Side Letters For Angel Investors In New Zealand

Yes, you can use a side letter for an angel investor in New Zealand to document special rights without rewriting your full investment agreement.

The slightly more nuanced part is making sure the side letter works cleanly with your main funding documents, company constitution and shareholder arrangements. If it contradicts them, gives away more than you meant to, or creates unfair expectations with other investors, it can cause real tension later.

For early-stage startups, side letters are often a practical middle ground. You can keep the main deal simple, while giving a particular investor a specific right they need to say yes.

Let's look at how side letters usually work in angel rounds, what rights they can cover, and where you need to be careful under New Zealand law.

What Is An Investor Side Letter?

An investor side letter is a short agreement that gives one investor specific rights alongside the main investment documents.

Think of it as an add-on. Your main documents set the deal for everyone, while the side letter records a special arrangement with one investor.

For example, your main angel investment documents might include:

• a term sheet
• a subscription agreement for the issue of shares
• a shareholders agreement
• your company constitution, if you have one
• board and shareholder resolutions approving the investment
• Companies Office filings after the shares are issued

A side letter might sit next to those documents and say, for example, that one angel investor will receive quarterly management updates, has a right to attend board meetings as an observer, or will be consulted before you make certain major decisions.

The side letter usually doesn't replace the main investment agreement. It should be drafted so it supports the rest of the deal, not quietly changes it in a way nobody else has agreed to.

When Should You Use A Side Letter For An Angel Investor?

You should consider using a side letter when one investor needs a specific right and it doesn't make sense to change the whole investment agreement for everyone.

This is common in early-stage rounds where your investors aren't all contributing the same amount, bringing the same strategic value, or taking the same risk.

You might use a side letter where:

• one angel investor is putting in a larger cheque than the others
• the investor is bringing strategic industry experience or introductions
• the investor needs certain information rights for their own reporting
• you want to offer a limited observer role without changing board composition
• the investor asks for a right to invest in your next round
• you need to record a commercial promise that's too specific for the main shareholders agreement

Say you run a Wellington SaaS startup and you're raising $400,000 from a group of angels. Most investors are contributing between $10,000 and $25,000. One investor is contributing $150,000 and also has deep experience selling to enterprise customers.

You may not want to rewrite the shareholders agreement for every investor. Instead, you might give that major angel a side letter covering quarterly updates, a board observer seat and a right to participate in your next fundraising round, as long as they continue to hold their shares.

That can be perfectly sensible, provided the wording is clear and your other documents allow it.

What Rights Can A Startup Investment Side Letter Cover?

A side letter can cover many different rights, but the rights need to be clear, workable and consistent with your wider investment documents.

Angel investor side letters in New Zealand commonly cover the following.

Information Rights

Information rights let an investor receive updates about your business.

These might include:

• quarterly financial summaries
• monthly or quarterly founder updates
• annual budgets
• key metrics, such as revenue, runway or customer numbers
• copies of board packs, subject to confidentiality and conflicts

You should be careful not to promise more reporting than your team can realistically prepare. A right that sounds simple during the raise can become a monthly admin burden when you're trying to build the business.

Board Observer Rights

A board observer right lets an investor attend board meetings without becoming a director.

This can be useful where an angel investor has valuable experience, but you don't want to give them formal director powers or duties.

Your side letter should spell out:

• whether the observer can attend all meetings or only some meetings
• whether they can receive board papers
• whether they can speak at meetings
• when they can be excluded, such as where there's a conflict or sensitive legal issue
• whether the right ends if they sell their shares or stop meeting a shareholding threshold

Remember, a board observer is different from a director under the Companies Act 1993. Directors owe duties to the company, including duties to act in good faith and in what they believe to be the company's best interests. If someone's role starts to look more like they're directing the company rather than observing, it's worth getting the structure right early.

Pro-Rata Or Follow-On Investment Rights

A pro-rata right lets an investor maintain their percentage shareholding in a future investment round.

For example, if your angel owns 5% of the company, a pro-rata right might let them invest enough in the next round to stay at 5%.

These rights can be helpful, but they need to fit with your future fundraising plans. If too many investors have strong follow-on rights, your next round may become harder to manage because there's less space for new investors.

Most Favoured Nation Rights

A most favoured nation right, often called an MFN right, says that if you later give another investor better rights, this investor can receive the same or similar rights.

MFN rights can make an investor feel protected, but they can also become messy. If one investor's side letter triggers rights for several others, a small concession in one negotiation can spread across your cap table.

If you agree to an MFN right, keep it narrow. For example, you might limit it to the same investment round, the same class of shares, or investors contributing above a set amount.

Consent Or Veto Rights

Consent rights give an investor a say before you take certain major actions.

These might include issuing new shares, changing the company constitution, selling key intellectual property, taking on large debt, or changing the nature of the business.

These rights can be high impact. If drafted too broadly, one investor may be able to slow down ordinary business decisions. If you're giving consent rights, make sure they're limited to decisions that genuinely affect the investor's position.

How Does A Side Letter Fit With Your Shareholders Agreement?

A side letter should fit neatly with your shareholders agreement, rather than cutting across it.

Your shareholders agreement usually contains the core rules between shareholders and the company. It might cover share transfers, founder vesting, pre-emptive rights, board appointments, reserved matters, confidentiality, exits and dispute processes.

