Equitable Charges: Uses and Pitfalls for NZ Startups

If a lender, investor, founder or supplier asks for an equitable charge, it can feel like standard finance paperwork. It is not something to skim. Startups often make three costly mistakes here: they assume a charge gives the same rights as full ownership, they sign a vague security clause without checking what assets are caught, or they forget that a security interest may need to be recorded properly to protect priority. Those errors can surface later, usually when cash is tight, a deal falls over, or the business wants to raise more money.

An equitable charge is a way of giving someone security over assets without transferring legal title to them. In practice, it often appears in founder loans, investor arrangements, IP-backed finance, shareholder funding and group company support documents. The details matter because the wording, the assets covered and the registration position can affect who gets paid first if things go wrong.

This guide explains what an equitable charge is, when startups in New Zealand use one, how to set it up properly, and the main legal and commercial risks to think through before you sign a contract or spend money on company setup.

Legal Checklist

An equitable charge can affect ownership, financing flexibility and enforcement rights, so founders should pin down the legal position early.

• Identify exactly which assets are being charged, such as shares, intellectual property, receivables, bank accounts or all present and after-acquired property.
• Check whether the arrangement also creates a security interest under the Personal Property Securities Act 1999, and whether registration on the PPSR is needed to protect priority.
• Confirm who owns the relevant assets now, including whether IP sits with the company, a founder, a contractor or a related entity.
• Review your constitution, shareholders agreement, investor documents and existing finance agreements for restrictions on granting security.
• Set out clear trigger events, enforcement rights and notice requirements before the chargeholder can step in.
• Make sure the security document states whether the charge is fixed, floating, specific or general, and how future assets are treated.
• Consider whether consents are needed from co-founders, existing secured parties, landlords, licensors or key counterparties.
• Check your disclosures and record-keeping, including board approvals, Companies Office updates where relevant and internal registers.
• Get the commercial wording reviewed before you sign, especially if the charge secures personal guarantees, founder obligations or broad default rights.

How To Set Up An Equitable Charge in New Zealand Legally

The safest way to set up an equitable charge is through a written security document that clearly identifies the debt, the secured assets and the enforcement rights. If the arrangement also creates a PPSA security interest, registration usually matters just as much as the contract wording.

What is an equitable charge?

An equitable charge gives a creditor or secured party a right to look to specific property, or a pool of property, as security for an obligation. The owner keeps legal title unless and until enforcement steps are taken, but the charged assets are no longer entirely free for the owner to deal with.

For startups, this usually comes up where a lender wants comfort but does not take an outright transfer. A founder may charge their shares to secure repayment of a loan. A company may grant a charge over receivables or IP to support working capital. An investor may ask for security over assets if bridge funding is provided in a distressed period.

The label is not the whole story. A document called an equitable charge may also create a security interest under the PPSA, which means the priority and enforcement rules can depend on more than general equity principles.

When do startups use equitable charges?

Founders usually see equitable charges in a few specific moments, especially when the business needs funding quickly and the parties want security without a full legal transfer.

• Founder or director loans to the company.
• Convertible note or bridge funding with downside protection.
• Security over shares in a holding company or subsidiary.
• IP-backed finance where trade marks, software rights or domain-related assets have value.
• Security given to a supplier or strategic partner as part of extended payment terms.
• Group restructuring where one entity supports another entity's obligations.

This is where founders often get caught. They focus on the funding amount and repayment date, but not on how much control the security gives away if there is a missed milestone, technical default or future capital raise.

What should the document cover?

The agreement should say exactly what obligation is secured and exactly what property is subject to the charge. General wording can create disputes later, especially if the business grows and new assets are created after the documents are signed.

A well-drafted document will usually include:

• The secured obligation, such as a loan, indemnity or broader set of payment obligations.
• The chargor and chargeholder details.
• A precise description of the charged property.
• Representations about ownership and authority.
• Restrictions on dealing with the assets.
• Events of default.
• Enforcement powers, including sale, collection or appointment rights if relevant.
• Notice provisions and cure periods.
• Priority and subordination wording where more than one financier is involved.

If shares are charged, the paperwork may also include signed transfer forms held in escrow, dividend directions or voting restrictions. If IP is charged, the description of the rights needs care. Founders often assume the company owns all branding and software, but contractor-created material or pre-incorporation assets may sit elsewhere.

