Veto Rights In Australia: What Startups Need To Know

If you’re building a startup or growing a small business, you’ll eventually hit a point where “who decides what” becomes just as important as your product, customers, or revenue.

Maybe you’re bringing on a co-founder, issuing shares to an early investor, or negotiating terms with a strategic partner. Suddenly, decisions that used to be quick and informal start to carry bigger consequences. That’s where veto rights often come into the conversation.

Veto rights can help protect key stakeholders from major decisions being made without their input. But they can also slow you down (or even create gridlock) if they’re drafted too broadly or used in the wrong situations.

Below, we’ll break down what veto rights are, where they usually sit in your legal documents, the types of decisions they typically apply to, and how to structure them so your business is protected without losing momentum.

What Are Veto Rights (And Why Do They Matter In A Business)?

In a business context, veto rights are rights given to a particular person or group (often a shareholder, founder, or investor) to block certain decisions unless they agree.

You’ll commonly see veto rights described as:

• Reserved matters (decisions that require special approval)
• Consent rights (a decision can’t happen without consent)
• Protective provisions (often used for minority investors)

At a practical level, a veto right changes the decision-making “default”. Instead of a simple majority vote (or directors’ resolution) being enough, the company must get approval from the veto-holder for the relevant matters.

Why Veto Rights Are So Common In Startups

Startups often move quickly, raise capital in stages, and adjust strategy as they learn. That speed and uncertainty can make investors (and sometimes co-founders) nervous about losing influence or having their stake diluted.

Veto rights are one way to manage that tension. They can protect someone from decisions that might:

• reduce the value of their shares
• change the fundamental direction of the business
• increase risk (for example, taking on large debt)
• lock the business into major obligations

Veto Rights vs “Control”

It’s also important to be clear about what veto rights don’t necessarily do.

Having veto rights doesn’t automatically mean someone “controls” the company day-to-day. However, veto rights can be strong enough that they create a form of negative control (the power to stop things), which can matter legally and commercially in some contexts. If you’re thinking about how control is assessed in corporate structures, the concept is explored further in control.

When Should You Consider Veto Rights In Your Startup Or Small Business?

Not every business needs veto rights. In fact, many early-stage businesses run perfectly well with straightforward director and shareholder decision-making rules.

But veto rights are common (and often reasonable) in situations like these:

You Have Multiple Founders With Different Roles Or Risk Exposure

If one founder is investing significant capital, or personally guaranteeing loans, they may want veto rights over decisions that increase financial exposure (like borrowing money or signing major leases).

You’re Bringing In External Investors (Especially Minority Investors)

Investors who don’t hold a majority stake will often ask for veto rights over certain “big ticket” items. From their perspective, it’s a way to protect their investment and ensure they’re not sidelined once their money is in.

You’re Planning A Future Capital Raise

Even if you don’t have investors today, thinking ahead can help. If you’ll likely raise in 6-18 months, setting sensible governance now can prevent rushed negotiations later (and avoid accidentally giving away too much control under time pressure).

You Want Clear Rules For High-Stakes Decisions

Sometimes veto rights are less about power and more about clarity. For example, you might decide that certain decisions should always require founder consent (like selling the business), regardless of who is on the board at the time.

Where Are Veto Rights Documented In Australia?

Veto rights don’t exist just because someone says they do. They need to be properly documented in your legal structure, otherwise you can end up with misunderstandings (and disputes) when it matters most.

In Australian startups and small businesses, veto rights are typically set out in one or more of the following places.

Shareholders Agreement

The most common place to document veto rights is a Shareholders Agreement.

This is a private contract between shareholders (and usually the company as well) that can cover:

• how decisions are made
• what decisions require special approval
• who gets information and reporting
• funding obligations
• share transfers and exit rules

Because it’s contractual, it can be tailored in detail and can include consequences if someone breaches it. However, it generally only binds the parties who have signed (and agreed to be bound), so if new shareholders come in later, they’ll usually need to sign a deed of accession (or otherwise formally agree) for the shareholders agreement to apply to them.

Company Constitution

Some veto-style rights can also be placed in a Company Constitution.

A constitution is part of the company’s internal governance rules. Depending on how it’s drafted (and how it interacts with the Corporations Act and your other documents), it can help embed approval requirements into the company’s internal rules, including for shareholders who become members later.

In practice, many startups use a combination: the constitution sets baseline governance, and the shareholders agreement contains the more detailed commercial arrangements.

Different Classes Of Shares

Another approach is to build veto-like rights into the rights attached to shares. For example, you might issue a class of shares that has special voting rights or requires that class’ consent for certain matters.

This is a more structural approach and needs careful drafting. For example, varying or creating class rights often triggers specific procedural requirements under the Corporations Act and the company’s constitution. If you’re considering this path, it’s worth understanding Different Classes of Shares and how class rights operate.

Side Letters Or Investment Documents

Investors sometimes request veto rights in a term sheet, side letter, or subscription documents. That can work, but you need to be careful that:

• the veto rights are consistent across documents (no contradictions)
• they actually bind the company and the relevant shareholders (including by ensuring the right parties sign)
• they remain workable as the business grows and brings in more parties

Common “Reserved Matters” That Veto Rights Usually Cover

Veto rights are often strongest when they’re limited to a clear list of major decisions. These are commonly called “reserved matters”.

