- Get your share structure clean before investors arrive: a simple founder holding ordinary shares, founder vesting in place, and room set aside for an employee share pool. Fixing it after a term sheet lands is far more expensive.
- Investors typically take preference shares while founders hold ordinary shares. A Pty Ltd can issue different share classes with different rights, which is what makes a priced round possible.
- Australia’s employee share scheme start-up concession lets eligible unlisted companies (turnover under A$50 million, incorporated less than 10 years) grant equity with tax deferred until sale, so leaving ESOP room early pays off.
Founder share structure is the thing to get right before you raise: a clean founder holding of ordinary shares, founder vesting in place, and room set aside for an employee share pool. Investors will expect preference shares sitting above your ordinary shares, so the structure needs to allow for share classes.
Getting your founder share structure right before you register your Pty Ltd with Sleek saves you an expensive restructure once investors arrive. This is structuring guidance, not legal or financial advice.
How should you structure founder shares before a raise?
The goal before a raise is simplicity and headroom. Investors and their lawyers will scrutinise your cap table, and a messy one signals risk and slows the deal. Four things make a structure investor-ready: a clean founder holding, an understanding of ordinary versus preference shares, founder vesting, and space reserved for an employee share pool.
Each is cheap to set up at incorporation and costly to retrofit once a term sheet is on the table. The rest of this guide takes them in turn, then covers the mistakes that cost founders at the raise.
Start with a clean founder shareholding
A clean founder shareholding means a small number of founders holding ordinary shares in clear, agreed proportions, with nothing unusual bolted on. At incorporation, decide the founder split deliberately and document it.
Avoid spreading tiny parcels of equity across friends, family, or early helpers who are not committed long-term, because every name on the register is someone an investor’s lawyer will want to understand, and someone whose signature you may need later.
Keep the share register and ASIC records accurate from day one, ideally as part of getting the wider company setup right from the start. The number of shares you issue is somewhat arbitrary, but issuing a reasonable quantity (for example, a few million ordinary shares rather than 100) gives you flexibility to allocate small percentages later without fractional shares. A clean, well-documented founder holding is the foundation everything else sits on.
Ordinary vs preference shares
Founders hold ordinary shares; investors usually want preference shares. The distinction matters because a Pty Ltd can issue different classes of shares carrying different rights, and the rights attached to preference shares are what investors negotiate for.
Ordinary shares are the baseline: they carry voting rights and a share of profits and proceeds after other classes are paid. Preference shares sit above them, typically with priority on a return of capital if the company is sold or wound up, and often other protections.
Ordinary shares | Preference shares | |
Typically held by | Founders, employees | Investors |
Priority on exit | After preference shares | Ahead of ordinary shares |
Voting | Usually full voting | Negotiated, varies |
Purpose | Founder and team ownership | Investor downside protection |
You do not need to create preference shares before you raise; investors bring their own preferred terms. What matters pre-raise is that your constitution allows multiple share classes, which a properly set-up Pty Ltd constitution does, so you are not scrambling to amend it mid-deal.
Founder vesting before investment
Founder vesting means your own shares are earned over time rather than owned outright from day one, usually over a three or four year period. It feels counterintuitive to put restrictions on your own equity, but doing it before a raise protects you and your co-founders. If one founder leaves after six months, vesting ensures they do not walk away with a large slice of the company while the others carry it for years.
Investors increasingly expect founder vesting and may impose it as a condition of investing. Setting it up yourselves, on your own terms, before they arrive is far better than having it dictated in a term sheet. It signals professionalism and aligns the founding team for the long haul. Vesting is typically documented through the shareholders agreement or a share buy-back arrangement, which is an area to get drafted properly.
Leaving room for an ESOP
An employee share option pool (ESOP) is equity set aside to grant to employees, and reserving room for it before you raise matters because investors will expect it, and if you create it after the round it dilutes you rather than being shared. A common approach is to set aside a pool of perhaps 10% of equity for the team, established before or as part of the raise.
Australia’s tax treatment makes this especially worthwhile for startups. Under the ATO’s employee share scheme start-up concession, eligible companies can grant equity to employees with the taxing point deferred until they sell the shares, rather than taxed upfront. To qualify, broadly, the company must be an Australian resident, unlisted, incorporated less than 10 years, with aggregated turnover under A$50 million in the prior year.
