Founder Vesting Clauses In Shareholders Agreements

Yes, you can include a founder vesting clause in an Australian shareholders agreement. For many startups, it's one of the most useful ways to make sure founder equity is earned over time, rather than locked in from day one.

The nuance is in how you structure it. In Australia, vesting usually sits inside your shareholders agreement, but it needs to work with your company constitution, the Corporations Act 2001, your share register, any ASIC filings and, very importantly, tax advice.

If you're building a company with other founders, vesting can feel a little awkward to raise. It can sound like you don't trust each other. In reality, it's usually the opposite - you're agreeing upfront on what happens if life changes, someone leaves early, or an investor asks how founder equity is protected.

What Is A Founder Vesting Clause?

A founder vesting clause is a clause that says your shares, or your right to keep them, build up over time as you continue contributing to the business.

In a startup, each founder might receive shares at the beginning because you've all agreed to build the company together. The problem is what happens if one founder leaves after three months but still owns 30% of the company. That can make fundraising harder, create resentment and leave the active founders doing the work while someone else keeps a large stake.

Vesting is designed to avoid that outcome. It can apply to:

• Founders' ordinary shares, where shares are issued upfront but are subject to buyback or transfer rights if you leave early.
• Options or rights, where you earn the right to receive shares over time.
• Performance-based equity, where part of your equity depends on hitting agreed milestones.

For Australian founder teams, the most common approach is often called reverse vesting. You receive your shares upfront, but the company or other shareholders can buy back or require a transfer of your unvested shares if you leave before the vesting period ends.

That approach can be simpler from a founder alignment point of view, but it needs careful drafting because share buybacks and transfers have legal and tax consequences.

How Does Founder Equity Vesting Work In Australia?

Founder equity vesting usually works by setting a vesting schedule, then linking that schedule to what happens if you stop working in the business.

A common startup vesting structure is:

• Four year vesting period, where equity vests over four years.
• One year cliff, where no equity vests until you've stayed involved for 12 months.
• Monthly or quarterly vesting after the cliff, where the remaining equity vests gradually.

For example, say Mia and Raj start a SaaS company in Sydney. They each hold 50% of the shares, but their shareholders agreement says their shares vest over four years with a one year cliff. If Raj leaves after six months, none of his shares have vested, so the company can require his unvested shares to be transferred or bought back. If he leaves after two years, roughly half of his shares may have vested, while the unvested balance can be dealt with under the agreement.

Your vesting schedule doesn't have to be four years. You might choose a shorter or longer period depending on:

• how early the business is
• whether each founder is full-time or part-time
• who brought the idea, IP, capital, customer relationships or technical build
• whether a founder has already contributed before incorporation
• what future investors are likely to expect

The key is to be clear about when shares vest and what evidence shows that the vesting condition has been met. If vesting depends on vague ideas like contribution or commitment, you're more likely to have disputes later.

Should Founder Shares Vest Or Be Issued Over Time?

It depends, but many Australian startups use upfront share issue with reverse vesting because it gives founders ownership from the start while still protecting the company if someone leaves early.

There are a few common ways to structure founder vesting.

Option 1: Issue Shares Upfront With Reverse Vesting

Under this model, you receive your full shareholding at the beginning. The shareholders agreement then says that if you leave before your shares have vested, the company or the other shareholders can buy back or require the transfer of the unvested shares.

This can work well because:

• the cap table is clear from day one
• founders feel like owners from the start
• investors can see the vesting protections in the shareholders agreement

The catch is that the buyback or transfer mechanism needs to be legally workable. A company share buyback must comply with the Corporations Act 2001. Depending on the type of buyback, you may need shareholder approval, notices, ASIC lodgements and specific timing steps. If the arrangement is actually a transfer to the other founders, your agreement should set out the transfer process, price and any approvals needed.

Option 2: Issue Shares Gradually

Under this model, you only receive shares as they vest. This can seem tidy, but it may create extra administration because the company needs to issue shares over time and update its records.

For a proprietary company, issuing shares usually means updating the members register, approving the issue under the company constitution and shareholders agreement, and considering ASIC notification requirements. You also need to think about whether later share issues happen at a higher value, which can create tax complexity.

