Director Service Agreement UK: What It Is, Why You Need One, and What It Should Include

A director service agreement (DSA) is a written contract between a UK company and one of its executive directors that sets out the terms governing the director's role — their duties, remuneration, notice period, restrictive covenants, IP ownership, confidentiality obligations, and the conditions under which the relationship can end. Unlike a standard employment contract, a director service agreement is specifically designed for the director relationship, which carries fiduciary duties, broader company-law obligations, and more complex post-termination considerations. Every company with executive directors needs one — and most early-stage businesses don't have one until something goes wrong.

What Is a Director Service Agreement?

A director service agreement is the legal document that defines the working relationship between a company and its executive directors. It sits alongside — and is different from — your company's articles of association and any shareholders agreement.

The articles govern how the company is run as a corporate entity: voting rights, share classes, decision-making procedures. The shareholders agreement governs the relationships between shareholders: transfer restrictions, drag-along rights, pre-emption, dividends. The director service agreement governs the relationship between the company and each individual executive director: what the director does, what they're paid, how long they stay, and what happens when they leave.

These are three separate documents. Many founder-directors assume the articles cover everything, or that a shareholders agreement is sufficient. They don't, and it isn't.

Who Needs a Director Service Agreement?

Executive Directors

Executive directors — those who work in the business on a day-to-day basis, draw a salary, and hold a director's appointment — are the primary candidates for a full director service agreement. This includes:

• Founder-directors of companies at any stage. Even if you founded the company yourself, the absence of a written agreement creates ambiguity about your remuneration, your entitlements on exit, and your IP obligations.
• Employed directors brought in to lead operations, finance, or a specific function. Without a written DSA, their terms of employment and their director obligations exist as two separate, potentially conflicting arrangements.
• Directors taking equity as part of their remuneration package. A DSA that doesn't address vesting, good leaver / bad leaver provisions, and post-exit share treatment is a legal problem waiting to happen.

Non-Executive Directors

Non-executive directors typically receive a letter of appointment rather than a full service agreement. But a properly drafted appointment letter covering their duties, fees, time commitment, confidentiality obligations, and term is still essential — particularly as the company grows and governance expectations increase.

Founder-Directors Specifically

Founders often assume that because they own the company, formal documentation between them and the company is unnecessary. This is one of the most common and expensive mistakes in early-stage business. The company is a separate legal person. If you are drawing a salary, have IP that you developed, or could at some point exit or be removed from the board, you need a written agreement that records what was agreed. Without it, disputes default to general employment law — which was not designed for founder relationships.

What Must a Director Service Agreement Include?

A properly drafted DSA covers the following:

Role and Duties

The director's title, the scope of their responsibilities, their reporting line, and the standard expected of them. This should be specific enough to be enforceable but flexible enough to accommodate the company's growth. A director's duties under the Companies Act 2006 (including the duty to act in good faith in the company's best interests) should be explicitly referenced.

Remuneration

Salary, bonus structure, pension contributions, benefits, and any equity or options. The agreement should specify when and how remuneration is reviewed, and what triggers a variation. Many disputes arise not from what directors were paid but from what they expected to be paid — and a well-drafted DSA removes that ambiguity.

Notice Periods

Notice periods for executive directors are typically longer than for ordinary employees — commonly three to six months for director-level roles, and up to twelve months for senior executives. The agreement should specify the notice required by both sides and whether the company can elect to pay in lieu of notice (PILON) rather than require the director to work out the period.

Restrictive Covenants

Post-termination restrictions are among the most commercially important clauses in any director service agreement. Common restrictions include:

• Non-compete: prevents the director from working for a direct competitor for a defined period after leaving
• Non-solicitation of clients: prevents the director from approaching the company's clients after departure
• Non-solicitation of staff: prevents the director from recruiting the company's employees to a new venture
• Non-dealing: prevents the director from conducting business with the company's clients, even if the client approaches them

These restrictions are only enforceable if they are reasonable in scope, duration, and geographic reach. Courts regularly strike down overreaching clauses. A six-month non-compete for a senior director in a specialist market is typically enforceable; a five-year restriction covering all commercial activity would not be.

