Putting in the hard yards for a startup can be exciting - especially when you’re promised equity as the business grows. But it can also get confusing (fast) when your “pay” is mainly shares, options, or a future ownership stake.
A really common question we hear is: if you’re under a sweat equity agreement, are you still entitled to minimum wage in New Zealand?
This (2026 updated) guide explains how minimum wage rules generally apply in NZ today, how to tell whether you’re an employee or something else, and what a properly structured sweat equity arrangement should look like so everyone’s protected from day one.
What Is A Sweat Equity Agreement (And What Is It Trying To Do)?
A “sweat equity agreement” is a broad, practical term for an arrangement where you contribute time, skill, labour, or expertise to a business in exchange for equity (or the right to receive equity later) instead of - or in addition to - cash payment.
In real life, sweat equity arrangements often show up in situations like:
- A developer builds an app for a startup in exchange for shares or options.
- A marketer agrees to run campaigns for 6 months for equity rather than a normal fee.
- A co-founder works full-time while the business is “pre-revenue”, with the promise of equity once funding lands.
- A key early hire accepts reduced cash salary plus equity to compensate for risk.
These arrangements can be totally legitimate - but the legal risk usually comes from mixing up “equity compensation” with “wages”, or treating someone like an employee without meeting employment law obligations.
It’s also worth saying upfront: a sweat equity arrangement isn’t one standard document. Depending on the relationship, it might be documented through:
- a Founders Agreement (common for co-founders);
- a Share vesting agreement (very common where equity is earned over time);
- an Option Deed (where you get a right to receive shares later, usually on conditions);
- an employment agreement (where equity is “on top” of salary); or
- a contractor agreement (where equity is part of the commercial deal).
Am I An Employee, A Contractor, Or A Founder (And Why Does It Matter)?
Whether you’re entitled to minimum wage usually turns on one core issue: are you actually an employee?
In New Zealand, minimum wage obligations generally apply to employees. So before you can answer “am I entitled to minimum wage?”, you need to work out what your legal relationship really is - not just what the document is called.
It’s common for a business to label someone a “contractor” or “co-founder” while treating them like staff day-to-day. If a dispute arises, authorities and the Employment Relations Authority can look at the real nature of the relationship.
Signs You Might Be An Employee
No single factor decides it, but some common indicators of employment include:
- You work set hours (especially if the business controls your roster).
- You’re closely supervised or managed like staff.
- You can’t genuinely send someone else to do the work (no real ability to subcontract).
- You’re integrated into the business (team email, internal systems, representing the company).
- You’re paid in a way that looks like wages (regular “pay cycle”, not invoices).
- You don’t carry real commercial risk (for example, you’re not fixing defects at your cost).
If this sounds like your situation, you may need a proper Employment Contract in place - and the business needs to meet minimum employment standards.
Signs You Might Be A Contractor
On the other hand, you’re more likely to be a genuine independent contractor if:
- You invoice for work and manage your own tax/GST (where applicable).
- You control how you do the work (not just what outcomes you must deliver).
- You can work for other clients at the same time.
- You provide tools/equipment/software needed for the job.
- You can subcontract or engage others (and you’re responsible for delivery).
- You take on real commercial risk and fix issues at your cost.
If you’re truly contracting, the relationship is usually documented using a Contractor Agreement, and minimum wage rules generally don’t apply in the same way (because it’s not an employment relationship).
What If I’m A Founder Or Director?
Founders often wear multiple hats: shareholder, director, and worker. The tricky part is that you can be a director/shareholder and still be an employee if you perform work under an employment arrangement.
For example, it’s common for a founder to:
- hold shares (ownership);
- be appointed as a director (governance role); and
- work day-to-day in the business (operational role).
That operational role is where minimum wage issues tend to come up - especially when the “deal” is: “We can’t pay you yet, but you’ll get equity.”
Even if you’re excited about the upside, it’s still important to structure the arrangement correctly so the company doesn’t accidentally breach employment law (and so you know exactly what you’re owed).
If I’m An Employee, Am I Still Entitled To Minimum Wage In NZ?
