Founder Secondary Sales in New Zealand: Legal Issues for Startups

A founder secondary sale can look simple on paper: an investor wants to buy some of a founder’s shares, money changes hands, and the cap table updates. In practice, this is where startups often get caught. Founders sign side letters without checking drag and tag rights, agree on a price without reviewing the shareholders agreement, or overlook how the sale affects board dynamics and future fundraising. Those mistakes can create disputes long after the transaction closes.

If you are weighing up a founder secondary sale in New Zealand, the legal work is not just about a share transfer form. You need to know what your constitution says, whether other shareholders have pre-emptive rights, what consents are needed, what disclosures should be made, and how to document the deal so everyone is clear on the written terms. This guide explains the main legal issues, the common traps, and the practical points to sort out before you sign.

Overview

A founder secondary sale is the sale of existing shares by a founder to another person, usually an incoming investor, an existing investor, or occasionally another founder or senior team member. Unlike a primary raise, the company usually does not receive the sale proceeds, so other shareholders often look closely at why the sale is happening and whether it aligns with the company’s long term interests.

In New Zealand startups, the key legal question is rarely whether a founder can ever sell. The real question is whether the sale fits the company’s existing governance documents and investor arrangements.

• Check the company constitution for share transfer restrictions and director approval requirements.
• Review the shareholders agreement for pre-emptive rights, tag-along rights, drag-along rights, lock-up periods and founder vesting terms.
• Confirm whether any board approval, shareholder consent or investor consent is required before the transfer can proceed.
• Decide what transaction documents are needed, such as a share sale agreement, deed of adherence, waiver letters and updated cap table records.
• Consider what warranties and disclosures the founder should give, especially around title to shares, authority to sell and any existing encumbrances.
• Think about the commercial story, including founder commitment, retention, signalling to the market and impact on future capital raising.
• Make sure Companies Office records, share registers and internal company records are updated properly after completion.
• Speak with an accountant or tax adviser about tax treatment, because legal documents and tax outcomes do not always line up neatly.

When New Zealand Businesses Use NDAs

Although a founder secondary sale is mainly a share transfer exercise, NDAs are often used at the early discussion stage to keep sensitive company information confidential while pricing and diligence are being worked through.

This usually happens when the buyer wants access to financial information, customer metrics, product plans, board materials or fundraising history before deciding whether to proceed. Even where the company is not the seller, the company’s confidential information is often part of the transaction process.

Why confidentiality matters in a founder secondary sale

The buyer may need enough information to assess the value of the shares and the company’s prospects. That can include information the founder cannot freely circulate without the company’s consent.

For example, before you sign a term sheet or exclusivity arrangement, the parties may want to exchange:

• management accounts and forecasts
• customer concentration information
• details of key supplier or platform contracts
• employee incentive arrangements
• board-approved budgets
• information about pending fundraising discussions
• details of disputes, claims or compliance issues

If that information leaks, the company may face real commercial damage. Competitors could learn about pricing or strategy, employees could become unsettled, and future investors may get the wrong signal about internal stability.

Who should be party to the NDA

The right NDA structure depends on who is disclosing the information. If the company’s confidential information is being shared, the company should generally be involved rather than leaving the founder to handle confidentiality personally.

This is where founders often get caught. A founder may assume that because they own the shares, they can share anything relevant to the sale. That is not necessarily right. Company information belongs to the company, and directors also owe duties in relation to company interests and proper use of information.

What an NDA should cover in this context

An NDA used for a founder secondary sale should be tailored to deal discussions, not copied from a generic supplier template.

It will often need to cover:

• what information is confidential
• who can receive it, such as advisers and potential financiers
• what purpose it can be used for
• whether contact with staff, customers or suppliers is restricted
• how long the confidentiality obligations last
• when information must be returned or deleted
• what happens if disclosure is legally required

An NDA is not the main transaction document, but it can set the tone for the process and reduce risk before more detailed agreements are negotiated.

Legal Issues To Check Before You Sign

The most important legal work in a founder secondary sale is confirming whether the transfer is actually permitted, on what conditions, and with what approvals.

Constitution and shareholders agreement

Start with the company’s constitution and shareholders agreement. These documents usually control the transfer process.

Key clauses to review include:

• restrictions on transfers
• director discretion to decline registration of a transfer
• pre-emptive rights in favour of existing shareholders
• tag-along rights for minority shareholders
• drag-along rights if a larger sale is in play
• founder lock-up periods
• vesting, leaver and clawback provisions
• investor consent rights for founder disposals
• requirements for incoming holders to sign a deed of adherence

A founder may think they are selling only a small parcel and that the formalities can be dealt with later. Often they cannot. If the documents require the shares to be offered first to existing shareholders, or require board approval before any transfer is registered, that process usually needs to happen in the right order.

Board process and directors’ duties

The board may need to approve the transfer or decide whether to register it. That decision should be handled properly, with directors considering the constitution, the shareholders agreement and the company’s interests.

If the founder is also a director, conflicts need to be managed carefully. A conflicted director may need to disclose their interest and avoid participating to the extent required by the Companies Act 1993, the constitution, or agreed governance procedures.

This matters in real founder moments. If a company is midway through a raise, facing a key customer renewal, or trying to retain staff after a difficult quarter, a founder cash-out can send a message. The board should think about that context rather than treating the transfer as a mere paperwork exercise.

What exactly is being sold

You need a clear answer on the shares being transferred and the rights attaching to them. Startups often have multiple share classes, option pools, convertible instruments or historic SAFEs-style arrangements that affect the cap table.

Check:

• the share class and rights attaching to those shares
• whether the shares are fully paid
• whether any liens, security interests or other encumbrances exist
• whether any vesting or reverse vesting still applies
• whether any transfer restrictions apply to that class specifically

If the cap table is messy, the secondary should not proceed until the position is confirmed. Otherwise, the parties risk documenting a sale that does not match the company’s actual records.

