Share Types Explained: Choosing The Right Shares For Your Startup

If you’re building an Australian startup, figuring out your share types can feel like a “later” problem - something you’ll sort out once the product is live, customers are paying, and investors are knocking.

But in practice, your share structure affects a lot from day one: how you and your co-founders control decisions, what happens if someone leaves, how you bring on investors, and how you protect your business if things don’t go to plan.

The good news is you don’t need to be a corporate law expert to make good decisions. You just need to understand the main share types used in Australia, what they actually do, and which options match where your startup is heading.

Below, we’ll break down the most common share types, how they’re typically used in startups, and the practical steps you can take to get your structure right (without overcomplicating it).

What Are “Share Types” In An Australian Company?

In an Australian company, a share is essentially a unit of ownership. If your company issues 100 shares and you hold 60, you generally own 60% of the company.

But not all shares have to work the same way.

Share types (sometimes called “classes of shares”) are different categories of shares that can come with different rights and restrictions. Those rights can cover things like:

• Voting (who controls decisions)
• Dividends (who gets paid profits, and when)
• Capital (who gets paid first if the company is wound up or sold)
• Conversion (whether a share can convert into another type later)
• Transfer restrictions (whether shares can be sold or transferred easily)

For early-stage startups, the share structure often starts simple - but it should still be designed with growth in mind.

Why Share Types Matter For Startups (Not Just Big Companies)

When you’re small, share types can feel theoretical. But they quickly become real when you need to:

• bring on a co-founder or early team member
• raise capital from angels or venture capital
• issue equity to advisors (or create an employee option plan later)
• separate “control” from “economic value”
• plan for an exit (sale of the business, acquisition, or buyback)

Getting your share types wrong can lead to major issues later - like losing voting control earlier than you expected, or creating an investment structure that investors won’t accept without expensive restructuring.

The Most Common Share Types Used In Australian Startups

There isn’t one “perfect” share structure for every startup. But there are patterns that come up repeatedly in Australia depending on how you’re funding the business and what outcomes you’re planning for.

Here are the share types you’ll most commonly hear about.

Ordinary Shares

Ordinary shares are the default share type in Australia, and the most common starting point for founders.

Ordinary shares usually carry:

• one vote per share (unless the constitution says otherwise)
• rights to dividends (if declared)
• rights to participate in capital distributions (for example, on a winding up)

In a very early startup with one or two founders and no outside investors yet, ordinary shares are often all you need.

That said, the way your ordinary shares are issued (and documented) still matters. If you have more than one shareholder, a properly drafted Shareholders Agreement can be just as important as the share types themselves, because it sets expectations around decision-making, exits, and what happens when things change.

Preference Shares

Preference shares are shares that “prefer” the holder in certain ways - commonly around getting paid first.

In Australian startups, preference shares are often issued to external investors because they can provide protections such as:

• liquidation preference (investors get their money back first if the company is sold or wound up)
• preferred dividends (a right to dividends before ordinary shareholders, though this is less common in early-stage startups)
• conversion rights (the ability to convert preference shares into ordinary shares later, often at an exit)

Preference shares can be a helpful way to attract investment while keeping your founder ordinary shares intact - but the specific terms matter a lot. Two “preference share” offers can look similar on the surface and be wildly different in practice.

Redeemable Shares

Redeemable shares are shares that are designed to be redeemed (bought back) by the company in certain circumstances.

They’re sometimes used to create flexibility in ownership - for example, where there is a planned buyback pathway. However, redeemable shares are not something most startups use at the very beginning, because:

• they can be complex to document properly
• redemptions/buy-backs are regulated and must be done in accordance with the Corporations Act (including specific procedures and solvency considerations)
• they can raise funding and cashflow considerations (you need money to redeem them)
• they may have tax and accounting implications

In early-stage startups, we more commonly see ownership issues managed through shareholder agreements, vesting, and transfer restrictions instead of redeemable shares.

