Founder equity vesting, reverse vesting and leaver provisions

In Australian VC documents, the primary tool for taking back a departing founder's shares is a compulsory transfer mechanism (a deemed transfer notice or call option), under which the board allocates the leaver's shares to continuing shareholders or a nominated buyer. A compulsory transfer is preferred operationally because a share transfer avoids the shareholder resolution and ASIC waiting-period steps of a company share buy-back. To ensure the transfer can be completed if a departing founder refuses to sign, the Shareholders Deed is executed as a deed and includes an irrevocable power of attorney given to secure performance of the leaver's obligations. The Shareholders Deed binds the company and all shareholders who are party to it, so every new shareholder should be required to accede. Many companies also mirror the compulsory transfer provisions in the constitution so they bind all members, including executors and others who never signed the deed. If the constitution is amended after the shares are issued, every founder should consent in writing, because an amendment allowing shares to be compulsorily acquired can be challenged. Leaver voting, by contrast, is best handled contractually (an undertaking not to vote, backed by an irrevocable power of attorney given to secure performance of the leaver's obligations) rather than through the constitution, which avoids varying class rights.

A company share buy-back sits in the deed as a fallback (and some Australian documents prefer a buy-back for unvested shares because bought-back shares are cancelled under s 257H(3) rather than transferred to another shareholder). Under the Corporations Act 2001 (Cth), buying back a departing founder's shares is a selective buy-back (s 257D), requiring a 75% special resolution on which the selling founder and their associates cannot vote in favour (or a resolution agreed at a general meeting by all ordinary shareholders), lodging the notice of meeting and accompanying documents with ASIC before they are sent to shareholders (s 257D(3)), lodging the offer documents with ASIC (s 257E), 14 days' prior notice to ASIC (s 257F), including all material information with the offer (s 257G), no material prejudice to creditors (s 257A), and notice of cancellation to ASIC within one month (s 254Y). Where the buy-back fallback is used, the constitution should include a quorum carve-out, and the deed should require the leaver not to vote against the buy-back resolution or frustrate the quorum, since s 257D only prevents the leaver and their associates voting in favour. A compulsory transfer and a buy-back may have different tax implications for the leaver, the company and any person acquiring the shares, so check the choice of mechanism and price with a tax adviser.

Where a founder holds shares through a family trust or personal holding company, the trustee or holding company is the registered shareholder while the individual founder performs the work. Both the holding entity and the individual founder personally must be parties to the Shareholders Deed so leaver triggers, IP obligations, and restraints cannot be bypassed, and the deed should treat a change of control of the holding company or corporate trustee as a deemed transfer. If the company relies on the replaceable rules (s 135), shareholders have some statutory protection, but it is limited. On a new issue of shares, s 254D requires the directors of a proprietary company first to offer the shares to existing holders of that class, as far as practicable in proportion to their holdings, unless the company authorises a particular issue by resolution in general meeting. Section 254D does not apply to transfers of existing shares. On a transfer, the only replaceable-rule control is s 1072G, which gives the directors discretion to refuse to register a transfer for any reason. That discretion does not give the other founders a right of first refusal, and it offers no protection if the selling founder controls the board. A Shareholders Deed should therefore set out pre-emptive rights and founder lock-ups on share transfers, drag-along rights so a minority shareholder (including a departed founder who kept vested shares) cannot hold out and block a 100% exit, and tag-along rights so a majority cannot sell a controlling stake without offering the other founders the same exit terms. Where the Shareholders Deed sets its own pre-emption regime for new issues (typically with carve-outs for the ESOP, SAFE and convertible note conversions, and the investment round itself), the constitution should also displace or modify s 254D. Only the constitution can do that (s 135(2)), and waivers in the deed bind only the shareholders who are party to it.

Whenever a founder leaves during the vesting period, their unvested shares are transferred or bought back for the lower of the founder's issue price (often nominal) and Fair Market Value, though some deeds allow pro-rata or partial acceleration on death or permanent incapacity. The distinction between leaver categories primarily determines what happens to the founder's vested shares.

A founder who is terminated for cause, commits fraud, or materially breaches their IP or restraint obligations is treated as a Bad Leaver, exposing their vested shares to a compulsory transfer or buy-back at the lower of issue price and Fair Market Value, or at a discount to Fair Market Value. Unlike in the UK, the Australian penalty doctrine can apply without a breach (Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205). A discount that operates as security for a founder's obligations, including an obligation to remain engaged, can be challenged if it is out of all proportion to the company's legitimate interests (Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525). Discounts triggered by breach are most exposed. Investors often push for voluntary resignation to be treated as Bad Leaver as well, whereas founders commonly negotiate to keep vested shares on resignation after the cliff, subject to a contractual voting undertaking backed by an irrevocable power of attorney given to secure performance of the leaver's obligations if needed.

