Types Of Shares Explained

If you’re building an Australian startup or small business, shares can start to come up surprisingly early - especially when you’re raising money, bringing in a co-founder, giving key team members equity incentives, or planning for future growth.

But not all shares are the same. There are different types of shares, and the choices you make can affect who controls the company, who gets paid dividends (and when), and what happens if someone wants to sell or exit.

In this guide, we’ll walk you through the most common types of shares used in Australian proprietary companies, what they mean in practice, and how to approach share structuring in a way that supports your business (rather than creating future disputes).

We’ll keep this practical and founder-friendly - but also accurate enough to help you have informed conversations with investors, accountants and lawyers.

Important: This article is general information only and not legal or tax advice. Share structuring can have significant legal and tax consequences, and different rules can apply depending on your circumstances. Sprintlaw can help with the legal side, but we don’t provide tax advice - you should speak to a qualified accountant or tax adviser (and, where relevant, a financial adviser) before implementing a share structure or employee equity plan.

What Are Shares (And Why Do They Matter For Your Business)?

A share is essentially a unit of ownership in a company. If your company issues 100 shares and you own 60, you generally own 60% of the company.

But “ownership” can mean different things depending on the rights attached to the shares. That’s where different types of shares come in.

When your company issues shares, each share (or class of shares) can carry rights about:

• Voting (who gets to make decisions and how much influence they have)
• Dividends (who gets paid profits, and in what priority)
• Capital (what happens on a sale, liquidation, or winding up)
• Transfer (whether shares can be sold freely or need approvals)

For many startups, your share structure is part of your “business foundations”. Done well, it can support investment and growth. Done poorly, it can lock you into the wrong control dynamics, create tax headaches, or cause major disputes between founders later on.

In Australia, companies can create different share classes (as long as this is permitted by the company’s governing rules - typically its constitution) and properly documented. In practice, you also need to follow the Corporations Act requirements and your company’s internal approval processes when issuing shares, varying share rights, paying dividends, and recording ownership.

Common Types Of Shares In Australia (With Plain-English Examples)

There are many ways to create and customise share rights, but in practice most Australian startups and small businesses tend to use a few core share types (or combinations of them).

Ordinary Shares

Ordinary shares are the most common type of shares. In many small businesses, everyone simply holds ordinary shares and that’s it.

Ordinary shares usually come with:

• Voting rights (often one vote per share)
• Rights to dividends (if declared)
• Rights to share in company assets if the company is wound up

Practical example: Two co-founders each hold 50 ordinary shares in a company that has issued 100 shares total. Each co-founder owns 50% and has equal voting power.

Ordinary shares are often a good fit early on, but once you introduce investors, employee equity, or family members, you may want more flexibility - and that’s where additional share types may help.

Preference Shares

Preference shares typically give the holder priority over ordinary shareholders in certain circumstances (commonly dividends and/or a return of capital).

Preference shares can be structured in many ways, but common “preference” features include:

• Dividend priority (paid before ordinary shareholders)
• Return of capital priority on an exit or winding up
• Fixed dividend rate (in some cases)

Practical example: Your company raises funding and issues preference shares to an investor. If the company is sold, those preference shares might receive a set return first (depending on the agreed terms), before remaining proceeds go to ordinary shareholders.

Preference shares are common in venture capital or sophisticated investment scenarios, but they can also be used in certain family business structures or where you want to separate “economic return” from “control”.

Redeemable Shares

Redeemable shares are shares that the company can buy back (redeem) under certain conditions, usually set out in the terms of issue.

They’re sometimes used when:

• Someone is investing for a limited period
• You want an “exit mechanism” that doesn’t rely on finding a buyer
• You’re creating a structured return arrangement (often with professional advice involved)

Redeemable shares can be legally and financially complex, and they are not a “set and forget” solution. If you’re considering them, it’s worth getting your documents carefully drafted so the redemption mechanics, pricing, and timing are clear. You’ll also want to consider whether the arrangement could be treated differently for accounting or tax purposes, and whether any restrictions apply under the Corporations Act (for example, around share buy-backs and capital maintenance).