Option 3: Use Options Or Rights

Options can work well where the company wants someone to earn equity over time without becoming a shareholder immediately. This is more common for employees, advisors or later hires, but it can also be used for founders in some cases.

Options bring their own legal and tax issues, including employee share scheme rules if the recipient is an employee. If you're thinking about options, it's worth getting advice before you promise anything in writing.

What Should A Good Leaver Bad Leaver Clause Say?

A good leaver bad leaver clause should clearly explain what happens to your vested and unvested shares when you leave, and how the exit price is calculated.

This clause matters because not every departure is the same. If you leave because of serious misconduct, the company may want a stronger right to recover shares. If you leave because of illness or the board agrees to your departure, a fairer outcome may be appropriate.

A shareholders agreement will often split leavers into categories.

Good Leaver Events

A good leaver is usually someone who leaves in circumstances that aren't their fault or are agreed by the company. Examples can include:

• death or permanent incapacity
• serious illness
• leaving under an agreed founder offboarding deed or with board or shareholder consent
• redundancy, if the founder is also an employee
• another event the shareholders agree is a good leaver event

For a good leaver, the agreement might say they keep their vested shares, and their unvested shares are bought back or transferred at fair market value, cost, or another agreed price.

Bad Leaver Events

A bad leaver is usually someone who leaves in more serious circumstances. Examples can include:

• serious misconduct
• fraud or dishonesty
• serious breach of the shareholders agreement
• breach of confidentiality or IP obligations
• leaving to compete with the business

For a bad leaver, the agreement might say they lose unvested shares for nominal value, and in some cases may be forced to sell vested shares at a discount or at the lower of cost and market value.

You need to be careful here. If the consequences are too harsh or unclear, the clause is more likely to be challenged or create leverage in a dispute. The clause should be firm enough to protect the business, but not so aggressive that it becomes commercially unrealistic.

How Do Buybacks And Transfers Actually Happen?

Buybacks and transfers happen through a legal process, not just a line in the shareholders agreement saying someone gives back their shares.

Your agreement should spell out the process step by step. Otherwise, you may know the commercial outcome you want, but struggle to actually complete it when someone leaves.

If The Company Buys Back Shares

A share buyback is where the company buys shares from a shareholder. In Australia, company buybacks are regulated under the Corporations Act 2001.

Depending on the type of buyback, the company may need to:

• check that the buyback doesn't materially prejudice the company's ability to pay its creditors
• get shareholder approval
• prepare share buyback documents
• lodge documents with ASIC
• wait through any required timing periods before completing the buyback
• update the company's share register and records

The exact steps depend on whether the buyback is equal, selective, employee share scheme related, on-market or another type. For private startups, selective buybacks are common, but they come with process requirements that should be handled carefully.

If Shares Are Transferred To Other Founders

A transfer is where the departing founder sells or transfers shares to the remaining founders, an incoming founder or another approved buyer.

Your shareholders agreement should cover:

• who can buy the shares
• whether board or shareholder approval is needed
• how the price is calculated
• when completion happens
• whether a share purchase agreement or other transfer documents need to be signed
• how the share register is updated

Transfers can sometimes be simpler than buybacks, but they still need to match your company constitution and any pre-emptive rights in the shareholders agreement.

What Tax Issues Should You Think About Before Using Vesting?

You should get tax advice before finalising founder vesting, because the legal structure you choose can change the tax outcome for you and the company.

This is one of the areas where legal and tax advice need to work together. As business lawyers, we can help structure the vesting rights in your shareholders agreement, but you'll usually also want advice from your accountant or tax adviser on the ATO treatment.

Common tax issues to consider include:

• When shares are issued - shares issued when the company has little value may have a different tax profile from shares issued later when the business is worth more.
• Whether vesting creates a tax point - depending on how the arrangement is structured, tax may arise at issue, vesting, sale or buyback.
• Capital gains tax - if shares are sold or bought back, there may be CGT consequences.
• Employee share scheme rules - if a founder is also an employee or receives options, Division 83A of the Income Tax Assessment Act 1997 may be relevant.
• Buyback tax treatment - company share buybacks can have specific income tax and capital treatment.

