Getting your first injection of capital from friends and family can feel like the perfect win-win: you get the funds you need to launch or grow, and the people closest to you get to back something they believe in.
But mixing money and relationships can also get messy fast if you don’t set clear expectations from day one. A “quick bank transfer” without paperwork can turn into a long-term dispute about ownership, repayment, or what happens if the business hits a rough patch.
This guide is updated for current NZ expectations around clear documentation, good disclosure, and sensible risk management, so you can raise money without accidentally creating a personal or legal headache later.
Is Friends And Family Funding Right For Your Business?
Friends and family funding usually sits somewhere between “bootstrapping” and “formal investment”. It’s often used when:
- you’re pre-revenue (or early revenue) and banks aren’t interested yet;
- you need funds quickly to hit a launch date or purchase stock/equipment;
- you’re building a prototype/MVP and you need runway before a bigger raise;
- your supporters are comfortable with higher risk than a traditional lender would be.
That said, it’s not automatically the easiest option. The “cost” isn’t just interest or dilution - it can be relationship strain if things go wrong.
Common Situations Where Things Go Wrong
We often see friends and family arrangements go sideways because nobody talks about the awkward questions upfront, like:
- Is this a loan or an investment? (They’re very different legally and practically.)
- What does the money entitle them to? (Repayments, shares, dividends, a say in decisions?)
- What if you need more funding later? (Do they get diluted? Do they get repaid first?)
- What if you and a co-founder fall out? (Or one founder leaves?)
- What if the business fails? (Are you personally on the hook?)
If you’re feeling slightly uncomfortable reading that list, that’s normal - and it’s also the reason to document the deal properly. Clear paperwork can protect the relationship as much as it protects the business.
What Are Your Main Funding Options (And What Do They Mean Legally)?
When you raise money from friends and family in New Zealand, it generally falls into one of these buckets:
- a simple loan (secured or unsecured);
- shares (a straight equity investment);
- a convertible instrument (like a convertible note or SAFE-style arrangement); or
- less common hybrids (profit share, revenue share, or informal “IOUs” - which we generally don’t recommend).
The best fit depends on your business structure, what your supporter wants, and what you want the business to look like in 12–24 months.
Option 1: A Loan (Debt Funding)
A loan is often the cleanest option if your supporter wants repayment (not ownership) and you want to keep your cap table simple.
In plain terms, the questions you need to answer are:
- How much is being lent?
- Is there interest? If so, how is it calculated?
- When do repayments start (immediately, or after a grace period)?
- Is there a fixed repayment schedule, or repayment “on demand”?
- Can you repay early without penalty?
- What happens if you miss repayments?
Even when it’s “just family”, a written Loan Agreement matters because it prevents misunderstandings like “I thought you’d pay me back once you were profitable” versus “I thought it was payable next year”.
If the person lending money expects security (for example, over business assets), you’ll also need to think carefully about how and when that security is documented and registered. This is one of those areas where getting tailored legal advice is worth it, because the wrong structure can create complications with future lenders or investors.
Option 2: Shares (Equity Funding)
If your friends or family are investing for upside (rather than guaranteed repayment), they may invest by taking shares in your company.
This can be a great option when:
- you’re not ready to commit to loan repayments;
- you want your supporters to share the risk and reward;
- you’re building a business that may later raise from external investors.
But equity can get complicated quickly if expectations aren’t managed. Even a small shareholder can create ongoing obligations around governance, information rights, and decision-making - especially if your company doesn’t have clear rules in place.
At a minimum, you’ll want to think about:
- what class of shares they’re getting (and what rights attach to them);
- how you’re valuing the business (or whether you’re using a simple pricing method);
- what decisions require shareholder approval;
- what happens if someone wants to sell their shares later.
For many NZ startups and small businesses, a well-drafted Shareholders Agreement is where these expectations get locked in. It’s also common to align it with a Company Constitution so the rules are consistent and enforceable.
Option 3: Convertible Notes (And Similar “Convert Later” Funding)
Convertible instruments are popular where you want to raise money now, but you don’t want to agree on a valuation yet.
Instead of issuing shares immediately, the supporter provides funds and the instrument converts into shares later - commonly when you do a bigger priced round, or when a trigger event happens (like a set date or revenue milestone).
This structure can be useful because it:
- lets you move faster without negotiating a valuation too early;
- can align incentives (supporters get a discount or other conversion benefit);
- may make future fundraising smoother (when done properly).
However, convertible instruments can also become a trap if they’re vague or inconsistent - especially if you raise multiple small amounts on different terms.
If you’re considering a convertible note approach, it’s worth getting it documented properly as a Convertible Note (or an equivalent structure suited to your situation), so the conversion mechanics, triggers, and investor rights are clear.
What Should You Agree On Before You Take Any Money?
Before any funds hit your bank account, pause and have an honest conversation about expectations. It’s much easier to agree when everyone’s optimistic than when the business is under pressure.
Here are the big-ticket items you should cover upfront.
1. The “What Exactly Is This?” Question
Spell out whether the money is:
- a loan (repayable);
- an equity investment (ownership); or
- convertible (loan now, shares later).
If you’re not clear, you risk a dispute later where both sides believe they’re right - and unfortunately, informal conversations are hard to prove.
2. Control And Decision-Making
A common friend-and-family expectation is: “I’m not trying to run your business, I just want to help.” That’s great - but it still needs to be reflected in the legal arrangement.
If you’re issuing shares, be clear on:
- voting rights (if any);
- whether they’ll get regular updates (and how often);
- whether they have any say on big decisions (like selling the business, taking on debt, or appointing directors).