Why registration can matter

If the charge falls within the PPSA framework, registration on the Personal Property Securities Register can be central to priority. A creditor with earlier or better registration may rank ahead, even if another party thought it already had protection under a contract.

That matters in real founder scenarios. Before you sign a new funding round, a due diligence review may uncover an unregistered earlier charge. Before you spend money on setup for a product launch, a lender may ask whether your IP and receivables are already encumbered. Before a sale of business, competing security claims can delay settlement.

Registration is technical, and mistakes in debtor details, collateral classes or timing can reduce the value of the security. This is one reason tailored drafting matters.

Business structure and ownership checks

The company granting the charge must actually own, or have rights in, the assets. That sounds obvious, but early-stage businesses often blur the lines between founder-owned assets and company assets.

Before granting security, check:

• Whether the company or a founder owns the trade mark, logo, business name, domain or software code.
• Whether any asset sits in a trust, holding company or related entity.
• Whether contractor agreements assign IP to the business.
• Whether the constitution or shareholders agreement restricts charging shares or major assets.
• Whether an existing lender already has a general security interest.

If the structure is not clean, the charge may not deliver the protection the secured party expects, and the startup may accidentally breach other agreements.

Legal Requirements And Compliance Issues To Check

An equitable charge does not usually require a special operating licence, but the transaction still needs to comply with ordinary company, contract, fair dealing and record-keeping rules. The legal requirements depend less on the label and more on what assets are charged, who the parties are and how the arrangement is marketed and documented.

Do You Need Registration, Licensing Or Approval?

No special business licence exists just to use an equitable charge. But if the arrangement creates a PPSA security interest, registration on the PPSR may be needed to protect the secured party's position, and company approvals or contractual consents may also be required.

You should also check whether the transaction triggers other approvals. A shareholders agreement may restrict security over shares. Existing finance documents may prohibit new security without consent. A constitution may require director or shareholder approvals for certain dealings.

Company and governance requirements

If a New Zealand company grants an equitable charge, directors should be satisfied that the company has authority to do so and that the decision is in the company's interests. The approval process should be documented properly.

That often means preparing:

• Board resolutions approving the transaction.
• Shareholder resolutions where the constitution or shareholders agreement requires them.
• Updated internal registers and security records.
• Copies of any third-party consents.

Good governance matters later. If the business enters a dispute, a restructuring or a capital raise, poor records create avoidable friction.

Fair dealing and disclosure rules

If you are presenting an equitable charge to founders, small business counterparties or potential investors, your descriptions must be accurate. The Fair Trading Act 1986 can apply to misleading statements in trade, including statements about rights, remedies and financial arrangements.

The practical risk is simple. A party says the charge is only a formality, or says it covers one asset when the drafting actually reaches much more. If the explanation is misleading, the legal and relationship fallout can be significant.

Use plain English summaries alongside the formal documents, but make sure those summaries match the legal wording. Do not downplay enforcement consequences just to get the deal signed faster.

Privacy and information handling

If the charge supports an online business or platform, privacy issues can appear where customer data, subscriber lists or account rights are part of the secured asset pool. The Privacy Act 2020 does not stop a business granting security, but it does affect how personal information is collected, stored, disclosed and transferred.

Founders should think carefully before treating customer data as a simple finance asset. Your privacy policy, internal access controls and third-party service contracts should line up with how data may be accessed if enforcement ever happens.

Trade marks, branding and IP records

If brand assets are part of the security package, ownership and registration status should be checked before documents are signed. A pending trade mark application, an unassigned logo, or software built by a freelancer without proper IP assignment can weaken the value of the charge.

For a startup building enterprise value around its brand or product, that matters as much as the finance terms. If the secured party believes it has a charge over valuable IP, but the company does not clearly own that IP, both sides face risk.

Contracts, Online Sales And Growth Risks For Equitable Charges

The main risk with an equitable charge is not the concept itself, it is the way it can quietly restrict future funding, product growth and exit options. The charge should fit your current deal and your next 12 to 24 months, not just solve today's cash problem.

How charges affect future fundraising

New investors and lenders will ask what security already exists. A broad charge over all present and after-acquired property can make future finance harder, especially if the secured party has no clear release process or broad default rights.

Before you sign a contract for bridge funding, ask:

• Does the charge block new debt or security?
• Will a future investor require this charge to be subordinated or released?
• Are there financial covenants or technical defaults that could be tripped easily?
• Can ordinary business changes, like a restructure or new share issue, require consent?

