Startup Title Options In New Zealand: Types, Structures, And Legal Basics

If you’re building a startup in New Zealand, “options” will probably come up sooner than you expect.

Maybe you’re hiring your first key engineer and they want “some skin in the game”. Maybe an advisor is helping you land early customers and you want to reward them without paying a big cash fee. Or maybe you’re talking to investors and they’re asking how you plan to attract and keep great people as you scale.

That’s where share options (often offered under an employee share scheme) can be a powerful tool. But they’re also a legal and tax-heavy area, and small drafting mistakes can create big headaches later (especially when you raise capital, restructure, or sell the business).

Below, we’ll walk through what options are, how they work in a typical startup, and the key legal considerations you should think about as a business owner in NZ.

What Are Options (And Why Do Startups Use Them)?

In simple terms, an option gives someone a right (but not an obligation) to acquire something later, usually at a set price and under set conditions.

In a startup context, “options” almost always means options to acquire shares in your company. That means you’re giving someone the right to buy shares later if certain conditions are met.

Startups use options because they can help you:

• Attract talent when you can’t match corporate salaries
• Reward key people for growing the value of the business
• Align incentives (if the company does well, option-holders can benefit)
• Manage cash flow by offering equity upside rather than immediate high cash payments
• Encourage retention through vesting and “good leaver/bad leaver” style rules

That said, options aren’t a “free” way to pay people. They come with legal, commercial, governance and (often) tax consequences. Getting the structure right from day one can save you a lot of time (and cost) later.

Options vs Shares: What’s The Difference?

This is one of the most important concepts to get clear early.

• Shares: someone owns part of the company now (they’re a shareholder), and usually has rights immediately (like voting rights, dividend rights, access to certain information, and rights on a sale).
• Options: someone does not own shares yet. They typically get no shareholder rights until they exercise the option and are issued (or transferred) shares.

From a founder’s perspective, options can feel “safer” than issuing shares upfront, because you can attach conditions (like vesting, performance milestones, or time-based service requirements) before ownership actually passes.

Why Some People Say “Title Options”

“Title” is sometimes used as a general way of referring to ownership. In this context, people may say “title options” to mean a right to obtain ownership of shares later, rather than handing ownership over today.

However, “title options” isn’t a standard legal term in New Zealand startup documentation. More commonly, you’ll hear “share options” or “employee share scheme (ESS) options”.

How Do Options Work In Practice For NZ Startups?

Although every startup is different, most options follow the same basic lifecycle:

1. Grant: the company grants the option to the person (often under an option plan and a specific option agreement).
2. Vesting: the option becomes exercisable over time or once milestones are met.
3. Exercise: the person chooses to exercise the option and pays the exercise price (if any).
4. Issue/Transfer of shares: the person becomes a shareholder and is added to the cap table/share register.
5. Exit events: the option may accelerate, lapse, convert, or be dealt with under “sale” rules depending on what happens (fundraising, acquisition, IPO, etc.).

Here are the main moving parts you’ll usually see in an options setup.

1) Vesting (Time-Based Or Milestone-Based)

Vesting is the mechanism that stops someone from getting the full benefit immediately. It’s often used to encourage retention and long-term contribution.

Common vesting models include:

• Time-based vesting (e.g. 25% per year over 4 years)
• A “cliff” (e.g. nothing vests until 12 months, then a chunk vests at once)
• Milestone-based vesting (e.g. vesting tied to product delivery, revenue targets, or fundraising)
• Hybrid vesting (time + milestones)

Vesting rules should be drafted carefully, because “milestones” can be surprisingly ambiguous in real life (and ambiguity is where disputes are born).

2) Exercise Price (And Why It Matters)

The exercise price is what the option-holder must pay to acquire the shares when they exercise.

It might be:

• Nominal (e.g. $0.01 per share)
• Fixed (e.g. $1.00 per share)
• Based on a valuation (e.g. fair market value at grant date)

Choosing the exercise price is a commercial decision, but it also has legal and tax implications. For example, if the exercise price is extremely low compared with the true value, you may create tax issues for the recipient (and administration headaches for you).

3) Expiry Dates And Lapse Rules

Options usually expire if they’re not exercised by a certain date, or if certain events happen.

