running from the date the director ceases to hold shares; a company that relies on the employment covenants alone has the weaker of the two.

Termination, the board and the shares that follow

On termination the director resigns from the board, the leaver provisions apply to the shares and options as the equity documents provide, the service agreement's payment in lieu and garden leave clauses operate, and any settlement should deal with both the employment and the equity, because a settlement agreement that ends the employment without dealing with the shares leaves the director as a shareholder; the service agreement should provide that the company may require the transfer of shares under the articles and the shareholders' agreement, and that payments for loss of office need shareholder approval under section 217 of the Companies Act 2006, with the two-year limit in section 188 observed.

What it costs

Senior or director service agreement, £995. With properly drafted restrictive covenants and garden leave. Five working days.

Employment contract, £595. One template you can reuse for a grade of staff. Five working days.

Buying online forms the engagement on payment. The scope is what the employment contracts and handbooks page describes, you accept the Terms of Service at checkout, and I email you within four working hours to get started. If you would rather ask something first, email me.

What you get

• A bespoke contract drafted for how you employ people
• Restrictive covenants drafted at a scope a court will uphold
• Confidentiality and intellectual property provisions that put ownership where it belongs
• The statutory particulars, so the document does the job section 1 of the Employment Rights Act 1996 requires it to do
• Flexibility clauses where you genuinely need them, drafted to survive challenge
• Core policies: disciplinary, grievance, sickness absence, equal opportunities, data protection and, increasingly, AI use
• One round of amendments

What is not included

• Acting for employees
• Employment tribunal representation
• Payroll, pensions auto-enrolment and tax
• Immigration and sponsor licence work
• Day to day HR handling, disciplinaries, grievances and redundancy processes

Questions I am often asked

Do we need a service agreement if the director has a shareholders' agreement?

A service agreement is still needed. The shareholders' agreement governs the shares; it does not govern the employment, the notice, the garden leave or the termination grounds. The two are drafted to use the same leaver definitions.

If we dismiss a director for misconduct, do they lose their shares?

What the leaver provisions in the shareholders' agreement and the articles say, which the service agreement is drafted to match: a bad leaver transfers vested shares at the lower price and unvested shares at nominal value, if the articles contain the mechanism.

Should the director's covenants be in the service agreement or the shareholders' agreement?

Both, consistently drafted. The shareholder covenants are enforced more readily because they protect goodwill the director owns; the employment covenants cover the period the director is employed but holds no shares.

Related guidance and services

• Employment contracts and handbooks, £995, the service this page describes
• Shareholders agreement, £995
• Settlement agreements for employers, £795
• Director service agreement
• Shareholders agreement with vesting and good and bad leaver terms

This page is general guidance for businesses in England and Wales, not advice on your own circumstances. Last reviewed: October 2026. Email geoffrey@caesar.co.uk.