In most cases, yes. If you’re an employee, you’re generally entitled to be paid at least the minimum wage for all hours worked, even if you’ve also agreed to receive equity.
In NZ, minimum wage obligations are set under the Minimum Wage Act 1983 and updated by Government decisions. The big idea is simple: employees must be paid at least the legal minimum for their work.
Where sweat equity causes problems is when a business tries to treat equity as a substitute for wages, or tries to delay wages indefinitely while still receiving ongoing labour.
“But I Agreed To It” Usually Isn’t The End Of The Story
A lot of founders and early team members say something like:
- “I agreed to work for equity, so I can’t complain about pay.”
- “We signed a contract saying I won’t be paid until funding.”
- “I’m happy to do it - it’s my dream.”
We get it - this is common in the startup world. But minimum employment entitlements generally can’t be signed away. Even if a contract says “no wages”, if the person is legally an employee, the business may still have to meet minimum wage requirements.
Also keep in mind: minimum wage is only one piece of the puzzle. If you’re an employee, you may also have entitlements under laws like the Employment Relations Act 2000 and the Holidays Act 2003 (for example, annual leave, sick leave eligibility, and public holiday rules), depending on your situation.
What About “Volunteering” For A For-Profit Startup?
True volunteering is usually associated with charities, community groups, and not-for-profit organisations.
If a for-profit company is receiving ongoing productive work that looks like employment, calling it “volunteering” won’t necessarily remove employment obligations. This is one of those areas where getting advice early can save a lot of stress later - particularly if the relationship deteriorates or the business grows quickly.
Can Shares, Options, Or “Sweat Equity” Count As Minimum Wage?
This is the make-or-break question for many startups.
As a general principle, if you’re an employee, minimum wage needs to be paid as wages (money) for hours worked. Equity can be an additional benefit, incentive, or long-term reward - but it’s usually not treated as a direct substitute for minimum wage in the way founders often hope.
There are a few practical reasons for this:
- Equity value is uncertain (it might end up worth nothing).
- Equity is usually illiquid (you can’t use it to pay rent next week).
- Equity often vests over time or depends on milestones.
- Equity terms can be complex (leaver provisions, dilution, buybacks, vesting cliffs).
So even if both parties genuinely intend equity to be the “payment”, employment law may still require the employer to pay at least minimum wage in cash.
Why This Often Turns Into A Dispute Later
Imagine this: you work 30–40 hours a week for a year under a “sweat equity” deal. The business doesn’t take off, you leave, and you never receive the equity you expected (or it’s heavily conditional and doesn’t vest).
At that point, you might feel you’ve effectively worked for free. The business might feel you “knew the risk”.
This is exactly where disputes can land - because what felt like an informal startup arrangement can be viewed through the lens of employment minimum standards.
How Do I Know If My Sweat Equity Arrangement Is Actually Fair (And Legal)?
There’s the legal question (minimum wage compliance) and then there’s the commercial reality (is the deal actually fair?). You should think about both.
A Quick Sweat Equity “Reality Check”
If you’re considering (or already in) a sweat equity setup, ask:
- What exactly am I receiving? Shares now, options later, or “a promise”?
- When do I receive it? Immediately, over time (vesting), or only on a funding round?
- What happens if I leave early? Do I keep anything, or do I lose all equity?
- What happens if I’m terminated? Are there “bad leaver” provisions?
- What is the equity really worth? Is there a valuation, or at least a clear method?
- Am I being treated like an employee? Fixed hours, supervision, exclusivity?
- Is there cash pay at all? Even a reduced salary that still meets minimum wage?
If the answers are vague, that’s a red flag - not because the business is “bad”, but because vague legal foundations are where misunderstandings and disputes are born.
Don’t Ignore The Company Governance Side
Equity arrangements don’t just affect pay - they affect control and decision-making. If you’re getting shares, you may also need clarity on:
- voting rights;
- drag/tag rights;
- what happens on a sale of the business;
- how dilution works when investors come in; and
- whether you can transfer or sell shares.
That’s where a tailored Shareholders Agreement becomes important, particularly once there’s more than one owner or the business is raising capital.