The practical point is this: don't copy a US-style vesting clause and assume it works cleanly in Australia. Australian company law and tax rules are different, and early tax planning can save a lot of pain later.

What Do Investors Expect To See?

Investors usually expect to see founder vesting if your startup is early-stage and the founders are still critical to building the business.

From an investor's perspective, founder vesting helps answer a simple question: what happens if a key founder leaves soon after investment? If there's no vesting, an inactive founder may keep a large shareholding, which can make the company harder to manage and less attractive for future rounds.

Investors may look for:

• a clear vesting schedule for each founder
• a one year cliff if the company is still very early
• good leaver and bad leaver rules
• IP assignment from each founder to the company
• restraints and confidentiality obligations
• board approval rights for share transfers
• a clean cap table that matches the company's records

If you raise capital later, investors may ask you to restart or extend vesting. This is sometimes called re-vesting. It can be negotiable, especially if you've already spent years building the business before the funding round.

For example, if you've bootstrapped for three years and are raising your first seed round, it may not feel fair for all founder shares to start vesting again from zero. A more balanced position might be partial re-vesting, or vesting only for a portion of the founder shares over the next two to three years.

What Documents Do You Need For Founder Vesting?

You usually need more than one document, because vesting affects ownership, company records, exits and founder obligations.

The main document is your shareholders agreement, or a separate share vesting agreement if that structure suits the company better. This should set out the commercial deal between the founders and shareholders, including vesting.

You should also check or prepare:

• Company constitution - this needs to work with the shareholders agreement, especially around share issues, transfers and buybacks.
• Founder employment or contractor agreements - if you're working in the business, these should align with leaver events and role expectations.
• IP assignment deeds - the company should own the intellectual property used to build the product, brand or platform.
• Confidentiality obligations - these protect your code, customer lists, strategy, pricing and other business information.
• Board and shareholder approvals - these may be needed for issuing shares, approving transfers or completing a buyback.
• Share register updates and ASIC filings - the company's records should match what has legally happened.

Templates often miss the interaction between these documents. For example, a shareholders agreement might say unvested shares can be bought back, but the constitution might restrict buybacks or transfers in a different way. That mismatch can create problems right when you need the documents to work.

Common Mistakes To Avoid

The biggest mistake is waiting until there's tension between founders before discussing vesting.

It's much easier to agree on fair rules while everyone is excited, aligned and focused on growth. Once someone is leaving, every clause becomes more emotional.

Other common mistakes include:

• Using vague milestones - words like meaningful contribution or active involvement can be hard to apply unless you define them clearly.
• Forgetting the constitution - your shareholders agreement and constitution need to work together.
• Ignoring tax - the wrong structure can create tax issues even if the legal drafting looks neat.
• Making bad leaver rules too harsh - overly aggressive consequences can lead to disputes and make negotiations harder.
• Failing to deal with IP - if a founder leaves and the company doesn't clearly own the IP, your product or brand may be exposed.
• Not updating company records - your share register, approvals and ASIC records should reflect the agreed position.

Another mistake is assuming equal equity means equal vesting terms. Equal shares can make sense, but you may still need different vesting arrangements if one founder is full-time, another is part-time, and another has already contributed significant IP or funding.

Key Takeaways

• A founder vesting clause in Australia is usually included in your shareholders agreement and often works through reverse vesting.
• Common vesting terms include a four year vesting period, a one year cliff, and monthly or quarterly vesting after the cliff.
• Good leaver and bad leaver clauses should clearly explain what happens to vested and unvested shares when someone leaves.
• Share buybacks and transfers need to comply with your constitution, shareholders agreement, company records and the Corporations Act 2001.
• Tax can change the best structure, so it's worth speaking with your accountant or tax adviser before signing.
• Investors often expect founder vesting because it keeps the active team aligned and protects the company if someone leaves early.

If you'd like help with your shareholders agreement, founder vesting terms, leaver clauses or company setup documents, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.