Share sale agreement terms

A founder secondary sale should usually be documented in a proper share sale agreement, even where the parties know each other well.

The agreement commonly covers:

• the shares being sold
• the purchase price and payment mechanics
• conditions precedent, such as board approval or waiver of pre-emptive rights
• completion steps and timing
• warranties from the seller about title, authority and encumbrances
• buyer warranties where relevant, such as authority and sophistication
• confidentiality and announcement rules
• restraints or ongoing commitments, if negotiated
• indemnities, if a specific risk has been identified
• governing law and dispute process

The scope of warranties matters. In a founder secondary sale, the founder is selling their shares, not usually giving a full business sale warranty package. Buyers may still ask for broad statements about the company. Founders should be careful not to promise matters outside their knowledge or control.

Disclosure and due diligence boundaries

A buyer will often ask questions about the company before agreeing the price. Some level of due diligence is normal, but the process should be controlled.

The company should decide:

• what information can be disclosed
• who can disclose it
• whether the board has approved the disclosure
• how sensitive information will be staged or redacted
• whether equal access should be offered to existing investors if rights are engaged

Founders should avoid casual assurances in emails or calls. If a statement helps justify the price, it may later be treated as part of the factual basis of the deal. Keeping disclosures accurate, limited and recorded can reduce arguments later.

Investor rights and future fundraising

A secondary sale can affect the next round even if the immediate buyer is happy. New investors often ask whether founders have taken money off the table and, if so, on what scale.

A modest secondary, done transparently with investor support, may be acceptable. A larger founder sell-down early in the company’s growth can raise concerns about alignment and commitment. The legal documents should match the commercial narrative so there is no inconsistency when due diligence happens later.

Records and Companies Office updates

Completion is not the end of the process. The company’s share register and internal records need to be updated properly.

Depending on the structure, that may include:

• signed share transfer documentation
• board resolutions
• shareholder waivers or consents
• deed of adherence from the incoming shareholder
• updated cap table
• updates to Companies Office shareholding information where required

If records are left incomplete, the next financing or due diligence process can become slower and more expensive.

Tax and accounting crossover

The legal documents should not be treated as tax advice. A founder secondary sale can have tax and accounting consequences for the seller, and sometimes for employee share scheme or valuation issues around the company more broadly.

That is one area to discuss with an accountant or tax adviser before you sign, especially if the transaction is part of a larger funding round or if the seller has moved jurisdictions or holds shares through a trust or other vehicle.

Common NDA Mistakes

The most common NDA mistake in a founder secondary sale is assuming a generic confidentiality form is enough, when the real issue is controlling company information during a sensitive share transfer discussion.

Using an NDA that ignores the company

If the founder signs an NDA personally but the information belongs to the company, the protection may be misaligned. The company should usually be involved where its confidential information is being shared.

Defining confidential information too narrowly

If the NDA only covers clearly marked documents, verbal discussions, board updates and financial commentary may fall outside the protection. In a founder secondary sale, some of the most sensitive disclosures happen in meetings and follow-up emails.

No restriction on approaching staff, customers or investors

A buyer who gets access to company information should not usually be free to contact the company’s team or commercial counterparties whenever they like. The NDA may need a non-contact or non-circumvention style restriction during the deal process.

Letting advisers and affiliates receive information without controls

Most buyers will want to share information with lawyers, accountants and investment decision-makers. That is normal, but the NDA should make the recipient responsible for those people and limit use to the transaction evaluation.

Forgetting the deal does not always proceed

Many founder secondary discussions do not complete. If talks stop, the NDA should make it clear what happens to the information and what confidentiality obligations continue.

Treating the NDA as the only protection needed

An NDA helps at the start, but it does not replace the transaction documents, board process or shareholder approvals. Founders sometimes focus on secrecy and miss the bigger legal issue, which is whether the transfer can be completed under the company’s existing rules.

FAQs

Can a founder sell shares without asking other shareholders first?

Not always. Many New Zealand startup constitutions and shareholders agreements include pre-emptive rights or consent requirements. The answer depends on the company’s documents and the specific shareholding structure.

Does the company receive the sale money in a founder secondary sale?

Usually no. In a secondary sale, the buyer pays the founder selling the shares. That is different from a primary capital raise, where the company issues new shares and receives the investment funds.

Do you need a share sale agreement for a small founder sell-down?

Usually yes. Even a relatively small transfer should be documented clearly so the parties record the price, warranties, conditions and completion steps. Informal emails are often not enough.

Should the buyer sign the shareholders agreement?

If the existing shareholders agreement binds future holders, the buyer will often need to sign a deed of adherence or similar document before the transfer is registered. This keeps governance and investor rights consistent after completion.

Can a founder share company financials with a potential buyer?

Not automatically. Company financials and board materials are company information, so disclosure should be handled with company approval and usually under an NDA. The founder should not assume personal ownership of that information just because they hold shares or sit on the board.

Key Takeaways

• A founder secondary sale is more than a transfer form, it needs to fit the constitution, shareholders agreement and board process.
• Pre-emptive rights, investor consents, vesting terms and transfer restrictions are often the first issues to check.
• The founder should not give broad warranties about the company without carefully defining what is and is not being promised.
• NDAs are often useful where confidential company information will be shared during pricing or diligence discussions.
• Proper records matter, including the share register, board approvals, deed of adherence and Companies Office updates where required.
• Tax treatment should be discussed with an accountant or tax adviser before completion.

If you want help with share sale agreements, shareholder approvals, confidentiality arrangements, cap table records and transfer documentation, you can reach us on 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.