While every deal is different, here are veto rights that frequently come up in Australian startups and small businesses.

1) Issuing New Shares Or Changing The Capital Structure

Issuing new shares can dilute existing shareholders. That’s why veto rights often apply to:

• issuing new shares
• granting options or convertible instruments
• changing share rights (including creating a new share class)

This is also where documents like an Option Deed can become relevant, particularly if you’re granting options to advisors, employees, or early contributors.

2) Taking On Major Debt Or Providing Security

Debt can help you grow, but it can also introduce serious risk (especially if it comes with security interests over business assets or personal guarantees).

Veto rights often apply to borrowing above a threshold amount, entering finance facilities, or granting security over company assets.

3) Selling The Business Or Key Assets

A sale of the company (or a sale of key assets) is a classic veto matter. This can include:

• selling all or substantially all assets
• merging with another company
• entering a binding sale process

For many founders, it’s sensible that an exit can’t happen unless key stakeholders agree.

4) Major Operational Commitments Above A Threshold

This often covers things like:

• signing large customer contracts on risky terms
• entering long-term leases
• committing to significant supplier arrangements

The key here is to make the threshold realistic. If it’s set too low, you’ll need approvals constantly and the business will slow down.

5) Hiring Or Firing Key Executives

Some veto rights apply to changes in senior leadership, such as:

• appointing or removing a CEO
• changing director appointments
• material changes to executive remuneration

This can make sense where a founder’s involvement is core to the company’s value, or where an investor wants visibility over leadership stability.

6) Related Party Transactions

Related party transactions can include deals between the company and a founder, director, or associated entity (for example, the company paying a founder-owned supplier).

Veto rights here can protect against conflicts of interest and help ensure transactions are on fair terms.

7) Changes To The Business Plan Or Core Business Model

This is sometimes requested by investors, but it needs careful drafting. The risk is that a veto right over “business model changes” can become overly subjective.

If you include this type of veto right, define it clearly (for example, “entering a new industry” or “ceasing the core product line”) rather than vague wording.

How To Draft Veto Rights So They Protect Your Business Without Creating Gridlock

The biggest risk with veto rights isn’t that they exist. It’s that they’re unclear, too broad, or don’t come with a workable decision-making process.

Here are practical ways to keep veto rights commercially useful.

Keep The List Of Veto Matters Tight And Specific

Veto rights should focus on truly material decisions. If the veto list becomes a “catch-all” that covers everyday operations, you may end up with:

• slow decision-making
• missed opportunities (especially in fast-moving markets)
• frustration between founders and investors
• higher dispute risk

A good test is: Would we normally want a board meeting and serious discussion for this decision? If not, it probably shouldn’t be a veto matter.

Use Thresholds (And Make Them Increase Over Time)

Many veto rights are tied to dollar values. For example, “no contracts over $100,000 without investor consent”.

That can work, but remember: as you grow, $100,000 might become a normal deal size.

Consider mechanisms like:

• automatic annual increases
• thresholds tied to revenue
• thresholds that can be adjusted by board resolution

Clarify The Process And Timeframes For Consent

A veto right should come with a clear “how”. Otherwise, you’ll be stuck wondering things like: How do we request consent? How long do we wait? What happens if they don’t reply?

Common process terms include:

• notice must be given in writing with enough detail
• consent must be granted (or refused) within a set timeframe
• silence is either deemed consent or deemed refusal (depending on what’s negotiated)

This helps prevent veto rights being used as a passive delay tactic.

Think About Deadlock Scenarios Upfront

Deadlock happens when a decision can’t be made because the veto-holder blocks it (or when required approvals can’t be reached).

Your documents should anticipate deadlock and provide a pathway forward, such as:

• escalation to a founders’ meeting
• mediation
• buy-sell mechanisms (in extreme cases)

Even if you hope you’ll never use these clauses, having them can keep everyone focused on resolution rather than conflict.

Align Veto Rights With Founder Equity And Vesting

If founders have veto rights, it’s also common to align those rights with ongoing involvement in the business. For example, if a founder leaves early, should they still be able to veto major decisions?

This is where equity vesting structures and a Share Vesting Agreement can help match decision-making power with long-term commitment.

Make Sure Your Governance Documents Don’t Contradict Each Other

One of the most common “silent problems” we see is where different documents say different things about approvals and decision-making.

For example, your shareholders agreement might require investor consent for issuing shares, but your constitution might allow directors to issue shares without reference to that consent.

This is fixable, but it’s far easier (and cheaper) to align the documents early.

Key Takeaways

• Veto rights let a particular shareholder, founder, or investor block certain decisions unless they consent, and they’re usually used for high-impact “reserved matters”.
• Common veto matters include issuing new shares, taking on major debt, selling the business, entering large contracts, and making key leadership changes.
• Veto rights are typically documented in a Shareholders Agreement, a Company Constitution, and sometimes through different classes of shares or investment documents.
• The best veto rights are specific, limited to material decisions, and include clear processes and timeframes so they don’t slow down everyday operations.
• Planning for deadlock and aligning veto power with founder commitment (for example through vesting) can prevent serious governance disputes later.

This article is general information only and does not constitute legal advice. For advice tailored to your circumstances, get in touch with a lawyer.

If you’d like help setting up (or negotiating) veto rights 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.