Founder Loan Agreements in New Zealand

A founder loan can keep a startup moving when revenue, grants or investment have not arrived yet. Problems usually start when the money is transferred first and the terms are discussed later. One founder may think it is repayable on demand, another may treat it as risk capital, and the company accounts may record it in a way nobody reviewed.

Common mistakes include calling unpaid work a loan without clear approval, leaving interest unclear, and assuming a future investor will accept founder debt sitting ahead of their investment. A founder loan agreement in New Zealand should make the commercial deal obvious before funds are advanced: who owes the money, when it must be repaid, whether interest applies, what happens on a raise or sale, and how the loan ranks against other debts.

Clear loan records also help directors, accountants and future investors understand whether the company is borrowing responsibly under the Companies Act 1993 and whether the founders have agreed to the same expectations.

Founder Loan Terms to Set Before Funds Are Advanced

A founder loan agreement should identify the borrower, the lender, the amount, the repayment trigger and the priority of the debt before any money leaves the founder's bank account.

For many startups, the borrower is the company. That makes the document a company loan agreement, even if the lender is also a director, employee or shareholder. In other cases, one founder lends directly to another founder to help them buy shares, pay incorporation costs or contribute to working capital. Those are very different arrangements, so the first step is to name the correct parties.

If the company is the borrower, use its registered company name, NZBN and Companies Office details. If an individual founder is the borrower, use their personal legal name. A loan to a co-founder should not be casually recorded as company debt unless the company has actually accepted the obligation.

A practical unsecured loan agreement in NZ usually covers:

• Principal amount: the total amount lent, or the maximum amount if the loan will be advanced in stages.
• Advance date: when each payment is made, including whether future advances are optional or required.
• Purpose: whether the money is for operating expenses, product development, stock, wages, rent, professional fees or another use.
• Borrower and lender details: company number, NZBN, addresses and contact details where relevant.
• Repayment date or trigger: a fixed date, repayment on demand, repayment after a capital raise, repayment from surplus cash, or repayment on sale of the business.
• Interest: whether the loan is interest-free, has a fixed interest rate, or has interest that accrues but is not paid until maturity.
• Default rules: what happens if the borrower misses a payment, becomes insolvent, sells key assets, stops trading or breaches the agreement.
• Subordination: whether the founder agrees to rank behind banks, trade creditors, new investors or other funding.
• Conversion expectations: whether the loan can convert into shares, and if so, when and how.
• Approvals and records: board approval, director interest disclosures, shareholder consent and accounting treatment.

One founder contributing money does not automatically mean the other founder has to match it. If equal economic contribution is expected, say so. If the loan sits separately from share ownership, say that too. This avoids a common dispute where a lending founder later argues they should receive extra shares, while the other founder says the money was always meant to be repaid as debt.

The agreement should also distinguish a genuine startup founder loan from unpaid salary, reimbursed expenses and capital contributions. Unpaid salary generally arises from an employment or contractor arrangement. Reimbursements cover business expenses paid personally. Share capital is money paid in exchange for shares. A founder loan is a debt that the borrower must repay according to its terms.

A simple example shows why the label matters. If Mia pays $40,000 into her startup's bank account and the accounts record it as shareholder funds, a future buyer may treat it as equity already at risk in the business. If the directors approved a loan agreement before payment, the same $40,000 may be treated as a debt repayable under agreed conditions. The commercial result can be completely different.

Repayment and Interest Should Match the Startup's Cash Flow

Repayment terms work best when they are specific enough to be enforceable and realistic enough that the company can operate without immediately breaching the agreement.

A founder lending money to their company often wants flexibility. The company may not know when revenue will arrive, and cash flow may change quickly. However, a vague promise to repay when things are better is hard to apply. Founders should choose a repayment structure that reflects the actual funding plan.

Common repayment options include:

• Fixed maturity date: the loan is repayable on a set date, with or without instalments. This is clear, but can create pressure if the startup has not raised funds by then.
• Repayment on demand: the lender can ask for repayment after giving notice. This gives the lender leverage, but can make investors nervous if one founder can suddenly drain company cash.
• Repayment after a funding round: the loan becomes repayable when the company completes an equity raise or other financing. Investors may ask for this to be deferred or capped.
• Repayment from surplus cash: the company repays only when it has enough working capital. This needs a clear test so founders do not argue about what surplus means.
• Instalments: the company repays a set amount monthly or quarterly. This can suit revenue-generating SMEs, but may not suit a pre-revenue startup.
• Repayment on sale or exit: the loan is repaid from sale proceeds before shareholder distributions, subject to any subordination arrangements.

Interest is also a commercial choice. A founder may lend interest-free to keep the company simple, especially at seed stage. Another founder may want interest because they are taking risk and tying up personal cash. Either approach can work, but silence is risky.

