Founder Shares: How to Set Them Up in Australia

Getting the founder shares right can make or break your startup. They affect control, incentives, investment readiness and, ultimately, your exit.

If you’re building a company in Australia, it’s worth taking a little time up front to define exactly who owns what, when those shares actually vest, and the rules that apply if someone leaves. Done well, founder shares keep your team aligned as you grow. Done poorly, they can lead to disputes and stalled capital raises.

In this guide, we’ll break down what founder shares are, how to split them fairly, common vesting approaches, and the key legal documents you’ll want in place so your venture is set up for success.

What Are Founder Shares?

“Founder shares” is a practical term, not a special legal class. In most Australian startups, founder shares are ordinary shares issued to the founding team when the company is formed (or shortly after). They typically come with full voting rights and rights to dividends and capital on exit, subject to any vesting or transfer restrictions you agree.

You can tailor rights through your company’s governance documents. Many startups start with ordinary shares only, then introduce different classes or options later as investors come on board. If you need flexibility, your Company Constitution can set or limit what rights different share classes may carry, and your board/shareholders can create new classes if needed.

Key features of founder shares usually include:

• Voting rights (often 1 vote per share)
• Pro-rata right to dividends (when declared)
• Rights to capital on winding up or exit (after creditors)
• Restrictions on transfer (e.g. pre-emptive rights to other shareholders)
• Vesting conditions and leaver provisions (if agreed)

As your company matures, you might consider different rights for future investors or team members. If you’re weighing up alternatives, it helps to understand different classes of shares and how they affect control and economic outcomes.

How Should You Split Founder Shares?

There’s no single “right” formula to divide founder shares. What matters is that the split reflects each person’s contribution and role, and that everyone understands how ownership can change over time through vesting, dilution and exits.

Start With Roles, Risk And Contribution

Think about:

• Who is full-time vs part-time, now and in the next 12-24 months
• Who is bringing critical IP, industry access, or initial capital
• Who will lead key functions (product, sales, operations, finance)
• Who is taking on the most risk (e.g. leaving a job, investing savings)

It’s normal to start with a proposed split, then sanity-check with a simple model: what happens to each founder’s percentage after one or two early funding rounds? Will the people driving the most value still have meaningful ownership?

Set Expectations Early (And Put Them In Writing)

Agreeing on ownership is only the starting point. You should also decide how decisions get made, what happens if someone leaves, and how new shares can be issued.

Capturing those rules in a Shareholders Agreement gives your company a stable foundation. It typically covers board composition, decision thresholds, pre-emptive rights on new issues, drag/tag rights for exits, and dispute resolution. Investors will expect to see this in place before they commit funds.

Avoid “Equal Without Evidence”

Split 50:50 or 25:25:25:25 only if it genuinely reflects contribution, commitment and risk. Even small differences in time commitment or responsibility can justify an uneven split. The most important point is to be transparent and fair - your working relationships will thank you later.

Model Dilution

Expect future dilution from option pools and funding rounds. If you plan to introduce an option pool for staff, factor that in before finalising your founder split. Many startups plan for a 10-15% pool alongside or just before a seed round.

For deeper planning, it helps to map scenarios and sanity-check outcomes with neutral numbers. You can also read through practical considerations for founders in how to allocate shares in a startup.

Do Founder Shares Need Vesting?

Vesting is one of the best tools to protect your company and keep founders aligned. Without vesting, a co-founder could leave early with a large stake and no ongoing contribution. With vesting, ownership accrues over time as value is created.

Common Vesting Terms

• Time-based vesting: shares vest monthly or quarterly over 3-4 years.
• Cliff: no vesting until a 6-12 month cliff; if the founder leaves during the cliff, nothing vests.
• Reverse vesting: the shares are issued up-front but subject to buy-back or forfeiture if the founder leaves before vesting.
• Performance-based vesting: a portion vests on hitting specific milestones (e.g. product launch, revenue targets).

Leaver Provisions

Most founder vesting frameworks distinguish “good leavers” (e.g. illness, sale of the company) and “bad leavers” (e.g. resignation to join a competitor, gross misconduct). The price the company can buy back unvested (and sometimes vested) shares will vary depending on which category applies.

To formalise vesting and leaver terms, founders often use a Share Vesting Agreement. This sits alongside your constitution and shareholders agreement and ensures the company has clear mechanisms to enforce vesting and buy-backs.

Don’t Forget The Option Pool

Employee equity is a powerful tool for hiring and retention. If you plan to offer options to staff, you’ll typically create an option pool and implement an Employee Share Option Plan (ESOP). This should dovetail with your founder vesting timelines so incentives across the whole team stay aligned.

What Legal Documents Do You Need For Founder Shares?

Putting the right documents in place early reduces risk and shows investors you’re serious. At a minimum, consider the following:

• Company Constitution: Sets core rules for issuing shares, holding meetings, decision-making and transfers. If you’re still using the replaceable rules, consider adopting a tailored Company Constitution that suits a startup’s needs.
• Shareholders Agreement: Governs founder relations and critical decisions, pre-emptive rights, drag/tag, dispute resolution and exit mechanics. A clear Shareholders Agreement is an investor expectation.
• Share Vesting Agreement: Implements vesting, leaver definitions and buy-back mechanics for founder shares. See Share Vesting Agreement.
• Option Plan (ESOP): Sets the framework for employee options, vesting schedules, exercise rules and leaver treatment. Consider an Employee Share Option Plan if you’ll issue options.
• Option or Share Grant Letters: Individual documents that set each founder’s or employee’s grant, vesting schedule and any special terms.
• Board And Shareholder Resolutions: Approving the issue of shares, creating classes, establishing the option pool or buying back shares.