Non-Voting Shares

Non-voting shares are shares that generally do not give the holder voting rights (or only give voting rights in limited scenarios, depending on the terms).

These can be useful if you want to:

• Bring in investors who want an economic return but not operational control
• Allocate equity to a family member without changing decision-making control
• Create an employee incentive plan where you want to limit voting influence

Practical example: You issue non-voting shares to a passive investor so they can participate in dividends and exit proceeds, but you and your co-founder retain voting control to run the business day to day.

Special Class Shares (Often “Class A” / “Class B” Shares)

Instead of using labels like “non-voting shares” in the name, companies often create separate classes such as:

• Class A shares
• Class B shares
• Class C shares (and so on)

The label itself doesn’t matter as much as the rights attached to the class. “Class A” might be ordinary voting shares, and “Class B” might be non-voting shares, or vice versa.

This approach is common because it gives you flexibility to tailor rights based on what your business actually needs, rather than forcing everything into standard categories.

However, because custom share classes can be tailored in many ways, the drafting needs to be precise. Your constitution and shareholder documents need to match what you’ve agreed commercially - otherwise you can end up with a structure that doesn’t do what you thought it would.

How Different Share Rights Actually Work (Voting, Dividends, And Exits)

When people talk about “different types of shares”, they’re usually really talking about the different rights that can be attached to a share.

Here are the key rights to understand, in practical terms.

Voting Rights: Who Controls The Company?

Voting rights affect major company decisions, including:

• appointing or removing directors
• approving certain major transactions
• changing the company’s constitution or share structure

In many proprietary companies, voting is effectively the “control lever”. If you’re giving away shares, it’s important to understand whether you’re giving away control or just an economic stake.

This is one reason why founders sometimes use separate classes of shares - for example, issuing non-voting shares to investors or team members, while keeping voting shares with founders.

Dividend Rights: Who Gets Paid (And In What Order)?

Dividends are distributions of company profits to shareholders (when declared).

Different share classes can have different dividend entitlements, including:

• equal entitlement (common with ordinary shares)
• priority entitlement (common with preference shares)
• different rates or formulas (more bespoke structures)

It’s also worth remembering that dividends are not automatic. Directors generally decide whether to declare dividends, and companies must satisfy legal requirements before paying them - including that the dividend is fair and reasonable to shareholders as a whole, and that paying it does not materially prejudice the company’s ability to pay its creditors (among other requirements). Your accountant can also help you understand the tax and franking implications of dividends.

Capital Rights: What Happens On A Sale Or Wind Up?

If your company is sold or wound up, different share types can determine:

• who gets repaid first
• whether someone gets a fixed return
• how the “remaining” value is split

These are the kinds of terms that become very important in investment deals - and they’re also where misunderstandings can become expensive if documents are unclear.

Transfer Rights: Can Shares Be Sold Or Transferred Easily?

Most startups and small businesses want to control who can become a shareholder. That’s why share transfers are often restricted, with processes such as:

• board approval requirements
• pre-emptive rights (existing shareholders get first option to buy)
• drag-along and tag-along rights (common in exits)

These rules are typically set out in a Shareholders Agreement and/or the company’s constitution.

When Should You Consider Different Types Of Shares In A Startup Or Small Business?

Not every business needs a complex share structure from day one. In fact, over-engineering your structure early can create unnecessary admin and confusion.

That said, there are a few common triggers where it’s worth considering whether you need different types of shares (or at least a clear plan for them).

1. You’re Bringing In A Co-Founder (Or Formalising A Founding Team)

If you’re starting with more than one founder, it’s not just about splitting percentages - it’s about making sure decision-making is workable and expectations are aligned.

For example, you might decide:

• everyone holds the same type of ordinary shares
• one founder holds a separate class with certain voting rights (less common, but sometimes relevant)
• equity vests over time (often handled through separate arrangements)

Even with a simple share structure, you’ll usually want clear rules on transfers, exits, and dispute management in a Shareholders Agreement.

2. You’re Raising Capital From Investors

Investors often want certainty over:

• their economic rights (e.g. dividends or proceeds on exit)
• their downside protection (what happens if things don’t go to plan)
• their information rights (reporting)
• sometimes, specific veto rights on key decisions

These outcomes can be achieved in different ways - sometimes through preference shares, sometimes through contractual rights, and sometimes through a mix.