If interest applies, the agreement should state the rate, how it accrues, whether it compounds, when it is payable and whether unpaid interest is added to the principal. If the loan is interest-free, state that clearly. A later claim that interest was assumed can cause friction, especially if the company becomes valuable.

Default interest should be used carefully. A high default rate may look attractive to the lending founder, but it can damage the balance sheet and deter future investors. A startup that owes a founder large compounding default interest may find it harder to raise capital, because new investors will ask whether their funds are simply being used to repay insider debt.

For a director loan agreement in NZ, directors should consider their duties under the Companies Act 1993 when approving repayment terms. Directors must act in good faith and in the best interests of the company, and should not allow the company to take on obligations it cannot meet. If a director is also the lender, the conflict should be disclosed and recorded.

Founders should also speak with their accountant before finalising interest and repayment mechanics. Interest can have accounting and tax consequences, including questions about deductibility, income treatment and withholding obligations. The legal document should align with the way the loan will be recorded in the accounts, so the company is not left with one story in its contract and another in its financial statements.

A founder who needs personal certainty should avoid relying only on goodwill. For example, if Liam lends $25,000 and needs it repaid within 12 months to meet a personal mortgage commitment, the agreement should say that. If the company cannot realistically accept that obligation, the founders may need to consider equity funding, a smaller loan, staged advances or a different funding source.

Subordination and Conversion Expectations Need Clear Words

Subordination and conversion clauses decide whether the founder gets repaid like a creditor, waits behind others, or may become a shareholder instead of being repaid in cash.

An unsecured founder loan does not give the lender security over company assets. The founder is still a creditor, but without a registered security interest over assets such as equipment, inventory or receivables. If the company later grants security under a secured loan agreement to a bank or another lender, that secured creditor may rank ahead of the founder. The Personal Property Securities Register is relevant for secured lending, but many founder loans are deliberately unsecured to keep early funding simple.

Subordination is different from being unsecured. A subordinated loan is one where the founder agrees that another creditor, investor or class of creditor is paid first. This can be crucial during fundraising. An investor may not want their money used to repay founder debt immediately after completion. They may require founder loans to be postponed until the company hits revenue milestones or until the board approves repayment.

Subordination can be permanent, temporary or event-based. For example:

• the founder loan ranks behind a bank facility until the bank is repaid;
• repayment is not allowed without investor director approval;
• only a percentage of the loan can be repaid from a capital raise;
• the loan can be repaid only if the company remains solvent after payment;
• the loan ranks behind trade creditors in a winding up or sale scenario.

These rules should be written in plain terms. A sentence saying the loan is subject to future funding is usually not enough. Future investors, banks and other founders will want to know exactly what is postponed, who can approve repayment and whether interest continues to accrue during the postponement.

Conversion expectations deserve the same level of clarity. A founder may say, I will lend the company $50,000 now and we can convert it later if the round goes well. That can be fine as a commercial conversation, but it is not a safe legal position unless the mechanism is agreed.

A conversion clause should address:

• Who can trigger conversion: the lender, the company, the board, the shareholders or an automatic event.
• Trigger events: a priced equity round, a sale, a maturity date, a default, or written agreement between the parties.
• Conversion price: a fixed price, a discount to the next round price, a valuation cap, or another agreed formula.
• Shares issued: ordinary shares or another class, and whether the shares carry the same rights as existing founder shares.
• Approvals: board and shareholder approvals, pre-emptive rights, constitution requirements and Companies Office updates.
• Interest treatment: whether accrued interest converts, is forgiven or remains payable in cash.

Conversion mechanics should not be copied from a SAFE or investment agreement without checking whether they fit the founder loan. A SAFE is typically designed as a future equity instrument, not as a normal repayable debt. A founder loan can include conversion rights, but it still needs debt terms for repayment, default and ranking.

Share issues and share purchase arrangements in New Zealand companies must be handled consistently with the Companies Act 1993, the company constitution and any shareholders agreement. Directors should check whether existing shareholders have pre-emptive rights, whether a special approval is required, and whether the issue price is properly authorised. If shares are issued, the company register and Companies Office records need to be updated.

Conversion can also affect founder control. If one founder lends more money and later converts at a discount, their shareholding may increase. That may be fair if everyone agreed upfront. It can be damaging if the other founder discovers the dilution only when an investor asks for a cap table. A conversion clause should be read alongside the shareholders agreement and founder vesting arrangements so there are no surprises.

Records That Avoid Founder Disputes

Good records turn a founder loan from a memory-based promise into a transaction that directors, accountants, investors and co-founders can verify.

Founder disputes often arise months after the money was advanced, when the startup is raising capital, splitting from a co-founder or negotiating a sale. The lending founder points to bank transfers and messages. The company points to accounting entries. The other founder says they never approved the debt. These disputes are easier to prevent than to fix.