How To Structure Sweat Equity Arrangements Safely (So Everyone’s Protected)
The good news is you don’t have to choose between “startup reality” and “legal compliance”. In many cases, you can structure things in a way that respects minimum standards and still rewards people with equity upside.
Here are common (and safer) approaches we often see.
1. Employment + Equity “On Top”
If the person is going to be treated like an employee day-to-day, the cleanest structure is usually:
- a proper employment agreement that pays at least minimum wage for hours worked; and
- a separate equity arrangement (options or vesting shares) as an incentive.
This can be documented with an Employment Contract plus a separate equity instrument (like a vesting arrangement or options).
This approach reduces risk because the minimum wage component is clearly handled, while the equity piece still rewards long-term contribution and growth.
2. Contractor + Equity As Part Of The Commercial Deal (Where It’s Truly Contracting)
If the relationship genuinely looks like independent contracting (project-based, invoicing, control over work), you can structure the commercial deal so the contractor receives equity as part of what they’re paid for delivering outcomes.
This should be clearly documented in a tailored Contractor Agreement so the scope, deliverables, IP ownership, confidentiality, and payment/equity triggers are all clear.
Tip: contracting relationships still have legal risks - especially around misclassification and intellectual property. For example, if your contractor is creating code, designs, or brand assets, make sure the agreement clearly states who owns the IP.
3. Vesting Shares (So Equity Is Earned Over Time)
Vesting is one of the most common ways to make sweat equity workable and fair. Instead of handing over a big chunk of ownership upfront, the person earns it gradually by sticking around and contributing.
A properly drafted share vesting agreement can cover things like:
- the vesting schedule (for example, monthly over 3–4 years);
- a “cliff” period (for example, no vesting until 12 months);
- what happens if someone leaves early;
- good leaver/bad leaver outcomes; and
- buyback rights and price-setting mechanisms.
This is also where you can align expectations: equity is a long-term reward, not a substitute for the day-to-day legal minimum if the person is an employee.
Options can be useful if the business isn’t ready to issue shares right away, or if you want clear conditions before ownership changes. Often, options are documented in an Option Deed.
Options can reduce early cap table complexity, but they still need careful drafting - especially around exercise price, vesting, expiry, and what happens if someone leaves.
5. Founder Arrangements: Clarify Roles Early
If you’re a co-founder working in the business, don’t rely on handshake deals - even if you’re friends (especially if you’re friends).
A Founders Agreement can help set expectations on:
- who does what (roles and responsibilities);
- how much time each person commits;
- equity split and vesting;
- decision-making; and
- what happens if a founder exits.
Getting this right early can prevent the classic startup problem where one person works full-time, another works “when they can”, and nobody agrees on what’s fair later.
6. Put The Deal In Writing (Even If You Trust Each Other)
Sweat equity is one of those areas where good intentions aren’t enough. When expectations aren’t written down, you can end up with:
- disputes about how many hours were worked;
- arguments about whether equity was “earned”;
- confusion over what happens if the company pivots; and
- serious compliance risk if the person was actually an employee not being paid minimum wage.
Even a well-meaning startup can accidentally create legal exposure. That’s why it’s worth getting the structure right upfront - it protects the business and the individual.
Key Takeaways
- If you’re legally an employee, you’re generally entitled to be paid at least the minimum wage for hours worked, even if you’re also receiving equity.
- Calling something a “sweat equity agreement” doesn’t automatically avoid employment obligations - what matters is the real nature of the working relationship.
- Equity (shares/options) is usually treated as an incentive or long-term reward, not a straightforward substitute for minimum wage in cash.
- If the relationship is genuinely contracting, minimum wage rules usually don’t apply the same way, but the agreement still needs to be properly documented to manage risk.
- Clear documentation (like an Employment Contract, Contractor Agreement, share vesting agreement, or founders agreement) helps prevent disputes and protects everyone from day one.
- Because sweat equity arrangements can trigger both employment law and company ownership issues, getting tailored legal advice early is often the easiest way to avoid expensive problems later.
If you’d like help reviewing or structuring a sweat equity arrangement (so it’s fair, clear, and legally compliant), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.