Common lapse triggers include:

• the person leaves the business (resignation or termination)
• the company is sold (and the plan says unexercised options lapse or are cashed out)
• a fundraising event (and the plan requires reorganisation)
• failure to meet milestones by a deadline

This is also where you’ll often see “good leaver” and “bad leaver” style mechanics (i.e. more favourable outcomes if someone leaves on good terms vs being terminated for cause).

What Legal Documents Do You Need For Options?

Options are only as strong as the paperwork behind them. From a business owner’s perspective, the goal is to make sure the arrangement is enforceable, clear, and workable when your company grows (and when things get stressful, like a dispute or an acquisition).

Most startups need a combination of the documents below.

An Option Plan (The Rules Of The Scheme)

An option plan sets out the overall rules of the program, including eligibility, vesting, exercise mechanics, leaver treatment, and what happens on a sale or restructure.

If your company will grant options to multiple people over time, having a plan helps keep things consistent and reduces the chance that every grant becomes a one-off negotiation.

An Option Agreement (The Specific Grant)

Even with a plan, you typically grant options through a separate agreement that specifies:

• who the option-holder is
• how many options are granted
• what class of shares they can acquire
• the vesting schedule
• the exercise price
• expiry date and special conditions (if any)

This is also where you can tie the grant to key obligations (for example, confidentiality and IP ownership obligations).

A Shareholders Agreement (So Your Future Cap Table Doesn’t Get Messy)

Options convert into shares. So even though options aren’t shares yet, you should think ahead: what happens when someone exercises?

In many startups, the moment an option-holder becomes a shareholder, they should be bound by a Shareholders Agreement so everyone is playing by the same rules.

This is especially important for:

• transfer restrictions (so shares don’t end up in the wrong hands)
• exit mechanics (drag-along/tag-along)
• decision-making and reserved matters
• minority protections and dispute pathways

A Company Constitution (To Allow The Right Share Classes And Processes)

Your Company Constitution can affect how shares are issued, what rights attach to different share classes, and what approvals are needed.

If you plan to create different share classes (for example, ordinary shares for founders and a different class for employees), you’ll want to make sure your constitution supports that structure.

Employment And Contractor Agreements (To Protect IP And Confidentiality)

Options are commonly granted to employees and contractors. But the option itself doesn’t automatically protect your business if the relationship breaks down.

For employees, a tailored Employment Contract is key, particularly for confidentiality, intellectual property, restraints (where appropriate) and clear duties.

For contractors (e.g. a developer or marketing specialist), you’ll usually want a proper Contractor Agreement that covers IP ownership, deliverables, and payment terms, so there’s no argument later about who owns what your startup is building.

Cap Table And Company Records

Even if your options are well-drafted, you need good admin. That includes keeping your option register, board resolutions, and share register accurate.

Investors will typically want to understand:

• how many options are on issue
• how many have vested
• the fully diluted cap table (i.e. what the ownership looks like if all options are exercised)

Clean records make fundraising and due diligence much smoother.

Key Legal Considerations For Startups Using Options

Options can be a great growth tool, but they can also create risk if the legal foundations aren’t solid. Here are the big legal considerations we commonly see NZ startups needing to think through.

Are You Issuing New Shares Or Transferring Existing Shares?

When an option is exercised, the shares can come from:

• Issuing new shares (diluting existing shareholders), or
• Transferring existing shares (someone sells or transfers their shares to the option-holder)

Issuing new shares is common in employee option plans, but it needs to be done correctly under your company’s rules and the Companies Act 1993 framework. Transfers also need proper documentation and compliance.

What Rights Will The Shares Have?

Not all shares are equal. You need to decide what rights the option-holder receives on exercise, such as:

• voting rights
• dividend rights
• rights on liquidation or sale
• pre-emptive rights (rights to participate in future issuances)

If you don’t think this through early, you can accidentally create a shareholder base that makes it harder to fundraise or sell later.

Board And Shareholder Approvals

Depending on your constitution and shareholder arrangements, you may need specific approvals to:

• adopt an option plan
• grant options
• issue shares on exercise

This is one of those areas where it’s worth getting advice early, because “we agreed over email” can become a real problem when you’re trying to close an investment round and your paperwork doesn’t line up.