The core record is the written loan agreement signed before the first advance. For company loans, the company should also keep board minutes or written directors resolutions approving the borrowing. If the lender is a director, the director's interest should generally be entered in the company's interests register and, where the company has more than one director, disclosed to the board, subject to any applicable Companies Act exceptions. The approval should also be recorded in the decision-making documents. Even where a company is small, clean records help show the transaction was considered properly.

The records should match across:

• Bank transfers: payment descriptions should refer to the loan or advance, not vague personal notes.
• Accounting software: the loan should be recorded as a liability if the company is the borrower.
• Board minutes: the directors should approve the loan amount, repayment terms and any conflict management.
• Shareholders agreement: the loan should not contradict funding obligations, dilution rules or reserved matters.
• Company constitution: any restrictions on borrowing or share issues should be checked.
• Cap table: if conversion is possible, the potential dilution should be modelled.
• Companies Office records: details should be updated if conversion results in a share issue.

Emails and chat messages can support context, but they should not be the only record. A message saying can you put in $20k this week and we will sort it out later is an invitation to future disagreement. If money must move quickly, the founders can still approve a short written term sheet or loan letter before transfer, then replace it with a fuller agreement shortly afterwards.

Expense reimbursements need separate treatment. If a founder pays for software subscriptions, travel, stock or legal costs on the company's behalf, those amounts may be reimbursable expenses rather than a founder loan. Mixing small reimbursements into a large director loan account can make it difficult to know what is debt, what is expense, and what has already been repaid.

Unpaid wages and contractor fees also need care. A founder who works without pay may later say the company owes them salary as a loan. That is not always correct. The company should document whether the founder is an employee, contractor, director or unpaid founder, and whether any unpaid amounts are being deferred, waived, accrued or converted into debt. Employer obligations under the Employment Relations Act 2000 and Holidays Act 2003 may be relevant if there is an employment relationship.

A practical dispute-prevention step is to include a no set-off and entire agreement clause where appropriate. A no set-off clause can stop a borrower from refusing repayment because of an unrelated founder argument. An entire agreement clause can confirm that side conversations do not override the written loan terms. These clauses should be drafted to fit the deal, not inserted mechanically.

Consider a common scenario. Two founders each own 50% of a software company. One founder lends $60,000 to cover developers and hosting. The other founder contributes time but no cash. If the company later raises investment, the investor will ask whether the $60,000 must be repaid, converted, subordinated or forgiven. A clear founder loan agreement lets the company answer confidently. Without it, the funding round may slow down while the founders renegotiate a deal they thought was already settled.

Records also matter when a founder exits or a co-founder separation is being negotiated. A departing founder may remain a creditor even after selling or transferring shares. If the shareholder loan is not tied to share ownership, their repayment rights may continue. If the founders want repayment to accelerate, convert or be waived on exit, that needs to be written into the loan agreement or the exit documents.

FAQs

Do I Need a Written Founder Loan Agreement if I Trust My Co-Founder?

Yes. Trust helps the relationship, but a written agreement protects the relationship when cash gets tight, investors ask questions or a founder leaves. It also helps the accountant record the payment correctly.

Can a Founder Loan Be Unsecured in New Zealand?

Yes. Many founder loans are unsecured, meaning the founder does not take security over company assets. The agreement should still state that the loan is unsecured and explain how it ranks against other debts.

Should a Startup Founder Loan Charge Interest?

It depends on the commercial deal. An interest-free loan can keep things simple, while an interest-bearing loan may better reflect the founder's risk. The agreement should clearly state the rate, accrual method and payment timing, or confirm that no interest applies.

Can a Founder Loan Convert Into Shares?

Yes, but conversion should not be assumed. The agreement needs a clear trigger, conversion price or formula, share class, approval process and treatment of accrued interest. The company may also need to update its share register and Companies Office records.

What Is Different About a Director Loan Agreement in NZ?

A director loan agreement involves extra governance issues because the lender may be involved in approving the company's borrowing. The director's interest should generally be entered in the company's interests register and, where relevant, disclosed to the board, and the company should record the decision carefully under its governance processes.

Key Takeaways

• A founder loan agreement in New Zealand should be signed before funds are advanced, especially where the company is the borrower.
• Repayment terms should be specific, realistic and aligned with the startup's cash flow and fundraising plans.
• Interest-free loans are possible, but the agreement should say so clearly to avoid later claims for interest.
• Subordination and conversion terms can materially affect future fundraising, investor negotiations and founder control.
• Board approvals, accounting records, bank descriptions, shareholder documents and Companies Office updates should tell the same story.
• Founder loans should be kept separate from reimbursements, unpaid wages, share capital and informal founder contributions.

If you are putting founder money into a company or lending to a co-founder, Sprintlaw New Zealand can help with your founder loan agreement, repayment and interest terms, subordination wording and conversion mechanics. Contact us on 0800 002 184 or at team@sprintlaw.co.nz for a free, no-obligations chat.