Legal Considerations When Financing Your Business In New Zealand

When you’re financing your business, it’s easy to focus on the exciting parts first: the pitch deck, the product, the growth plan, and the money hitting your bank account.

But the legal side matters just as much. The way you raise money (and the documents you sign along the way) can affect your control of the business, your personal risk, your ability to raise again later, and even whether the deal is enforceable if things go wrong.

In this guide, we’ll walk through the most common funding options for New Zealand startups and SMEs, and the key legal issues to think about so you can move faster, reduce risk, and stay protected from day one. This article is general information only and isn’t legal or financial advice.

What Does “Financing The Business” Actually Mean For NZ Startups And SMEs?

Financing the business simply means getting the money you need to start, operate, or grow.

That money might come from:

• You (personal savings, reinvesting profits)
• Friends and family (informal loans or investment)
• Lenders (banks and other finance providers)
• Investors (angel investors, seed investors, later-stage investors)
• Customers (pre-orders, deposits, subscriptions)
• Strategic partners (co-development funding, distribution arrangements)

From a legal perspective, the big question isn’t only “how do we get the money?” It’s also:

• Is it debt or equity? (do you have to repay it, or are you giving up ownership?)
• Who carries the risk? (the company, or you personally?)
• What happens if something changes? (a founder leaves, the business pivots, the business can’t repay, you raise again later)
• What are you promising? (security interests, personal guarantees, reporting obligations, veto rights, exclusivity)

Getting clarity on these points early usually saves a lot of stress later, especially when you’re negotiating with lenders or investors who do this all the time.

Should You Raise Debt Or Equity (Or Something In Between)?

Most funding options fall into one of three buckets: debt, equity, or convertible/hybrid.

Debt Funding (Loans And Credit)

Debt is money you borrow and agree to repay (often with interest), typically on set terms.

Common examples include:

• Bank loans
• Business term loans
• Lines of credit / overdrafts
• Equipment or vehicle finance
• Trade credit with suppliers

Legal issues to watch:

• Personal guarantees: many lenders will ask directors or business owners to guarantee repayment. This can expose your personal assets.
• Security interests: a lender may require security over business assets (and sometimes wider security), often documented through a General Security Agreement.
• Covenants and defaults: loan documents commonly include promises about how you’ll run the business (financial reporting, restrictions on further borrowing, limits on asset sales). Default clauses can be triggered more easily than you’d expect.
• Who is actually borrowing? If you’re operating as a sole trader or partnership, the “business” and you can be legally the same person for liability purposes.

If you’re signing a loan in a hurry, it’s worth slowing down long enough to understand what happens if repayment becomes difficult or the lender wants to enforce security.

Equity Funding (Selling Shares)

Equity funding is when you raise money by giving someone ownership in the business (usually by issuing shares, or transferring existing shares).

This is common for:

• Startups raising seed or venture capital
• SMEs bringing in a co-owner to fund growth
• Family businesses formalising ownership and contributions

Legal issues to watch:

• Control and decision-making: even a minority shareholder can negotiate protections (like veto rights or board seats).
• Valuation and dilution: how the business is priced and what happens in later capital raises matters (especially if you’re raising funds in stages).
• Shareholder exits: what happens if someone wants out, becomes unwell, stops contributing, or there’s a dispute?
• Securities law and fundraising compliance: in New Zealand, issuing shares can be regulated under the Financial Markets Conduct Act 2013 (FMCA). Depending on the offer and who you’re offering to, you may need disclosure documents (like a product disclosure statement) and other compliance steps, or you may be relying on an exemption (for example, offers to wholesale investors, eligible investors, or certain “small offers”). The right approach depends heavily on the facts, so it’s important to get advice before circulating offer materials.

This is where a properly drafted Shareholders Agreement becomes a key risk-management tool. It can set clear rules for decision-making, transfers of shares, funding obligations, and dispute resolution.