Employees must hold the interests for at least three years, shares can be offered at a discount of no more than 15% of market value, and options must have an exercise price at or above market value. No single employee can hold more than 10% of the company. Where it applies, employees can also access the 50% CGT discount on shares held over 12 months.
Why it pays to plan early: setting aside ESOP room before the raise means the dilution is shared with incoming investors rather than falling entirely on founders afterwards. Getting this right at incorporation costs little, and it is worth understanding the full cost of incorporating a company in Australia before you start. The start-up concession then lets you reward early hires with equity without handing them a tax bill before there is any liquidity.
Pre-raise mistakes that cost founders
The common errors are all cheap to avoid beforehand and expensive to fix once investors are involved.
- A messy cap table. Too many small shareholders, undocumented promises of equity, or unclear founder splits all slow a raise and can spook investors.
- No founder vesting. A co-founder leaving early with full equity is one of the most damaging things that can happen to a young company.
- Forgetting ESOP room. Creating the pool after the round dilutes founders alone, and missing the start-up concession means employees get taxed upfront.
- Handing out equity too freely. Early advisors or contractors given shares instead of a documented agreement become permanent fixtures on your register.
- A constitution that blocks share classes. A bare-bones setup may not cleanly allow the preference shares investors need, forcing a mid-deal amendment.
Be candid with yourself: structuring wrong is genuinely expensive to undo, sometimes requiring share buy-backs, restructures, or renegotiation under time pressure during a raise. The cheap insurance is getting it right at incorporation.
How Sleek helps with founder share structure
Most founder-share problems trace back to a company set up quickly and cheaply without thinking about the raise to come. Sleek incorporates your Pty Ltd with a constitution that allows multiple share classes, records your founder holding correctly, and keeps your share register and ASIC filings clean as you grow.
A dedicated accountant helps you keep the structure tidy through to the raise. For the term sheet, valuation and shareholders agreement themselves, you will want a startup lawyer, and we can work alongside them.
This article is general structuring guidance, not legal or financial advice. Have a lawyer review your share structure and any actual raise.
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FAQs on founder share structure in Australia
How should founders split shares before raising investment?
Decide the founder split deliberately at incorporation, issue ordinary shares in clear agreed proportions, and document it in a shareholders agreement. Issue a reasonable number of shares, for example several million rather than a handful, so you can allocate small percentages later without fractions. Keep the register and ASIC records accurate from day one.
What is the difference between ordinary and preference shares?
Ordinary shares are the baseline class founders and employees hold, carrying voting rights and a share of proceeds after other classes are paid. Preference shares, which investors usually take, rank ahead of ordinary shares, typically with priority on a return of capital at exit. A Pty Ltd can issue different classes with different rights.
What is founder vesting and why do it before a raise?
Founder vesting means your shares are earned over time, commonly three to four years, rather than owned outright immediately. It protects the team if a founder leaves early, so they do not keep a large stake they did not earn. Investors increasingly require it, so setting it up on your own terms beforehand is better than having it imposed in a term sheet.
What is the employee share scheme start-up concession?
It is an ATO concession that lets eligible startups grant equity to employees with tax deferred until they sell, rather than taxed upfront. The company must be an Australian resident, unlisted, incorporated under 10 years, with turnover under A$50 million. Employees hold interests at least three years and no one can hold more than 10% of the company.
Can a Pty Ltd have different classes of shares?
Yes. A proprietary company can issue multiple share classes, such as ordinary and preference shares, each carrying different rights to voting, dividends and capital. This flexibility is what allows investors to take preferred shares in a priced round. The key is that your company constitution permits multiple classes, which a properly drafted one does.
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When should I involve a lawyer in structuring founder shares?
Use a lawyer for anything binding: the shareholders agreement, vesting documents, the ESOP rules, and the term sheet and round itself. General structuring decisions like a clean founder holding and reserving ESOP room can be planned earlier with your accountant at incorporation, but the legal documents for an actual raise should always be professionally drafted and reviewed.
