Preference Shares in New Zealand

If you’re raising capital for your business, you’ve probably heard investors ask for “preferred stock” or preference shares. It can sound like something only big tech startups deal with - but preference shares are used by plenty of growing New Zealand companies (including smaller, founder-led businesses) when they want to bring in funding without giving away too much control.

At the same time, preference shares aren’t a “set and forget” solution. If they’re drafted poorly, they can create serious headaches later - especially when you raise a new round, sell the business, or look to return value to shareholders (including by paying dividends).

In this guide, we’ll break down what preference shares are in New Zealand, why you might use them, the key risks to watch for, and what you’ll want documented before you issue them.

What Are Preference Shares In New Zealand (And How Are They Different From Ordinary Shares)?

In simple terms, preference shares are shares that come with “preferred” rights compared to ordinary shares - usually around:

Dividends (who gets paid first, and how much);
Capital returns (who gets paid first if the company is sold or wound up); and/or
Control and protections (like veto rights over certain decisions).

Most New Zealand companies start with only ordinary shares (sometimes called “common shares” in overseas contexts). Ordinary shares generally give shareholders:

a vote (unless the company sets up non-voting shares);
the right to dividends if declared; and
a right to share in sale proceeds or liquidation proceeds once company debts are paid.

Preference shares can change that “standard” position.

Where Preference Shares Fit Under New Zealand Company Law

In New Zealand, share rights and obligations are mainly governed by the Companies Act 1993, plus the company’s own internal documents (especially its constitution and shareholder arrangements).

Crucially, a company can only issue different classes of shares (including preference shares) if it has the legal ability to do so under its governance documents - which is why your Company Constitution matters a lot here.

If you’re not sure whether your company’s current setup allows for preference shares (or what approvals you need), it’s worth checking before you start negotiating terms with investors - because you don’t want to “agree the deal” and then discover you can’t actually implement it without amendments and shareholder approvals.

Also, it’s important to remember that “issuing the shares” is only one part of the legal picture: how you offer those shares to investors can trigger separate fundraising, disclosure, and conduct requirements under the Financial Markets Conduct Act 2013 (for example, whether you need a product disclosure statement, whether an exemption applies, and how you can market the offer). If you’re approaching anyone beyond a tight circle of eligible investors, it’s worth getting advice early so your capital raise doesn’t inadvertently breach NZ financial markets laws.

Why Do Small Businesses Use Preference Shares? (The Main Benefits)

Preference shares are popular because they’re flexible. They can be tailored to fit what you (as the founder or business owner) need, and what investors want in exchange for funding.

Here are some of the most common reasons businesses in New Zealand use preference shares.

1) You Can Attract Investment Without Giving Away Control Too Early

Many founders want to raise money but keep control of day-to-day decision-making. Preference shares can help because investors may accept:

limited voting rights, or voting only on certain major decisions; and/or
economic protections (like priority repayment on exit) instead of full control.

This can be particularly useful if you’re raising from angel investors, friends and family, or a strategic investor who mainly wants a commercial relationship rather than operational control.

2) You Can Set Clear “Who Gets Paid First” Rules

A major reason investors like preference shares is certainty.

For example, if the company is sold, preference shares can provide that the investor gets their investment back first (sometimes with a multiple, or with accrued dividends), before ordinary shareholders share the remaining proceeds.

This is often described as a “liquidation preference” (even though it usually applies on a sale, not just a liquidation).

3) They’re Useful When Your Valuation Is Hard To Pin Down

If your business is early stage or growing quickly, it can be hard to agree on valuation. Preference shares can be structured to bridge that gap by giving investors downside protection.

In other words: you might agree to a valuation that works for your cap table, but the investor feels comfortable because their preference rights help manage risk.

4) They Can Provide Dividend Flexibility

Some preference shares have dividend rights that are:

fixed (a set percentage);
cumulative (if you don’t pay this year, it “accrues” and remains payable later); or
non-cumulative (if not declared, it doesn’t accrue).

For a cashflow-sensitive small business, you need to be careful here - and in New Zealand, dividends are generally treated as a type of distribution, which means they’re subject to Companies Act rules (including director resolution requirements and the company meeting the required solvency test at the time of the distribution). The flexibility can still be useful if structured appropriately (for example, tying dividends to available profits and board discretion).

5) They Can Make Follow-On Funding Easier (If Done Properly)

When your first investor comes in, the share structure you set can either make your next raise smoother - or create a mess.

Well-drafted preference terms can create a clear template for future rounds (for example, setting a clear class structure, investor protections, and conversion mechanics).