Convertible Or Hybrid Funding (Notes And SAFEs)

Sometimes you’ll raise funding that starts as “debt-like” but can convert into equity later (often at a discount or valuation cap). This can be useful when:

• You’re early-stage and valuation is hard to agree on
• You want to move fast but still document the deal properly
• You’re planning a priced equity round later

These arrangements still need careful drafting. Key legal points include:

• When conversion happens (and what counts as a qualifying round)
• What happens if you never raise again (repayment? conversion anyway? maturity date?)
• How investor protections apply before and after conversion
• Ranking and priority if the company becomes insolvent
• FMCA treatment: depending on the structure, a convertible note or SAFE may also be treated as a “financial product” and trigger FMCA disclosure/compliance unless an exemption applies (and crowdfunding has its own rules via licensed providers). Don’t assume an overseas template matches New Zealand requirements.

If you’re using a template, make sure it actually fits New Zealand law and your cap table reality (not an overseas structure that creates confusion later).

Do You Have The Right Business Structure Before You Raise Money?

One of the most overlooked parts of financing the business is having a structure that matches your funding plan.

In New Zealand, many startups and growth-focused SMEs choose a limited liability company, because it can:

• make it easier to issue shares and bring in investors
• help separate business liabilities from personal assets (though personal guarantees can still change this)
• create clearer governance and ownership records

That said, “limited liability” doesn’t mean “no responsibility”. Company directors still have duties under the Companies Act 1993 and can face personal exposure in certain situations (including where the company trades recklessly or directors agree to obligations the company can’t reasonably perform).

Before you take investment (or even sign major finance documents), it’s smart to check:

• Is the company set up correctly with the right shareholders recorded?
• Are shares allocated and documented properly?
• Do you have clear rules about how decisions get made?

This is where a Company Constitution can be helpful, particularly if you want customised rules around share issues, director powers, and shareholder decision-making.

If you’re changing ownership arrangements as part of a raise (or bringing on a co-founder), make sure you document it correctly. In many cases, you’ll need formal steps for share transfers and updated company records.

What Documents Do You Need When Raising Funds?

The “right” documents depend on the funding type, but there’s a common theme: if it’s not written down properly, you can end up with unclear obligations, unenforceable terms, or disputes you didn’t see coming.

Key Documents For Debt Funding

If you’re borrowing, you’ll often see documents like:

• Loan agreement (amount, interest, repayment, default clauses, fees)
• Security documents (for example, a general security arrangement over business assets)
• Personal guarantee (if required)
• Intercreditor arrangements (if there are multiple lenders)

A big practical tip: check whether the lender can change key terms unilaterally, whether early repayment is penalised, and what triggers a “default” (it’s not always just missed payments).

Key Documents For Equity Funding

If you’re bringing in investors, common documents include:

• Term sheet (high-level commercial deal points)
• Share subscription agreement (the legal mechanism for issuing shares to investors)
• Shareholders agreement (governance and relationship rules)
• Company constitution updates (if the company’s rules need to change)
• IP assignments (to ensure the company owns what it’s selling and scaling)
• FMCA-related documents (depending on the offer, this could include investor certifications, disclosure documents, and other compliance steps)

Even if a term sheet says “non-binding”, parts of it can still create obligations (like exclusivity or confidentiality). If you’re not sure what you’re committing to, it’s worth getting advice before you sign.

Don’t Forget The Commercial Contracts That Make Funding “Bankable”

Investors and lenders will usually look at whether you have stable, enforceable revenue and manageable legal risk.

That often comes down to whether you have the right contracts in place with:

• customers (clear payment terms, deliverables, limitation of liability)
• suppliers (pricing, lead times, quality standards, termination rights)
• contractors (IP ownership and confidentiality)
• employees (clear duties and protections)

If you’re hiring or scaling your team as part of your funding plans, it’s important to have a compliant Employment Contract in place so you’re reducing risk while you grow.

What Legal Risks Should You Watch For When Taking Investment Or Loans?

When funding is on the table, the pressure to “just get it done” can be intense. But a few common legal traps can cause long-term problems if you miss them.

1. Giving Away Control Without Realising It

Funding terms can include controls that don’t look like “ownership”, but still restrict what you can do.

Examples include:

• investor veto rights over budgets, hiring, or taking on new debt
• requirements to get lender consent before selling assets
• board composition rules that shift decision-making away from founders

None of these are automatically “bad” - but you should understand them clearly before you sign.

