Last Updated on 25/08/2025 by Damin Murdock
Issuing shares to co-founders and investors is a critical step in shaping the ownership and governance of a startup. In Australia, this process must be handled with careful legal and strategic planning to avoid disputes, regulatory issues, or tax pitfalls. This article explores the key considerations for startup founders when allocating shares in the early stages of their business.
Choosing the Right Legal Structure
Before issuing any shares, your business should be set up under an appropriate legal structure. Most startups in Australia choose to register as a proprietary limited company (Pty Ltd). This structure is governed by the Corporations Act 2001 (Cth) and provides limited liability protection, the ability to issue shares, and a clear framework for investor participation.
Allocating Equity Among Co-Founders
One of the first challenges for founders is deciding how to split equity. This often reflects each person’s contribution, such as capital, intellectual property, time commitment, or domain expertise. Founders may also consider future roles and responsibilities when determining their share of the company.
To protect the company from early founder exits, it is common to use a vesting schedule. Vesting allows founders to earn their shares over time. A typical schedule might span four years with a one-year cliff, meaning no shares are earned if a founder leaves within the first year.
Creating Different Share Classes
Startups may issue different types of shares to serve distinct purposes. Ordinary shares are usually given to founders and carry full voting and dividend rights. Preference shares are often issued to investors and may include special rights such as liquidation preferences, priority dividend payments, or anti-dilution protections.
All classes of shares and their associated rights should be clearly defined in the company’s constitution or shareholder agreement to avoid misunderstandings.
Drafting a Shareholder Agreement
A shareholder agreement is an essential legal document that governs the relationships between shareholders. It outlines each party’s rights and obligations and covers important matters such as share transfers, dispute resolution, decision-making processes, board appointments, and exit provisions. A well-crafted agreement helps reduce future conflict and provides a stable foundation for the business.
Complying with Regulatory Obligations
Issuing shares requires compliance with Australian Securities and Investments Commission (ASIC) regulations. This includes lodging Form 484 to record changes in shareholdings, updating the company’s share register, issuing share certificates, and maintaining accurate meeting minutes.
If you plan to raise more than $2 million or issue shares to more than 20 investors in a 12-month period, you may also need to meet disclosure requirements unless you qualify for an exemption, such as the sophisticated investor test.
Valuation and Tax Implications
It is important to consider the value of the shares you are issuing. Issuing shares at a discount or without proper valuation can result in adverse tax consequences, particularly for shares issued to employees or related parties. The Income Tax Assessment Act 1997 (Cth) outlines the conditions under which benefits from share allocations may be taxable.
Startups may consider implementing an Employee Share Scheme (ESS) to offer equity incentives with tax advantages. These schemes must meet specific conditions, such as offering shares at a specific value and complying with ATO reporting requirements.
Planning for Dilution and Future Funding
Generally speaking, every new share issuance reduces the ownership percentage of existing shareholders. It is essential to model potential dilution scenarios and understand how future funding rounds may affect control and ownership. Founders can preserve flexibility by using instruments such as convertible notes or Simple Agreements for Future Equity (SAFEs) to raise capital without immediate dilution.
Understanding Investor Expectations
Professional investors often require specific rights and protections as a condition of their investment. These may include board seats, veto powers on key decisions, tag-along and drag-along rights, and reporting obligations. Founders should negotiate these terms carefully to balance investor confidence with maintaining control over the business.
Aligning with Long-Term Strategy
The share structure you create today will shape your ability to grow, attract talent, and exit successfully. Equity allocations should align with your business goals, whether that includes a strategic sale, public listing, or long-term ownership. Consider how shareholding decisions affect future funding, succession planning, and corporate governance.
Final Thoughts
Issuing shares is not just a matter of dividing up ownership. It is a legal and strategic decision that impacts every aspect of your startup’s future. By understanding the regulatory framework, tax implications, and long-term consequences, founders can make informed decisions that support sustainable growth.
For tailored advice on structuring equity, preparing shareholder agreements, and complying with ASIC obligations, feel free to contact Damin Murdock at Leo Lawyers via our website, on (02) 8201 0051 or at office@leolawyers.com.au. Further, if you liked this article, please subscribe to our newsletter via our Website, and subscribe to our YouTube , LinkedIn, Facebook and Instagram. If you liked this article or video, please also give us a favourable Google Review.
DISCLAIMER: This is not legal advice and is general information only. You should not rely upon the information contained in this article and if you require specific legal advice, please contact us.
Damin Murdock (J.D | LL.M | BACS - Finance) is a seasoned commercial lawyer with over 17 years of experience, recognised as a trusted legal advisor and courtroom advocate who has built a formidable reputation for delivering strategic legal solutions across corporate, commercial, construction, and technology law. He has held senior leadership positions, including director of a national Australian law firm, principal lawyer of MurdockCheng Legal Practice, and Chief Legal Officer of Lawpath, Australia's largest legal technology platform. Throughout his career, Damin has personally advised more than 2,000 startups and SMEs, earning over 300 five-star reviews from satisfied clients who value his clear communication, commercial pragmatism, and in-depth legal knowledge. As an established legal thought leader, he has hosted over 100 webinars and legal videos that have attracted tens of thousands of views, reinforcing his trusted authority in both legal and business communities."