Intellectual Property Ownership

Any IP created by the director in the course of their role should belong to the company, not the director personally. This includes software, content, processes, product concepts, client relationships, and any other commercially valuable output. Without an explicit IP assignment clause in the DSA, ownership disputes can arise on exit — and IP is often the company's most valuable asset.

Confidentiality

Confidentiality obligations should survive termination. The director will, during their role, have access to commercially sensitive information — client lists, pricing, strategy, financial data. A confidentiality clause that runs indefinitely (or for a defined long period post-exit) is both standard and essential.

Termination

The circumstances under which the agreement can be terminated — including summary dismissal for cause, removal as a director, resignation, redundancy, and illness. The agreement should also address what happens to any unvested equity, bonus accrual, and post-termination payments on each scenario.

Garden Leave

Larger DSAs often include a garden leave clause, allowing the company to require the director to stay away from work during their notice period while continuing to pay their salary. This is particularly valuable when a departing director has access to sensitive client relationships or proprietary information.

DSA vs. Employment Contract — Key Differences

A director of a company holds two distinct roles simultaneously. They are an officeholder under company law, with fiduciary duties to the company, regulated by the Companies Act 2006. And they are typically also an employee under employment law, with rights under the Employment Rights Act 1996.

A standard employment contract addresses the employment relationship. A director service agreement addresses both the employment relationship and the director relationship, including:

• The director's fiduciary duties and the standard expected of them as an officeholder
• The specific terms attaching to the directorship (removal, resignation, board attendance)
• Post-termination restrictions that go beyond what a standard employment contract would include
• IP assignment and confidentiality at a higher level than is typical in employee contracts

Operating with a standard employment contract and no DSA creates a gap — the company's legitimate interests as a corporate entity (IP, confidentiality, post-exit restrictions) are poorly protected, and the director's rights on exit are unclear.

Statutory Requirements Under the Companies Act 2006

The Companies Act 2006 imposes specific requirements around directors' service contracts:

Section 228 — Inspection rights: Companies must keep a copy of every director's service contract (or a written memorandum of its terms) available for inspection by members, at the company's registered office or SAIL address.

Section 188 — Long-term contracts: A directors' service contract guaranteed to run for more than two years must be approved by an ordinary resolution of shareholders. Without shareholder approval, the contract is void to the extent of the non-compliant term, and the company can terminate it on reasonable notice.

Section 189 — Civil consequence: If a long-term service contract is entered into without shareholder approval, the company can avoid it. This is a trap that catches founder-directors who grant themselves long-term contracts without understanding the approval requirement.

These are minimum statutory requirements. A properly drafted DSA will go well beyond them.

Common Mistakes Founders Make

No written agreement at all. Founders treat the company as an extension of themselves and see no need for a formal document. Years later, when investment, co-founder disputes, or exit conversations begin, the absence of written terms becomes a serious problem. Investors will ask for it. Acquirers will ask for it. The absence will delay or derail deals.

Relying on verbal terms. "We agreed I'd get a six-month notice period" is not a contract. Verbal terms are difficult to enforce and create the worst kind of dispute — one where both parties remember a different version of the same conversation.

Forgetting restrictive covenants post-exit. Founders often draft (or accept) DSAs without adequate post-exit restrictions, assuming loyalty or commercial sense will prevent problems. The classic scenario: a director exits, takes key client relationships to a competitor, and the company has no recourse because the DSA contained no enforceable non-solicitation clause. By the time the dispute arises, it's too late to draft the clause you needed three years ago.

IP left unaddressed. In tech and product businesses especially, the IP created by a founder-director may be the company's most valuable asset. A DSA without an explicit IP assignment clause creates a risk that the director, on exit, claims ownership of work they developed during their tenure.

Using a generic employment contract template. Employment contract templates found online are designed for employee relationships, not director relationships. They typically omit fiduciary duty references, director-specific termination provisions, and the post-exit restrictions that make a DSA commercially valuable.

