Secondary Sales of Startup Shares: Legal Considerations for Founders and Early Employees

You joined a startup early. You took below-market salary in exchange for equity. Three years and two funding rounds later, the company is doing well — but it’s nowhere near an IPO or acquisition. Your shares are worth something on paper, but your bank account doesn’t reflect it.

So you start thinking about selling some of your shares. Maybe a new investor wants in. Maybe a former colleague knows someone interested. Maybe you just need the liquidity.

The problem: selling shares in a private Australian company is nothing like selling shares on the ASX. There’s no open market, no clearing house, and no guarantee the company will even let the transfer happen. Before you start negotiating a price, you need to understand the legal framework you’re operating in — because getting it wrong can mean a failed transaction, a tax surprise, or a dispute with the people you still work with.

The Starting Point: Your Company’s Constitution and Shareholders Agreement

In a private company (Pty Ltd), the rules governing share transfers are found in three places: the Corporations Act, the company’s constitution, and any shareholders agreement.

The Corporations Act provides a baseline. Section 1072G gives the directors of a proprietary company a general discretion to refuse to register a transfer of shares for any reason. This is a replaceable rule — meaning the company’s constitution can modify or remove it — but most startup constitutions retain it in some form. In practical terms, this means that even if you find a willing buyer and agree on a price, the company’s board can block the transfer.

Most startups that have raised venture capital will also have a shareholders agreement (or subscription agreement with equivalent provisions) that overlays the constitution with additional transfer restrictions. These typically include:

• Pre-emptive rights — existing shareholders must be offered the shares first, usually at the same price and on the same terms as the proposed third-party sale
• Board consent — the transfer requires prior written approval from the board (and sometimes from investors holding a specified percentage of shares)
• Tag-along rights — if a major shareholder sells, minority shareholders can “tag along” and sell their shares on the same terms
• Drag-along rights — if a threshold majority agrees to sell the company, they can compel all other shareholders to sell too
• Permitted transfers — narrow exceptions allowing transfers to family members, trusts, or related entities without triggering the full pre-emptive rights process

If you’re a founder, you almost certainly signed a shareholders agreement. If you’re an employee who received shares through an employee share scheme (ESS), your shares may be subject to the same restrictions — or to additional ones in your ESS rules, option agreement, or employment contract.

The first step in any secondary sale is reading these documents carefully. Not the summary you were given when you joined — the actual agreements.

The Pre-Emptive Rights Process

Most shareholders agreements in VC-backed Australian startups include a pre-emptive rights mechanism modelled on the AVCAL or NVCA standard forms (adapted for Australian law). The typical process works like this:

1. Transfer notice. The selling shareholder gives written notice to the company specifying the number of shares, the proposed price, and the identity of the proposed buyer.
2. Offer to existing shareholders. The company circulates the notice to existing shareholders, who have a fixed period (usually 20–30 business days) to elect to purchase some or all of the shares on the same terms.
3. Allocation. If existing shareholders want to buy more shares than are available, the shares are allocated pro rata to their existing holdings (and sometimes with an oversubscription mechanism).
4. Completion or release. If existing shareholders take up all the shares, the transfer completes with them. If they don’t take up all of them, the selling shareholder is typically free to sell the remaining shares to the proposed buyer — but only at the same price and on the same terms, and usually within a limited window (60–90 days). If the window expires, the process starts again.

This process exists for a reason. Investors don’t want unknown third parties appearing on the cap table, and other shareholders want the opportunity to maintain their percentage ownership. But for a seller, it introduces delay, complexity, and uncertainty. Your buyer needs to understand that they may not end up with the shares — and that the process can take months.

Valuation: What Are the Shares Actually Worth?

In a listed company, the share price is observable. In a private startup, it’s not.

The most common reference point is the price per share from the last funding round — but this can be misleading. The price paid by a VC investor in a priced round typically reflects the value of preferred shares (with liquidation preferences, anti-dilution protection, and other economic rights), not ordinary shares. If you hold ordinary shares — as most founders and employees do — your shares are economically junior and worth less on a per-share basis.

Other valuation approaches include:

• Independent valuation — engaging an accountant or valuation professional to assess fair market value based on comparable transactions, discounted cash flow analysis, or asset-based methods
• Board-determined price — some shareholders agreements give the board the right to set the transfer price, often by reference to an agreed formula or a recent valuation
• Negotiated price — buyer and seller agree on a number, subject to the pre-emptive rights process

Australia doesn’t have a direct equivalent of the US “409A valuation” regime, but the ATO will still scrutinise transactions where shares are transferred at less than market value — particularly in the context of ESS arrangements. If you’re selling shares you acquired through an employee share scheme, the price you sell at has tax consequences (more on this below).