This is also where your company’s governance documents matter, because they set the rules of the road when there’s disagreement.
3. Repayment Or Exit Expectations
Supporters often assume there’s a “finish line”, even if they don’t say it out loud. You should talk about things like:
- Loan: when repayments start, how much, and what happens if the business is cash-tight.
- Shares: how they might ever turn shares into cash (dividends, sale of business, buy-back).
- Convertible: when conversion happens, and what happens if no conversion event occurs.
There’s no perfect answer - but there is a “right” approach, which is making sure everyone is agreeing to the same plan.
4. What Happens If Things Go Wrong?
This is the part most people avoid, but it’s the part that protects your relationships.
Talk through scenarios like:
- the business doesn’t perform and can’t repay a loan on the original schedule;
- the business needs another funding round and early supporters get diluted;
- you (or a co-founder) want to step away from the business;
- the supporter needs the money back unexpectedly;
- the business fails and there’s nothing to pay back or distribute.
Once these are documented, you reduce the chance of the funding becoming personal.
What Legal Documents Do You Need (And Why Templates Often Don’t Cut It)?
Friends and family fundraising is still fundraising. You’re dealing with real money, real expectations, and real risk - so your documents need to reflect what you’ve agreed.
In practice, the right documents depend on your funding option and your structure (sole trader, partnership, company). But here are the documents we commonly see as essential.
Loan Documents
- Loan agreement: sets the core repayment, interest, term, and default rules.
- Security documentation (if applicable): if the lender requires security, the terms need to be precise and workable.
A “handshake loan” can be enforceable in some circumstances, but it’s harder to prove, harder to manage, and more likely to cause relationship stress. A written agreement keeps it clean.
Equity Documents
- Share issue documentation: recording who owns what, at what price, and when.
- Shareholders agreement: the practical playbook for decision-making, exits, disputes, and transfers.
- Company constitution (sometimes): a consistent set of internal rules for how the company operates.
If you’re bringing in even one new shareholder, it’s worth thinking about how this affects future raises. For example, a later investor may expect you to have clear rules on share transfers, founder obligations, and decision-making thresholds.
Convertible Funding Documents
- Convertible note (or similar): sets the conversion triggers, discount/valuation cap (if any), repayment mechanics (if any), and what happens at maturity.
- Cap table and record-keeping: you’ll want a clean record of what converts into what.
Convertible structures are not “one-size-fits-all”. A generic template might not match your company’s constitution, your intended investor rights, or your future funding plans - and that’s where problems start.
Side Note: If You’re Not Yet A Company
If you’re operating as a sole trader or partnership and raising money, be extra careful.
Why? Because you might be personally liable for the debt or obligations you take on. Often, moving into a company structure before (or as part of) fundraising is a smart way to set better boundaries between business risk and personal risk.
If you’re weighing that up, a Company Set Up is usually the starting point - and it’s worth getting advice on whether it makes sense for your situation.
How Do You Stay Compliant When Raising Money In New Zealand?
Most friends-and-family raises are small and informal compared to public fundraising - but you should still treat compliance seriously.
Even where you don’t trigger complex disclosure rules, you can still create risk if you oversell the opportunity or aren’t clear about the downside.
Be Careful With What You Promise (Especially In Writing)
If you’re pitching your business to people you know, it can be tempting to make the opportunity sound “safe” to reassure them.
But if you:
- guarantee returns,
- promise repayment by a certain date without a realistic basis, or
- overstate expected revenue or contracts,
you could end up in a situation where someone claims they relied on those statements when deciding to give you money.
As a general rule: be optimistic, but be accurate. Put your key assumptions in writing, and be clear that business involves risk.
Don’t Blur The Line Between Personal And Business Spending
Once you’ve raised money, use it consistently with what you discussed. If the funds are for stock, marketing, or equipment, keep records showing that’s what it was used for.
This isn’t just “good admin” - it can protect you later if there’s a disagreement about whether you used funds appropriately.
Be Realistic About Updates And Transparency
Supporters usually want to know how things are tracking. If you don’t set expectations, you can end up with stress on both sides: they feel ignored, and you feel micromanaged.
A simple approach is to agree on:
- a monthly or quarterly update email;
- basic reporting (high-level revenue/costs, wins, risks);
- who they contact if they have questions (and boundaries around response times).
If you’re collecting personal information in the process (for example, keeping copies of IDs, addresses, or bank details), make sure your handling is consistent with the Privacy Act 2020. Many businesses also publish a Privacy Policy as part of good practice, especially when information is stored digitally.
Key Takeaways
- Friends and family funding can be a great way to get your business moving, but it needs clear expectations so money doesn’t damage relationships.
- Decide upfront whether the funding is a loan, shares, or a convertible arrangement - and document it properly before funds are transferred.
- A written Loan Agreement can prevent disputes about repayment timing, interest, and what happens if the business has a cash-flow crunch.
- If you issue shares, put practical governance rules in place through a Shareholders Agreement (and often a matching Company Constitution) so ownership and decision-making stay clear.
- Convertible funding can be efficient, but only if conversion triggers, investor rights, and edge cases are properly written down in a Convertible Note (or equivalent structure suited to your raise).
- Be careful about what you promise when raising money - clear, accurate communication and sensible record-keeping can reduce the risk of misunderstandings and disputes.
- If you’re not yet operating through a company, consider whether a Company Set Up is the right move before you take on funding, particularly to manage personal liability and keep your structure investor-ready.
If you’d like help raising capital from friends and family (or choosing the right structure and documents for your business), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.