2. Not Understanding Director Duties And Personal Exposure

If you’re a director, taking on finance can increase your responsibilities, especially if cashflow gets tight.

In particular, directors need to be careful about continuing to trade when the company can’t pay its debts as they fall due, and about entering into obligations the company can’t reasonably perform. If things deteriorate, there can also be risks around voidable transactions and enforcement of security.

This is also where personal guarantees and security documents matter: you may think you’re raising finance “for the company”, but a guarantee can pull you into personal liability.

3. Misleading Statements When Raising Money

Raising funds usually involves making statements about your business (revenue, pipeline, product readiness, forecasts).

Be careful about overpromising. Even when you’re not trying to mislead, inaccurate statements can create legal risk and damage trust. This is particularly relevant if you’re using marketing-style language in investor materials.

In New Zealand, the Fair Trading Act 1986 can apply to misleading or deceptive conduct in trade, and depending on the circumstances, fundraising disclosures may also be regulated under the Financial Markets Conduct Act 2013.

4. Data And Privacy Risk (Yes, Investors Care About This)

If your business collects customer information, payment details, health information, or even email addresses, you’ll need to take privacy compliance seriously.

Under the Privacy Act 2020, you’re expected to handle personal information responsibly and notify certain privacy breaches. Many investors will want to see you have good privacy practices in place because it’s a real operational risk.

For many businesses, having a clear Privacy Policy is a basic step toward showing you’re on top of compliance (especially if you’re operating online or collecting customer data through forms and subscriptions).

How Can You Prepare For Funding (So Due Diligence Doesn’t Derail The Deal)?

If you’re serious about financing the business in the next 3–12 months, it helps to get “funding-ready” before money is on the table.

Here’s a practical checklist that often makes a big difference.

1. Get Your Ownership And Records Clean

• Make sure your cap table is accurate and up to date
• Confirm founders’ shares and vesting (if relevant) are documented properly
• Ensure share issues/transfers were done correctly and recorded

If you’re planning to change ownership (for example, bringing in a strategic investor), it’s better to sort this out early than mid-negotiation.

2. Lock Down Your IP (Especially If Contractors Built Key Assets)

Investors want to know the company owns the brand, content, code, designs, and processes it relies on.

If contractors or co-founders created important assets and there’s no written IP assignment, the company may not actually own what it’s trying to scale - which can spook lenders and investors quickly.

3. Put Strong Contracts In Place With Customers And Suppliers

When someone is assessing your business, they’ll often ask:

• Are your key revenue contracts enforceable?
• Can customers terminate easily?
• Do you have liability exposure that could wipe out the business?

This is a common reason funding slows down: the business looks great, but the legal foundation isn’t there yet.

4. Know When You Need Tailored Advice (And Don’t DIY High-Stakes Documents)

It’s tempting to “save money” with generic templates for shareholder arrangements, loan terms, or investment documents.

But funding documents are the kind of paperwork that can shape your business for years. Getting them tailored to your deal (and aligned with NZ law, including FMCA requirements where relevant) can be one of the best risk-reducing investments you make early on.

Key Takeaways

• Financing the business can involve debt, equity, or hybrid options, and each has different legal consequences for control, risk, and future fundraising.
• Debt funding often involves security and personal guarantees, so it’s crucial to understand what happens if cashflow tightens or the lender enforces its rights.
• Equity funding can help you grow faster, but you should document investor relationships properly and be clear about decision-making, dilution, and exit rules.
• In New Zealand, raising equity or issuing convertible instruments may be regulated under the Financial Markets Conduct Act 2013, so you should check early whether disclosure or an exemption applies (including for crowdfunding).
• Having the right structure and governance documents in place (including a Shareholders Agreement and Company Constitution where appropriate) can make fundraising smoother and reduce disputes later.
• Strong contracts, clean company records, and clear IP ownership can prevent due diligence delays and help you look “investment-ready”.
• Privacy compliance and accurate representations matter when raising funds, particularly under laws like the Privacy Act 2020 and Fair Trading Act 1986.
• Because funding terms can have long-term impact, it’s usually worth getting tailored legal advice before signing key finance or investment documents.

If you would like help with financing the business, raising investment, or reviewing funding documents, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.