The important part is that the structure matches the deal you’ve negotiated, and all documents are consistent. Depending on the fundraising, you may also need to consider whether disclosure requirements apply (for example, under fundraising and financial services laws), particularly where offers are made to people who aren’t sophisticated investors.

3. You Want To Offer Equity Incentives To Key People

Equity incentives are common when you want to attract talent without paying market salary immediately, or when you want long-term alignment with key staff.

There are various approaches here (including different share classes, options, or other equity-like arrangements). The “right” approach depends heavily on your goals, your company stage, and how much complexity you can realistically manage.

It’s also important to get tax advice early. Employee equity can trigger tax issues (often referred to as the employee share scheme or “ESS” rules), and the timing of when someone is taxed can depend on how the incentive is structured.

Even if you don’t issue a new class of shares, it’s worth making sure your employee arrangements are properly documented in an Employment Contract so expectations and IP ownership are clear.

4. You’re Trying To Separate Control From Economic Benefit

This is a common need in family-run businesses or closely held companies.

For example, you may want to:

• keep voting control with the active directors
• allocate profit participation to other family members or passive investors

Separate share classes (such as voting and non-voting shares) can help, but the details matter. You’ll want to consider company governance carefully so you don’t create a structure that leads to resentment, disputes, or deadlock.

What Documents Do You Need When Issuing Different Types Of Shares?

Whenever you’re dealing with different types of shares, it’s not enough to “agree it in principle”. The legal documents need to reflect the structure clearly, and the company needs to follow proper processes when issuing shares.

Here are the documents that commonly come up for startups and small businesses.

• Company Constitution: your constitution sets the rules for how the company operates, including whether it can issue different classes of shares and what rights attach to them. Many growing businesses put a tailored Company Constitution in place so the internal rules actually match how the founders intend to run the company.
• Shareholders Agreement: this is the practical “relationship rulebook” between shareholders, usually covering transfers, decision-making, disputes, funding, and exits. A well-drafted Shareholders Agreement can be just as important as the share classes themselves.
• Share Issue Documentation: when you issue shares, you’ll generally need proper approvals and records (and in many cases, updates to ASIC records). This often includes board resolutions, share certificates (if used), updating the company’s share register, and lodging the relevant ASIC notification within the required timeframe. This is where many small businesses accidentally create compliance issues by doing things informally.
• Terms Of Issue (For A Specific Share Class): if you’re creating preference shares, redeemable shares, or other special classes, the rights should be clearly set out in writing - not just discussed over email.
• Founders/Equity Arrangements: if you’re trying to ensure a founder “earns” their equity over time (vesting), you’ll typically need a separate arrangement alongside the share issue so expectations are clear from day one.

It’s also a good idea to think about privacy and customer compliance early, especially if you’re building an online product. If you collect personal information, you’ll generally want a Privacy Policy that matches your actual data practices.

If your business is selling products or services to customers, you’ll also want to make sure your customer-facing terms align with the Australian Consumer Law (ACL) - for example, avoid “no refunds” statements that can breach consumer guarantee rules. Depending on your model, this may be covered through tailored business terms (for example, your online terms and conditions).

Key Takeaways

• There are many types of shares in Australia, but the main difference comes down to the rights attached to each share class (voting, dividends, capital, and transfer rights).
• Ordinary shares are the most common and are often enough for early-stage businesses, but more complex structures can help once you raise capital or bring in new stakeholders.
• Preference shares and other special classes can be useful for investment and risk allocation, but they need careful drafting so everyone understands what they’re getting.
• Your Company Constitution and Shareholders Agreement are key documents for setting (and protecting) share rights and preventing disputes.
• If you’re issuing shares to co-founders, investors, or team members, it’s worth getting the structure and documentation right early to avoid expensive fixes later. It’s also wise to get tax advice (particularly for dividends and employee equity/ESS) before you lock in a structure.

If you’d like a consultation on setting up the right share structure and documents for your startup or small business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.