A startup can outgrow a poorly drafted security package very quickly. What looks workable at seed stage may become a problem at Series A or during acquisition due diligence.

Online business models and digital assets

If you sell online, rely on software, or build value through a subscription base, your key assets may be intangible. That makes drafting and asset identification more important.

Examples include:

• SaaS code and deployment rights.
• Trade marks and brand assets.
• Customer contracts, customer terms and receivables.
• Platform accounts and domain-related rights.
• Data sets, to the extent they can lawfully be dealt with.

Not every digital asset can be described loosely and still produce clear security. If your business depends on licensing arrangements, open-source compliance, third-party platforms or contractor-built code, those details should be reviewed before security is granted.

Contract terms founders should negotiate

Founders do not have to accept every security term as presented. The practical goal is to give the secured party meaningful protection without handing over unnecessary leverage.

Terms worth negotiating include:

• A narrower asset pool instead of all assets.
• A clear cure period before enforcement starts.
• Limits on voting control or transfer powers where shares are charged.
• Carve-outs for ordinary course trading, customer collections or IP licensing.
• An agreed release mechanism once repayment or milestones are met.
• Restrictions on the chargeholder assigning the security without consent.

This is especially important where the secured party is also a shareholder, director, supplier or commercial partner. Mixed relationships can blur the line between security protection and operational control.

Consumer-facing businesses and service obligations

If your startup deals with retail customers, service users or online consumers, financing arrangements do not override your consumer law obligations. A charged asset pool may include customer receivables or business systems, but the company still needs to meet obligations under the Consumer Guarantees Act 1993 and the Fair Trading Act 1986 where those laws apply.

That matters in distress. If enforcement pressure starts, founders can be tempted to cut corners on refunds, representations or service quality. Security arrangements should not be managed in a way that causes new compliance problems.

Default and enforcement risks

The hardest part of an equitable charge is often the enforcement clause. Default is not always limited to missed repayment. It can include insolvency signals, breaches of other agreements, inaccurate warranties, change of control events or failure to provide information on time.

Before you sign, look closely at:

• What counts as default.
• Whether notice must be given.
• Whether there is time to fix the issue.
• What the chargeholder can do after default.
• Whether directors or founders have personal exposure through guarantees.

These points shape bargaining power if the business hits a rough patch. Founders often focus on best-case growth, but default wording controls the bad-day scenario.

FAQs

Is an equitable charge the same as a mortgage?

No. They are related concepts, but not identical. An equitable charge generally gives security rights without transferring legal title in the same way as a legal mortgage arrangement may do.

Can a startup grant an equitable charge over intellectual property?

Yes, if the startup actually owns the IP or has rights capable of being charged. The key issue is proving ownership clearly through trade mark records, assignment documents and contractor agreements.

Does an equitable charge need to be in writing?

In practice, yes. A written document is the safest and usual approach because it defines the assets, obligations, priority position and enforcement rights with enough certainty to be useful.

What is the biggest mistake founders make with an equitable charge?

The biggest mistake is granting broad security without understanding how it affects future fundraising and enforcement. A close second is failing to check PPSR registration and existing competing security interests.

Can an equitable charge affect a sale of the business?

Yes. Buyers and incoming investors will want security interests released or managed at completion. If the documents are unclear or the secured party has strong consent rights, a transaction can be delayed or repriced.

Key Takeaways

• An equitable charge is a security arrangement that gives a creditor rights over assets without an outright transfer of legal title.
• For New Zealand startups, it commonly appears in founder loans, bridge finance, share security and IP-backed funding deals.
• The document should clearly identify the secured obligation, the charged assets, the default triggers and the enforcement rights.
• PPSA analysis and PPSR registration can be crucial, because priority often depends on more than the document label.
• Founders should confirm asset ownership, especially for shares, software, branding, trade marks and contractor-created IP.
• Existing constitutions, shareholders agreements and finance documents may restrict the grant of new security or require consent.
• Misleading explanations about the effect of the charge can create Fair Trading Act risk, especially where the arrangement is described casually.
• A broad charge can interfere with future fundraising, online growth, restructures and an eventual business sale.
• Negotiating scope, cure periods, carve-outs and release mechanics can make the arrangement far more workable.

If you want help with security documents, PPSR registration, shareholder approvals, intellectual property ownership checks, you can reach us on 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.