What Happens If Someone Leaves?

People leaving is normal in startups. The legal issue is whether your options documentation clearly answers:

• do unvested options lapse automatically?
• can vested options still be exercised, and for how long?
• what counts as “cause”?
• what happens if the person is made redundant?

You’ll usually want these outcomes to align with your employment arrangements and exit management. If the employee’s employment ends, you may also need to follow lawful termination processes under NZ employment law (options don’t override those obligations).

Tax And Reporting Considerations (Don’t Leave This As An Afterthought)

In New Zealand, options granted under an employee share scheme (ESS) can have tax and reporting consequences for both the company and the individual. The tax outcome often depends on the specific ESS rules and how the offer is structured (including when the benefit is treated as arising, the restrictions that apply, and the value of the shares compared to any amount paid).

Because the tax treatment can be complex and fact-specific, it’s wise to get early advice from an accountant or tax adviser and to have your legal documents drafted consistently with the intended approach. Sprintlaw can help with the legal documentation and structure, but we don’t provide tax advice.

The key takeaway for founders is: don’t assume options are “tax-free” or “simple”. The structure matters.

Misleading Promises And Recruitment Risk

When you’re hiring, it’s tempting to sell the dream. But be careful about how you describe options and the potential upside.

In New Zealand, the Fair Trading Act 1986 can apply to misleading or deceptive conduct in trade, and you don’t want a dispute later where someone claims they were promised a particular ownership percentage or payout.

Practically, this means:

• keep option offers in writing
• be clear whether you’re talking about options or shares
• avoid “guaranteed value” language
• use clear examples (and label them as examples)

Common Mistakes Startups Make With Options (And How To Avoid Them)

Options can look straightforward, but a few classic mistakes come up again and again. Here’s what to watch for.

1) Using A Generic Template That Doesn’t Match Your Company Structure

Options need to align with your share structure, constitution, and shareholder arrangements. A generic template may not reflect how your company actually operates, especially if you have (or plan to have) different share classes or investor rights.

If you’re not sure whether your documents line up, getting a legal review early is usually cheaper than trying to fix things mid-fundraising.

2) Not Thinking About The “Fully Diluted” Cap Table

Options dilute ownership when exercised (if shares are issued). If you grant options without modelling “fully diluted” ownership, you might:

• over-promise equity to early hires
• surprise founders and early investors later
• make future rounds harder (because the cap table becomes messy)

It’s normal to reserve an option pool, but it should be done intentionally and documented properly.

3) Forgetting The IP Angle

If you grant options to someone creating value (like a developer, designer, or product lead), make sure you’ve legally secured the intellectual property they’re producing for your business.

Options are not a substitute for strong IP and confidentiality clauses. This is why well-drafted employment and contractor documentation matters so much for startups.

4) Unclear Leaver Rules

Leaver scenarios are where disputes often start. Clear definitions and clear outcomes reduce risk, protect morale, and help you move on quickly if someone exits.

5) Not Planning For Fundraising Or An Exit

Even if a sale or investment round feels far away, your options documentation should anticipate it.

For example:

• Will options accelerate on a sale?
• Can an acquirer “cash out” options instead of issuing shares?
• What happens if investors require a new share class or new constitution?

These aren’t just technicalities. They can change the economics of your deal and the expectations of your team.

Key Takeaways

• Options are a common way for NZ startups to attract and retain key people without giving away shares immediately.
• Options typically involve a grant, a vesting period, and then exercise where the option-holder pays an exercise price to acquire shares.
• Strong documentation matters, including an option plan, option agreements, and usually a Shareholders Agreement and Company Constitution that support your intended cap table.
• Options should sit alongside solid people documentation, like an Employment Contract or Contractor Agreement, so you’re protected on IP, confidentiality and expectations.
• Founders should plan for practical realities like leavers, fundraising, and exits, because options that look fine on day one can become a blocker later if the legal mechanics aren’t clear.
• Be careful about how options are described during hiring and negotiation (including under the Fair Trading Act 1986), and get tailored tax advice from an accountant or tax adviser on the employee share scheme (ESS) implications.

If you’d like help setting up options for your startup (or reviewing an existing plan before you raise capital), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.