A common mistake: assuming that because you paid nothing (or very little) for your shares, any sale price is pure profit. The tax position is more nuanced than that.

Tax Implications

The tax treatment of a secondary sale depends on how you acquired the shares and whether you’re eligible for any concessions.

Capital Gains Tax

When you sell shares in a private company, you’ll generally trigger a capital gains tax (CGT) event. Your capital gain is the difference between the sale proceeds and your cost base (what you paid for the shares, plus any incidental costs like legal fees).

If you’ve held the shares for more than 12 months, you may be eligible for the 50% CGT discount, which halves the taxable gain. For shares acquired through an eligible ESS under the startup concession (Division 83A of the Income Tax Assessment Act 1997), the cost base is typically the market value at the time of acquisition — which means the CGT discount period runs from when you acquired the ESS interest, not from when the shares vested.

ESS-Specific Considerations

If your shares were acquired under an employee share scheme, the tax treatment depends on the type of scheme:

• Startup concession (s 83A-33) — No amount is taxed at grant. When you sell, you pay CGT on the gain above your cost base. This is generally the most favourable treatment.
• Tax-deferred scheme — The discount on the shares is included in your assessable income at the earlier of certain events (including sale, cessation of employment, or 15 years). After that taxing point, any further gain is subject to CGT.
• Non-deferred scheme — The discount is taxed as income in the year of acquisition. Subsequent gains are subject to CGT with the cost base set at market value at the time of acquisition.

The interaction between ESS tax rules and CGT on a secondary sale can be complex. If you’re selling shares you received as an employee, get specific tax advice before signing anything. The difference between the startup concession and a tax-deferred scheme can mean tens of thousands of dollars in tax.

Stamp Duty

Historically, transfers of shares in private companies attracted stamp duty in some Australian states. This has been progressively abolished. As of 2026, stamp duty does not generally apply to share transfers unless the company is a “landholder” (meaning it holds significant direct or indirect interests in land). Most tech startups won’t trigger landholder duty — but if the company owns real property, check.

Practical Considerations

Beyond the legal mechanics, there are several practical issues to think about:

Board dynamics. If you’re a founder seeking to sell shares, the board may have concerns about signalling. A founder selling even a small portion of their equity can be interpreted — rightly or wrongly — as a lack of confidence in the business. Have the conversation with your co-founders and lead investors before formally triggering the pre-emptive rights process.

Information asymmetry. As a founder or employee, you have access to non-public information about the company. Selling shares while in possession of material inside information can create legal risk — not under insider trading laws (which generally apply only to listed securities), but under the general law of misrepresentation, the equitable duty of good faith, and potentially the misleading or deceptive conduct provisions of the Australian Consumer Law. Be transparent with your buyer about what you know and don’t know.

ESS leaver provisions. Many employee share schemes include “leaver” provisions that affect what happens to your shares if you leave the company. A “bad leaver” (terminated for cause, or resigning before a specified date) may be required to sell their shares back at cost or a formula price. A “good leaver” may have more flexibility. If you’re thinking about selling shares and leaving the company, the order of events matters.

Company cooperation. A share transfer requires the company to update its share register. If the board has consented and pre-emptive rights have been satisfied, the company should register the transfer — but in practice, a hostile or uncooperative company can delay the process. The mechanics of completion (transfer forms, share certificates, register updates, ASIC notifications) require the company’s involvement.

A Checklist Before You Sell

If you’re considering a secondary sale of startup shares, work through these steps:

1. Read your shareholders agreement, constitution, and ESS documents. Identify every transfer restriction that applies to your shares.
2. Check whether your shares are fully vested. Unvested shares typically cannot be transferred.
3. Understand the pre-emptive rights process. Know the timeline, the notice requirements, and who gets to buy first.
4. Get a realistic valuation. Don’t anchor on the last round price without understanding the difference between preferred and ordinary share value.
5. Get tax advice. Understand your CGT position, any ESS tax implications, and whether you’re eligible for the 50% CGT discount.
6. Talk to the board. A cooperative board makes the process smoother. A hostile one can make it practically impossible.
7. Engage a lawyer. The share sale agreement needs to deal with warranties, indemnities, completion mechanics, and the interaction with existing shareholder documents. This is not a handshake deal.

Secondary sales are increasingly common in the Australian startup ecosystem as companies stay private longer and employees seek liquidity before an exit event. But they remain legally complex transactions that sit at the intersection of corporate law, contract law, tax law, and commercial reality. Getting it right requires preparation — and getting it wrong can be expensive.

If you’re a founder or early employee looking to sell shares in a private company, or a buyer considering a secondary acquisition, get in touch. We can help you navigate the transfer restrictions, tax implications, and negotiation process.

For related reading, see our guides on co-founder agreements and intellectual property assignment — two areas that frequently intersect with equity transactions in early-stage companies.