Non-Voting Shares

Non-voting shares (or shares with limited voting rights) can be used where someone should benefit economically from the company, but you don’t want them to control decisions.

For example, you might use non-voting shares when:

• bringing on a passive investor who doesn’t need governance control
• allocating equity to an advisor (depending on the arrangement)
• creating different founder roles where one founder remains decision-maker

Non-voting shares can sound like a simple fix, but you should be careful: governance control isn’t just votes. Investor rights can also come from shareholder agreements and special approvals, so it’s important your structure is consistent across all documents.

Different Classes (A Class / B Class Shares)

A lot of startups use the concept of “Class A” and “Class B” shares (or similar classes) to separate rights.

For instance:

• Class A could be founder shares with voting control
• Class B could be investor shares with different economic rights (or vice versa)

There’s no universal definition - what matters is what the rights actually are in your constitution and shareholder documents.

If you’re considering multiple classes, it’s usually time to look closely at your constitution. Many startups adopt a tailored Company Constitution so the share rights and transfer rules match how the business really operates.

How To Choose The Right Share Types For Your Startup Stage

Choosing share types isn’t about selecting the “most advanced” option. It’s about choosing what matches your current stage and doesn’t box you in later.

Here’s a practical way to think about it.

If You’re Pre-Revenue Or Bootstrapping With Co-Founders

If you’re early-stage and funding the business yourselves, you’ll usually prioritise simplicity.

Common approach:

• issue ordinary shares to founders
• use vesting / good leaver-bad leaver concepts (usually documented in a shareholders agreement)
• ensure your constitution has sensible transfer restrictions

This is the stage where it’s easy to underestimate how quickly things change - co-founder roles evolve, responsibilities shift, and sometimes people leave. The earlier you document these issues, the less painful it tends to be later.

If You’re Raising Money (Angels, Seed, VC)

Once you’re raising external investment, share types become more strategic.

Investors often want protection for the risk they’re taking, and that’s where preference shares (and related rights) commonly come in.

That doesn’t automatically mean “bad deal for founders”, but it does mean you should understand what you’re giving away. A single clause about preference on exit can materially change what founders receive in a sale.

It’s also common to see startups raise funds using convertible instruments (like convertible notes or SAFEs) before issuing priced equity. If you’re using these, it’s worth getting Australia-specific advice early: the terms need to work with Australian company law and your constitution, and the commercial/tax outcomes can differ depending on how the instrument is structured.

If You’re Issuing Equity To Team Members Or Advisors

Giving equity to employees, contractors, or advisors is one of the fastest ways to make your cap table complicated.

Sometimes the solution is a new share type (for example, non-voting shares). But often, the better approach is to use options or a structured equity plan, so you don’t end up with dozens of small shareholders too early.

Keep in mind that employee equity and options can have significant tax consequences (including under Australia’s employee share scheme rules), and “vesting” doesn’t automatically mean there’s no tax impact. It’s a good idea to speak to a lawyer and an accountant before issuing equity to team members.

If you’re also hiring staff, it’s worth remembering your legal foundation isn’t just corporate - it’s employment too. Having the right Employment Contract and clear policies can reduce risk while you grow.

If You Want To Keep Control While Still Raising Capital

A common founder concern is: “How do we raise capital without losing control?”

There are a few ways share types can help manage this, such as:

• creating different classes with different voting rights
• issuing non-voting shares for certain stakeholders
• using preference shares for economics rather than control (depending on the negotiated rights)

But control isn’t only about share types. Control is also heavily influenced by:

• who sits on the board
• reserved matters (decisions requiring special approval)
• veto rights and investor consent rights

These are usually set out in your shareholder and investment documents, so it’s important your legal documents work together rather than contradicting each other.

Key Legal Documents That Should Match Your Share Types

Share types don’t exist in isolation. Even if you’ve chosen the right share types, your structure can still fail in practice if your documents don’t align.

Here are the key documents that typically need to match your share strategy.