This is also where aligned documentation becomes important - like a Shareholders Agreement that clearly sets out decision-making rules, share transfer restrictions, and how future funding is handled.

Preference shares aren’t “one size fits all”. The value (and risk) is in the fine print.

Here are some of the common terms that come up in New Zealand preference share deals.

Dividend Rights

This covers whether preference shareholders have:

priority to dividends over ordinary shareholders;
a fixed dividend amount or rate;
cumulative dividends; and
any conditions on payment (for example, only if declared by directors, and only if the company can lawfully make the distribution under the Companies Act solvency test).

Liquidation Preference (Exit Priority)

This is usually the headline economic term. It can specify:

the investor gets their investment amount back first (e.g. 1x);
whether it’s “participating” (they get their preference amount and also share in remaining proceeds) or “non-participating”; and
whether it increases over time or includes unpaid dividends.

Conversion Rights

Many preference shares are designed to convert into ordinary shares at some point, such as:

on a qualifying fundraising;
on an IPO;
on a sale of the company; or
at the investor’s election.

Conversion mechanics can heavily affect founder ownership later, so you’ll want these terms consistent with your broader cap table planning.

Voting Rights And “Protective Provisions”

Some preference shares are non-voting in day-to-day matters, but still give investors veto rights over major actions, such as:

issuing new shares;
changing the constitution;
taking on significant debt;
selling key assets; or
paying dividends to ordinary shareholders.

These terms can be reasonable - but if they’re too broad, they can make it hard for you to run the business or respond quickly to opportunities.

Redemption Rights

Some preference shares allow the investor to require the company to buy back (redeem) the shares after a certain time.

This is a big one for small businesses: redemption sounds simple, but in practice it raises legal and cashflow issues. In New Zealand, a redemption/buy-back generally needs to be permitted by the company’s constitution and must comply with Companies Act rules (including the required solvency test and proper approvals). You don’t want to accidentally agree to a term that puts the company in an impossible position later (for example, a “must redeem on X date” obligation when the company may not be able to lawfully fund it).

Risks And Downsides Of Preference Shares (What Business Owners Need To Watch Out For)

Preference shares can be a great tool - but they come with trade-offs. These are some of the most common risks we see for New Zealand businesses.

1) They Can Create Founder/Investor Misalignment On Exit

Preference rights often matter most at the point of sale.

Imagine this: your business sells for $2 million, which feels like a big win - but if there’s a 1x (or higher) liquidation preference plus accrued dividends, you may find ordinary shareholders receive much less than expected.

This can create real tension at exit time, and sometimes disagreements about whether to accept an offer at all.

2) Over-Complicated Terms Can Scare Off Future Investors Or Buyers

If your preference share terms are unusual or overly aggressive, future investors may insist on restructuring before investing - which often means renegotiating with existing preference shareholders.

Similarly, a buyer doing due diligence may treat complex preference rights as a risk factor (because it affects how sale proceeds are distributed and whether there are hidden veto rights).

Doing proper legal due diligence early (before you issue shares) can help you spot these issues before they become expensive.

3) Dividend And Redemption Obligations Can Hurt Cashflow

Some preference structures effectively behave like debt (especially when dividends accrue or redemption is mandatory).

If your business has seasonal revenue, tight working capital, or relies on reinvesting profits for growth, these obligations can box you in later.

It’s important to stress-test the terms against realistic scenarios - including a “slower year” where profits are down - and to keep in mind that even where the documents say a dividend/redemption is “payable”, the company generally still must meet the legal requirements for making distributions at the time.

4) You Can Accidentally Give Away More Control Than You Meant To

Preference shares sometimes come bundled with investor veto rights, board appointment rights, and information rights. None of that is inherently “bad” - but it needs to be proportionate.

A common mistake is agreeing to a long list of veto rights that, in practice, means you need investor approval for ordinary business decisions.

This can slow growth and create ongoing operational friction.

5) If Your Documents Don’t Match, You Can End Up In A Dispute

Preference share rights often sit across multiple documents, such as:

the constitution (share class rights);
share subscription documents;
a shareholders agreement; and
board/shareholder resolutions.

If these documents aren’t consistent, you can end up with ambiguity about which rights actually apply - which is exactly the kind of uncertainty that leads to shareholder disputes when money is on the line.

When Should You Use Preference Shares? (Practical Scenarios For NZ Businesses)

Preference shares are most useful when you want to raise capital while carefully balancing risk between you and the investor.

Here are some common scenarios where preference shares make sense.

You’re Taking On External Investors For The First Time

If you’re bringing on your first external investor, preference shares can help you offer investor protection without giving them full control of your company.