What Happens Without One — Practical Horror Scenarios

Scenario A: The departing co-founder. A co-founder director resigns with one week's notice because there's no specified notice period in writing. They immediately join a direct competitor, taking two of your largest clients with them. Without a non-solicitation clause and a defined notice period, you have limited legal recourse.

Scenario B: The IP dispute. Your technical director leaves after building your core product. Because there's no IP assignment clause in their service agreement, they claim that the code they wrote — even during their employed role — belongs to them personally. Untangling this in litigation is expensive, time-consuming, and existentially threatening for the company.

Scenario C: The investor red flag. You approach a Series A investor. Their legal team conducts due diligence and finds that none of your executive directors have signed service agreements. The deal is delayed by six weeks while agreements are drafted, negotiated, and signed under time pressure — costing you legal fees and goodwill you could have avoided entirely.

Scenario D: The salary dispute. A director exits and claims a contractual entitlement to a bonus they say was promised verbally. Without a written DSA specifying the bonus structure and the conditions for payment, the company faces a tribunal claim with uncertain outcome.

None of these scenarios are hypothetical. They play out regularly in growing UK businesses, in every sector, at every stage. A properly drafted director service agreement — in place from day one — costs a fraction of the legal fees involved in resolving any one of them.

How Heirs & Order™ Helps

The Business Structure Pack from Heirs & Order™ includes a Director Service Agreement Outline alongside your Shareholders Agreement and Holding Company Incorporation Brief. It gives you a professionally prepared document framework covering all the key provisions — role and duties, remuneration structure, notice periods, restrictive covenants, IP assignment, confidentiality, and termination — ready to finalise with a solicitor or adapt for your specific circumstances.

It's designed for founder-directors and entrepreneurs who need to get their legal foundations right from day one, without paying thousands for each document individually.

Frequently Asked Questions

What is a director service agreement in the UK?

A director service agreement (DSA) is a written contract between a company and one of its executive directors that sets out the terms of the director's role — including duties, remuneration, notice periods, restrictive covenants, IP ownership, confidentiality obligations, and termination conditions.

Is a director service agreement legally required?

Not strictly required, but the Companies Act 2006 requires companies to keep a written record of directors' service contract terms available for inspection. In practice, operating without one creates serious legal and commercial risk for both the company and the director.

What is the difference between a DSA and an employment contract?

A DSA addresses both the employment relationship and the director's specific obligations as a company officeholder — including fiduciary duties, IP assignment, post-exit restrictions, and director-specific termination provisions that standard employment contracts don't cover.

What notice period should a director have?

Typically three to six months for most director roles, up to twelve months for senior executives or those with access to highly sensitive information. The notice period must be approved by shareholders if it guarantees the contract runs for more than two years.

Are restrictive covenants in a DSA enforceable?

Yes — if they are reasonable in scope, duration, and geography. Courts will enforce non-compete and non-solicitation clauses that protect a legitimate business interest and are no wider than necessary to protect it. Overreaching restrictions will be struck down.

Do I need a DSA if I'm the sole director and shareholder?

Yes. Even if you are the company's sole director and 100% shareholder, a written DSA documents the terms of your relationship with the company as a separate legal entity. This matters when you bring in investors, add co-directors, seek a business loan, or plan an exit — all of which require clear documentation of director terms.

Ready to protect your position as a director? Get the Business Structure Pack — includes your Director Service Agreement Outline, Shareholders Agreement, and Holding Company Incorporation Brief. Everything you need to structure your company properly from day one.

See also: shareholders agreement UK — the companion document every director needs alongside their service agreement — nominee director UK for how a properly documented directorship works within a holding company structure — and family investment company UK for director obligations in a family wealth vehicle where founders are both directors and loan creditors.

Heirs & Order™ provides document preparation services for informational purposes only. Heirs & Order™ is not a law firm. This is not legal advice. We recommend all documents are reviewed by a qualified solicitor before use.