A Sydney two-founder pre-seed company incorporates in early 2024. Each founder takes 50% of the issued shares at $0.0001 per share, signs a founder accession deed and gets on with building. Eighteen months in, the technical co-founder gives notice — he is moving to a US AI lab and wants to keep “his” shares. The remaining founder has just signed a Series A term sheet with a Melbourne fund that has insisted, in writing, that 70% of the departing founder’s stake “vest backwards” into a company buy-back. The shareholders’ agreement has a reverse-vesting clause. Nobody has ever read it carefully. On a Thursday morning the company’s lawyer reads it for the first time and tells the remaining founder three things: the buy-back right is real, the price is $0.0001 per share, and the company cannot legally exercise the right next week.
That last sentence is where most reverse-vesting arrangements unravel. The right exists on the paper. The Corporations Act mechanics that actually execute the claw-back are skipped. By the time the lawyer drafts the s257B notice, the departing founder has retained counsel, the price has become contested, and the Series A closing date is in five weeks.
Reverse Vesting, Not Forward Vesting
Forward vesting is the model used for options under an Employee Share Option Plan: the recipient earns options over time and nothing is issued until each vesting tranche. Reverse vesting is the model used for founder shares: the founder is issued all of their equity on day one — keeping the cap table clean and resetting the CGT clock — but the company (or another shareholder) retains a contingent right to take back the unvested portion if the founder leaves before the schedule is up. Standard Australian schedules are four years, monthly vesting after a one-year cliff, sometimes with one or two years of prior service credit recognised at incorporation.
For founders, reverse vesting has three big advantages over a forward-vesting option grant: the CGT cost base is set at incorporation (typically a fraction of a cent), the 12-month CGT discount clock starts now rather than at each vest, and the company shows a real founder cap table to investors at every milestone. The trade-off is that the leaver mechanics have to actually work.
The Three Mechanisms — and Why Most Documents Pick the Wrong One
There are three ways a startup can move unvested founder shares off the leaver’s register. Each carries different Corporations Act consequences.
- Company buy-back under Part 2J.1. The company itself acquires the shares and cancels them. The Act recognises five buy-back categories — equal access, on-market, employee share scheme, selective and minimum holding — and each is gated by a different approval pathway. Founder reverse-vesting buy-backs almost always sit in the employee share scheme category (where the founder is also an employee or director and the shares are held under a plan) or, where that is not available, the selective category.
- Compulsory transfer to another shareholder. The shareholders’ agreement compels the leaver to sell unvested shares to the remaining founders, an ESOP trustee or a nominee at a contractual price. This avoids the buy-back rules entirely because the company is not the acquirer. It also avoids the financial assistance problem in s 260A if the remaining founders are funding the acquisition.
- Forfeiture and cancellation under the constitution. The constitution provides that unvested shares are forfeited on a defined leaver event and the company cancels them under s 258A. This is the cleanest mechanism on paper, but cancellation by forfeiture is interpreted narrowly by ASIC and the courts and the constitution has to be drafted very carefully to support it.
Most off-the-shelf founder agreements drop a “company buy-back” clause into the document, pick neither approval pathway, and leave the founder to discover at the leaver moment which category they are actually in.
What s257B Actually Requires
The Corporations Act 2001 (Cth) sorts buy-backs by two axes: who is bought back from, and how many shares. The 10/12 rule matters mostly for listed companies, but the approval architecture matters for everyone. A selective buy-back — which most founder reverse-vesting falls into when the shares are not held under a formal employee share plan — requires a special resolution passed by 75% of votes cast, with the leaver and their associates excluded from voting, plus lodgement of ASIC Form 280 with a notice period of at least 14 days before the meeting, plus lodgement of Form 281 after completion. The directors must form a positive view that the company is solvent and able to pay debts as they fall due both immediately before and immediately after the buy-back, recorded in a board minute.
An employee share scheme buy-back under s 257B(4) (read with reg 7.6.01) is meaningfully less onerous: an ordinary resolution suffices when the buy-back falls within the 10/12 limit, the special-resolution carve-out at s 257D is not triggered, and the lodgement requirements are shorter. The catch is that the shares must have been issued under a plan that meets the employee share scheme criteria. A founder share issued at incorporation under a stand-alone founder accession deed is, on most readings, not a scheme share. Backfilling that designation 18 months later, after the leaver has notified, is contentious.