This is especially relevant if you’re still proving your model, but you need cash to grow inventory, hire staff, fund marketing, or expand locations.

Just be mindful that if you’re offering shares to people outside a small group of eligible investors, you may also need to structure the offer to comply with the Financial Markets Conduct Act 2013 (and be careful about “financial advice” boundaries when discussing the investment).

You Want A Clear Framework For Future Funding Rounds

If you expect to raise more capital in 12–24 months, getting the structure right now matters.

In many cases, businesses will map the proposed terms in a Term Sheet first, then document the full deal once commercial points are agreed. This keeps negotiations efficient and reduces misunderstandings.

You’re Balancing Different Investor Types

You might have a mix of:

hands-on founders who run the business;
family/friends who want a relatively “safe” investment; and
an industry investor who wants strategic protections.

Preference shares allow you to give different risk/return profiles to different parties - as long as it’s all properly documented and understood.

You Want To Avoid Debt (Or You Can’t Get Bank Funding Yet)

Some businesses raise equity through preference shares to avoid high-interest borrowing or personal guarantees.

That said, preference shares can sometimes function “like debt” if they include fixed returns or mandatory redemption - so the detail matters.

How Do You Issue Preference Shares In New Zealand? (A Step-By-Step Overview)

Issuing preference shares usually involves both legal and practical steps. The exact process will depend on your company’s current structure and documents, but this is the general flow.

First, confirm whether your current constitution allows for:

different classes of shares;
the specific preference rights you’re proposing; and
the process for issuing new shares (including any shareholder approvals needed).

If you don’t have one - or it’s outdated - updating your Company Constitution is often step one.

2) Confirm Whether Existing Shareholders Have Pre-Emptive Rights

Many companies (and many shareholder agreements) include pre-emptive rights - meaning existing shareholders get the first right to participate in new share issues.

In New Zealand, there are also statutory pre-emptive rights in the Companies Act 1993 that can apply by default to the issue of new shares, unless they’ve been properly modified or excluded (for example, through the constitution and/or the relevant shareholder approvals). This is a common “surprise” issue if you try to bring in an investor quickly.

3) Agree The Commercial Terms

This is where you negotiate the key rights: dividends, liquidation preference, voting, conversion, and any special protections.

It’s usually smart to keep terms clear and avoid copying overseas templates that don’t translate well to New Zealand law or your practical reality as an SME.

4) Prepare The Investment Documents

Common documents include:

a Share Subscription Agreement (setting out the investment amount, shares issued, conditions, warranties, and key rights);
a shareholders agreement (or a deed of accession if you already have one); and
updated constitution provisions for the new class of shares.

If you’re doing a secondary transaction (for example, an existing shareholder sells some of their shares to a new investor), you may also need a Share Sale Agreement.

5) Pass The Required Resolutions And Update Your Company Records

Issuing shares generally requires directors’ resolutions and often shareholders’ resolutions, depending on your documents and the rights being issued.

Your company will also need to update its share register and make the required Companies Office notifications. Share certificates may be issued if your company uses them, but in practice many NZ companies don’t rely on share certificates (and record ownership via the share register instead).

6) Make Sure Your Ongoing Governance Still Works

This is the part many founders skip: you want to confirm that after the raise, you can still run the business efficiently.

For example, does your approval process now require investor sign-off for routine decisions? Are there reporting obligations you can realistically meet? Are there restrictions on future fundraising?

Getting the structure right now can save you a lot of friction later - especially if your business is moving fast.

Key Takeaways

Preference shares are a class of shares that can give investors priority rights (such as dividends, exit proceeds, and certain veto rights) compared to ordinary shares.
They can be a powerful way to raise capital while balancing investor protection with founder control, particularly for growing New Zealand SMEs.
Common preference share terms include dividend rights, liquidation preference, conversion rights, voting/protective provisions, and (sometimes) redemption rights.
The main risks are misalignment on exit, cashflow pressure from dividend/redemption features, overly broad investor control rights, and inconsistent documents that create ambiguity.
Before issuing preference shares, check whether your constitution permits different share classes, understand any Companies Act pre-emptive rights that may apply, and ensure your key documents are consistent and tailored to your business.
Separately, make sure your fundraising approach complies with the Financial Markets Conduct Act 2013 (including any disclosure or exemption requirements) before you start offering shares to investors.
It’s often best to document the deal properly from the start (rather than patching it later), especially if you plan to raise more capital or sell the business in the future.

If you’d like help issuing preference shares, updating your constitution, or documenting an investment round, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.

Preference Shares In New Zealand: Benefits, Risks And When To Use Them