A founder who leaves due to death, permanent incapacity, termination without cause, or resignation for 'Good Reason' (such as a material reduction in agreed duties or pay, or a forced relocation without consent, so a founder cannot be constructively pushed out) is generally a Good Leaver. The Shareholders Deed will specify whether a Good Leaver retains their vested shares (usually subject to a contractual voting undertaking backed by an irrevocable power of attorney given to secure performance of the leaver's obligations, so a departed founder cannot block future rounds) or whether their vested shares can be acquired at Fair Market Value (paid at completion or in instalments, and often funded by the incoming buyer of the shares or insurance rather than company cash). Without Good Leaver rules, a deceased founder's personally held shares form part of their estate. Under the replaceable rule in s 1072A (unless the constitution provides otherwise), the legal personal representative can elect to be registered as the shareholder, and the company must then register them (s 1072A(3)), or transfer the shares to another person, in which case the usual transfer rules, including the directors' discretion under s 1072G, apply (s 1072A(4)). The founder's directorship ends on death. Where shares are held through a trust or company, the trustee or holding company remains the shareholder and control follows the trust deed or holding company ownership, so the Shareholders Deed should bind each founder and their legal personal representatives (and require any transferee to sign an Accession Deed), with the compulsory transfer rules mirrored in the constitution. If the constitution is amended after the shares are issued, every founder should consent in writing, because an amendment allowing shares to be compulsorily acquired can be challenged. A founder who becomes totally and permanently disabled while keeping legal capacity keeps their shares and remains a director unless they resign or are removed. If a founder loses legal capacity, their enduring attorney or a tribunal-appointed financial manager/administrator controls any shares they hold personally, and unless the constitution provides otherwise, the incapacitated director stays in office, which on a two-director board where the quorum is two (s 248F) can leave the board unable to act until the members appoint another director or remove the incapacitated director (s 203C). An enduring attorney can generally vote the founder's shares but cannot act as a director in the founder's place.

Australian Shareholders Deeds commonly give the board discretion (often requiring investor director or investor majority consent) to deem any departing founder to be a Good Leaver, or to waive leaver buy-back rights. More broadly, operational decisions are usually made by the board of directors (s 198A), and unless the constitution or a Shareholders Deed provides otherwise, shareholders holding a majority of votes can appoint (s 201G) and remove (s 203C) directors by ordinary resolution, while under the replaceable rules the chair has a casting vote at directors' (s 248G(2)) and members' (s 250E(3)) meetings. Because standard incorporation constitutions are unlikely to include founder vesting, compulsory leaver transfers, or structured deadlock resolution clauses, founders should document board appointment rights, deadlock escalation, and investor reserved matters (including who controls leaver classification, Fair Market Value determination, and share allocation) in the Shareholders Deed.

Even if founders put a vesting schedule in place early on, incoming Seed or Series A lead VCs will commonly ask to apply or reset founder vesting so the founders remain committed for 3 to 4 years following the round. Founders commonly seek recognition for time already served, so that vesting applies only to a portion of their shares (for example, 50% treated as vested on completion of the round, with the balance vesting monthly over 36 months). Issuing new founder shares, or applying vesting to existing shares, may have tax implications for founders, so speak to your tax adviser before agreeing to a reset.

Acceleration on an exit is negotiated case by case in Australia. Because founder vesting usually operates through the Shareholders Deed's leaver provisions, which end when the deed terminates on completion of a 100% sale, founders should check whether unvested shares are sold on the same terms as vested shares or must first be transferred or bought back. Where the deed provides for acceleration, it may be single-trigger (vesting on the exit itself) or double-trigger (vesting if the founder is terminated without cause within 12 to 18 months after the exit). Double-trigger only matters where unvested shares remain subject to vesting (or are rolled into acquirer equity) after completion of the exit. Acquirers often deal with founder retention separately through their own arrangements, such as earn-outs, new equity or retention bonuses.

Clawing back a departed co-founder's shares does not stop them competing or soliciting staff and customers. Founder restraints are commonly placed in the Shareholders Deed as shareholder covenants protecting the company's goodwill, and should be no wider than is reasonable under the common law (in NSW, the Restraints of Trade Act 1976 also lets a court read down an unreasonable restraint). An exposure draft bill released by Treasury on 7 September 2026 would, if enacted (the Government is targeting 2027), prohibit non-compete clauses for employees earning at or below the Fair Work high income threshold, and clauses stopping employees from soliciting co-workers whatever they earn, in arrangements made or varied after it commences. Restraints in shareholder agreements are intended to sit outside the ban, but because 'employment arrangements' is defined broadly, founder restraints are best given in the Shareholders Deed and tied to the founder's shareholding and the company's goodwill rather than to their employment.