The drafting consequence is unromantic but important: if a startup wants to rely on the employee share scheme pathway, the founder shares should be issued under a documented founder share plan from day one, with the leaver and buy-back terms embedded in the plan rules. Otherwise, the company should default-draft to the selective buy-back pathway and accept the 75% special-resolution overhead.
Good Leaver, Bad Leaver — and the Price
Every well-drafted reverse-vesting clause splits leavers into two pools. Good leavers — typically death, permanent disability, termination without cause and (in some documents) a mutually agreed departure — keep their vested shares at market value and have unvested shares bought back at fair value, often a third-party valuation. Bad leavers — resignation, termination for cause, fundamental breach of restraints or material breach of the IP assignment — have their unvested shares bought back at the lower of cost and fair value (so almost always cost) and, in aggressive investor-side drafts, are forced to sell vested shares as well at cost.
Australian courts will scrutinise a bad-leaver buy-back at cost as a possible penalty if the differential between cost and fair value is large and the leaver category is defined too widely. The doctrinal anchor since Paciocco v ANZ [2016] HCA 28 is whether the clause protects a legitimate commercial interest in proportion to the breach; a bad-leaver clause that catches every resignation at par when fair value is $5 a share is exposed. Tightly defined trigger events, an arm’s-length valuation mechanic for fair value and a written rationale for the cost mechanic in board papers are the standard mitigations.
The Tax Layer Founders Forget
Reverse-vested founder shares are, technically, ESS interests under Division 83A of the Income Tax Assessment Act 1997 (Cth) when issued in connection with employment or services. For an early-stage Australian company, that ordinarily points to the startup concession in Subdivision 83A-B (subject to the company satisfying the conditions — unlisted, incorporated less than 10 years, aggregated turnover under $50 million, at least 75% Australian-resident employee participation across the plan). Under the concession, no income tax arises at grant, on vesting or on the cessation of the buy-back risk; the founder is taxed under CGT rules on later disposal, with the 12-month discount clock measured from the grant date.
Two structural points follow. First, if the founder shares are issued outside a compliant plan, the deferred taxing point under Subdivision 83A-C may bite — and the deferred taxing point is the earliest of cessation of forfeiture risk, cessation of employment, 15 years and disposal. Vesting under a reverse-vesting clause can crystallise an income tax liability if the documents are not in the concession. Second, a buy-back at cost from a bad leaver is a CGT event A1 for the leaver — the loss may be available, but only if the cost-base mechanics work, which they generally do not in a founder context.
What to Get Right at Incorporation
- Issue founder shares under a documented founder share plan, not a bare accession deed. The plan rules carry the vesting schedule, the leaver matrix and the buy-back mechanic.
- Pick a single mechanism per company and draft to it. Selective buy-back or compulsory transfer to other shareholders are the two robust defaults; pure forfeiture is brittle.
- Define the leaver categories tightly. A bad-leaver definition that captures any resignation will be reviewed for penalty risk and may not survive an arms-length valuation challenge.
- Build the s 257B paperwork into the founder onboarding pack. Form 280, the solvency board minute and the special-resolution template should sit in the same folder as the founder accession deed.
- Confirm the ESS startup concession is available from day one. If it is, the founder shares should be inside it.
- Re-test at Series A. Investors will require reverse-vesting on any unvested founder equity at the priced round; a clean pre-existing plan is the cheapest way to give them what they ask for.
The Bottom Line
Reverse vesting is the right mechanic for Australian founder shares — it keeps the cap table clean, sets the CGT clock at incorporation and gives investors a credible answer at term-sheet stage. But the right to claw equity back lives in the Corporations Act, not in the shareholders’ agreement, and the Act offers a small number of narrow pathways that have to be chosen and documented at incorporation rather than at the leaver moment. The founders who get this right pick the buy-back category at day one, draft the plan rules to fit it, embed the s 257B forms in the company secretariat pack and treat the leaver matrix as a live operational document — not as boilerplate that nobody will ever read. The ones who don’t discover, the week before Series A signing, that their reverse-vesting clause is theoretical.
Viridian Lawyers advises Australian startup founders, ESOP trustees and lead investors on reverse-vesting structures, s257B buy-back execution, founder share plans, and the practical mechanics of resolving leaver disputes ahead of a priced round. If you are incorporating a new company, papering a co-founder split, or executing a buy-back into a Series A closing, get in touch.