You may also need ancillary documents, such as IP assignment deeds from founders to the company, and confidentiality agreements with contractors and suppliers. Getting these right upfront helps avoid disputes over ownership of code, branding or other IP later.

How Do You Issue, Transfer Or Change Founder Shares Later?

As your company evolves, you’ll likely need to issue new shares, transfer existing shares, or adjust vesting. Here’s how to approach the main scenarios.

Issuing New Shares (Or Creating New Classes)

New shares are typically issued when raising capital or building an option pool. Check your constitution and shareholders agreement for:

• Authority to issue shares and any board/shareholder approvals required
• Pre-emptive rights (existing shareholders’ right to participate first)
• Any caps or processes for creating new share classes

You’ll want to document the board and (if required) shareholder approvals, issue the shares, update your share register, and file any ASIC updates. If you’re deciding between ordinary, preference or other classes for investors, revisit the pros and cons in different classes of shares.

Transferring Shares Between Founders Or Investors

Transfers usually arise when a founder departs or sells a portion to an incoming investor. Again, check pre-emptive rights and permitted transferee rules in your governance documents, then prepare transfer forms and update your register. For background on process and pitfalls, see off-market share transfers and the ASIC steps outlined in ASIC transfer of shares in private companies.

Buying Back Shares

Buy-backs commonly occur when enforcing vesting or leaver provisions. The Corporations Act sets out procedural requirements for different buy-back types (e.g. equal access, selective). Your constitution and shareholders agreement should define price mechanisms (e.g. nominal value for unvested shares) and the approvals required. It’s wise to get legal help to ensure the buy-back is compliant and properly recorded.

Setting Up An Option Pool

An option pool is generally created by board and shareholder approvals (per your constitution), then documented via an ESOP and individual grant letters. You’ll typically reserve a percentage of fully diluted share capital. To make sure you size the pool sensibly, consider your hiring plan and read the practical notes on valuing shares in a private company and how new issues affect dilution.

How Many Shares Should Your Company Have?

There’s no magic number of authorised shares under Australian law, but it’s useful to start with enough headroom to issue options and raise capital without constant restructures. If you’re unsure, this primer on how many shares a company can have and when to adjust the capital structure is a handy reference. If you anticipate a near-term round, you can also consider where and how you’ll issue new shares and what approvals you’ll need.

Step-By-Step: Setting Up Founder Shares

1) Incorporate And Set Your Governance Baseline

Register your company with ASIC, appoint directors, and adopt a startup-friendly constitution. Confirm initial share capital and the intended founder ownership split.

2) Agree The Founder Economics And Control

Align on the ownership split, board seats, key decisions requiring consent, and whether any founder has special responsibilities or milestones that justify different vesting.

3) Implement Vesting And Leaver Terms

Decide vesting period, cliff, and leaver categories. Put these into a Share Vesting Agreement and ensure the constitution and shareholders agreement allow buy-backs to enforce vesting.

4) Adopt Your Core Founder Documents

Finalise and sign your Shareholders Agreement, constitution, board and shareholder resolutions for initial issues, and any IP assignments to the company.

5) Establish (Or Plan) Your Option Pool

Decide pool size, adopt an Employee Share Option Plan, and prepare grant templates. You can create the pool now or alongside your next funding round.

6) Keep Your Registers And ASIC Filings Up To Date

Record all issues, transfers and buy-backs in your share register and complete any required ASIC notifications on time. This will save a lot of pain at due diligence.

Investor Expectations: What Will VCs And Angels Look For?

Investors want to see a clear, enforceable ownership framework that rewards contribution and protects the company if circumstances change. Specifically, they’ll look for:

• A signed Shareholders Agreement with investor-friendly basics (information rights, pre-emptive rights, drag/tag)
• Founder vesting and well-defined leaver provisions
• A realistic option pool and ESOP in place or planned
• Clean cap table and up-to-date share register
• Clear IP ownership by the company (not individuals)

If any of these items are missing, expect investors to require fixes as a condition of investment. It’s quicker and cheaper to put them in place now than to rush during a term sheet process.

Common Mistakes To Avoid

• Skipping vesting because “we trust each other” - trust is great; vesting protects the business if life changes.
• Equal splits that don’t reflect contribution - better to adjust now than resent later.
• No pre-emptive rights - risking unwanted third parties on your cap table.
• Messy paperwork - undocumented grants, missing registers and late ASIC filings delay deals and can scare off investors.
• Not planning for dilution - forgetting the option pool or likely seed/Series A rounds often leads to surprises.

Key Takeaways

• Founder shares are usually ordinary shares with tailored rules in your constitution, shareholders agreement and vesting documents.
• Agree a fair split based on roles, risk and contribution, and model how dilution from option pools and funding rounds affects each founder.
• Implement vesting with a clear cliff and leaver provisions using a Share Vesting Agreement so ownership aligns with long-term contribution.
• Put your core documents in place early - Company Constitution, Shareholders Agreement, ESOP and grant letters - and keep your registers current.
• Plan the option pool and future issues ahead of time so you can hire well and raise capital without last-minute restructuring.
• Investors expect clean, enforceable ownership and governance; setting this up now saves time, money and stress later.

If you’d like a consultation on structuring your founder shares and equity documents, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.