Company Constitution

Your company constitution is where many share rights are actually created and enforced - especially where you have multiple classes of shares.

If you plan to have different share types (or you want specific transfer restrictions), a tailored Company Constitution can help ensure your rules are clear, consistent, and workable in practice.

Shareholders Agreement

A shareholders agreement is often the “day-to-day” operating manual between owners. It typically covers things like:

• how decisions are made
• what happens if someone wants to sell or leave
• how deadlocks are resolved
• what happens if someone breaches obligations
• rules around issuing new shares (and dilution)

For startups, a well-structured Shareholders Agreement can be one of the most effective tools for reducing co-founder risk early.

Share Issuance And Cap Table Records

Whatever share types you choose, you’ll need clean records: who holds what, on what terms, and when the shares were issued.

This isn’t just admin - messy cap tables are one of the quickest ways to slow down investment, due diligence, and exits.

It’s also worth understanding the basics of Share certificates and how ownership is evidenced in company records.

Privacy And Customer-Facing Terms (If You’re Scaling)

Most startups collect personal information early - even if it’s just an email list, customer accounts, or payment details.

As you grow, investors will often look at whether your legal foundations are in place (including compliance basics). Having a fit-for-purpose Privacy Policy is one of those foundational pieces that supports scale and reduces risk.

Common Mistakes Startups Make With Share Types (And How To Avoid Them)

We see a few recurring issues when startups set up their share structures without thinking ahead. Here are the big ones to watch for.

1. Overcomplicating The Cap Table Too Early

It’s tempting to create multiple classes of shares from the start “just in case”.

But complexity has a cost: more documentation, more room for mistakes, and more time explaining your structure to investors later.

In many cases, the better approach is to keep the initial share types simple (often ordinary shares), then evolve the structure when there’s a real need - like a priced investment round.

2. Using Share Types To Solve A Relationship Problem

Share types are not a substitute for clear founder expectations.

If you’re worried about a co-founder leaving, underperforming, or wanting to exit early, the answer is usually not “let’s give them a different share type”. It’s normally:

• vesting arrangements
• good leaver/bad leaver clauses
• decision-making rules
• transfer restrictions

Those are typically contractual solutions (in your shareholders agreement), rather than share-type solutions.

3. Not Planning For Funding

Even if you’re not raising money today, it’s worth asking: Will we raise within the next 12–24 months?

If the answer is “maybe”, you should structure your shares and documents to avoid needing a painful overhaul later.

For example, investors may expect certain rights to be possible under your constitution, or they may require a clean mechanism for issuing new shares.

4. Forgetting The Difference Between Ownership And Control

Founders sometimes assume “majority ownership” automatically equals “control”. That’s not always true.

Control can be shaped by:

• voting rights attached to share types
• special approvals required for key decisions
• board structure
• shareholder agreements and investor rights

This is why it’s important to treat share types as one piece of a bigger legal structure, rather than the whole solution.

Key Takeaways

• Share types (classes of shares) let you allocate different rights around voting, dividends, and capital returns, which can be crucial as your startup grows.
• Ordinary shares are the most common starting point for founders, while preference shares are often used for external investors who want downside protection.
• Choosing share types should match your startup stage - early teams often benefit from simplicity, while funded startups may need more tailored share classes and rights.
• Your share structure needs to align with your Company Constitution, Shareholders Agreement, and clean cap table records, otherwise the “paper reality” won’t match how the business operates.
• Common pitfalls include overcomplicating shares too early, trying to solve founder relationship issues with share classes, and not planning for future fundraising.

Note: This article is general information only and doesn’t take into account your specific circumstances. It isn’t legal, tax or financial advice. For advice tailored to your startup (including tax and accounting implications of shares, options, vesting and fundraising instruments), speak with a lawyer and an accountant.

If you’d like help choosing the right share types for your Australian startup (or getting your constitution and shareholders agreement set up properly), you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.