If your side letter says something different, you need to be clear about which document wins.

For example:

• if your shareholders agreement says no investor has board observer rights, a side letter granting that right may create a conflict
• if your shareholders agreement has a standard process for future share issues, a side letter with special follow-on rights may need to be carved out
• if your constitution says certain decisions need shareholder approval, a side letter shouldn't quietly create a different approval pathway

A well-drafted side letter will usually say how it interacts with the main documents. It might also say that, if there's a conflict, the shareholders agreement or subscription agreement takes priority except for the specific rights granted in the side letter.

This matters because side letters are often signed quickly near the end of a raise. That's exactly when small drafting gaps can slip through.

What New Zealand Laws And Processes Should You Keep In Mind?

You should keep New Zealand company law, financial markets law and your company records in mind when using angel investment documents.

Most angel investments involve issuing new shares in a New Zealand company. That brings a few key legal and practical steps.

Companies Act 1993 Requirements

Under the Companies Act 1993, your board needs to properly approve the issue of shares. Directors also need to be comfortable that the consideration for the shares is fair and reasonable to the company and existing shareholders.

You'll usually need:

• a board resolution approving the investment and share issue
• updated share register details
• the investor's subscription details
• any required shareholder approvals under your shareholders agreement or constitution
• a Companies Office notice of share issue

For a New Zealand company, a notice of share issue generally needs to be filed with the Companies Office within 10 working days after the shares are issued.

A side letter doesn't remove these steps. It only records extra rights between the parties to that side letter.

Financial Markets Conduct Act 2013

If you're raising money by issuing shares, you also need to think about the Financial Markets Conduct Act 2013.

Many early-stage angel rounds rely on exclusions from the full regulated offer regime. Common pathways can include wholesale investor exclusions or the small offers exclusion.

The small offers exclusion is commonly discussed in startup raises because it can allow personal offers of shares without a product disclosure statement, subject to limits. In broad terms, it's capped at 20 investors and $2 million raised in any 12-month period. You should confirm how the rules apply before you raise, especially if you're speaking to a wider group of potential investors.

Side letters can also affect how your offer is understood. If one investor receives special economics or control rights, make sure your investment documents accurately describe the deal.

Intellectual Property And Confidential Information

Many startups are built on software, data, trade marks, designs, content or know-how. If a side letter gives an investor access to board papers, product roadmaps, customer metrics or technical information, confidentiality should be tight.

You may also want to check that your company's intellectual property is properly owned by the company before the investment round. Investors often expect founder assignments, contractor IP clauses and confidentiality arrangements to be in order.

If you have a brand name or product name that matters to the raise, you may also want to check your trade mark position with IPONZ. A side letter usually won't fix an underlying ownership problem.

What Should Be Included In An Investor Side Letter Agreement?

An investor side letter agreement should clearly identify the special right, who gets it, when it starts, when it ends and how it works with your main documents.

A practical side letter will often cover:

• Parties: the company, the investor and sometimes the founders or key shareholders
• Background: a short explanation of the investment round and main documents
• Special rights: the exact information, observer, pro-rata, consent or other rights being granted
• Conditions: any minimum investment amount, minimum shareholding or timing requirement
• Duration: when the rights end, such as on an IPO, sale, next funding round or transfer of shares
• Confidentiality: how confidential information can be used and shared
• Conflicts: what happens if the side letter conflicts with the shareholders agreement, constitution or subscription agreement
• Assignment: whether the investor can transfer the side letter rights to someone else
• Governing law: New Zealand law, if the company and round are New Zealand-based

Try to avoid vague promises such as "we'll keep you updated" or "you'll be consulted on major matters". Those phrases sound friendly, but they can be hard to apply when there's pressure or disagreement.

Instead, make the obligation specific. For example, say how often updates will be sent, what information they need to include, whether the investor can share them with advisers, and what happens if providing information would breach confidentiality or create a conflict.

Common Mistakes To Avoid

The biggest mistake is treating a side letter as a quick informal favour. Even if it's short, it's still a binding contract if the usual contract requirements are met.

Common issues include:

• granting rights that conflict with your shareholders agreement or constitution
• forgetting to tell the board or other key shareholders about the side letter
• giving one investor control rights that make future rounds harder
• using broad MFN wording that accidentally benefits several investors
• forgetting to include an end date or shareholding threshold
• promising detailed reporting that the business can't realistically maintain

It also helps to think about fairness and optics. Other investors may not need the exact same rights, but they shouldn't be surprised by rights that materially affect the company or their shareholding. If a side letter gives one investor a meaningful advantage, make sure the decision is deliberate and properly approved.

Key Takeaways

• A side letter can be a practical way to give an angel investor specific rights without changing the whole investment agreement.
• Common side letter rights include information rights, board observer rights, pro-rata rights, MFN rights and limited consent rights.
• The side letter should work cleanly with your shareholders agreement, constitution, subscription agreement and Companies Act processes.
• Be especially careful with broad veto rights, MFN clauses and promises that create too much reporting work for your team.
• Clear drafting should explain who gets the right, when it starts, when it ends, and what happens if documents conflict.

If you'd like help with angel investor side letters, shareholders agreements, investment documents or company approvals, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.