If you’re setting up a company in New Zealand, raising capital, or bringing on a co-founder, you’ll quickly run into a big question: how do you split ownership fairly without giving away control too early?
That’s where different share classes can help. In practice, the Class A vs Class B shares decision is often about balancing voting power, dividends, and future flexibility.
In this guide, we’ll break down how Class A and Class B shares typically work in NZ companies, when they can be useful, and what legal documents you should get right from day one so you’re not stuck trying to fix a messy cap table later.
What Are Class A And Class B Shares?
At the most basic level, shares represent ownership in a company. If you hold shares, you’re generally entitled to things like:
- a portion of profits (if the company pays dividends);
- a say in key company decisions (through voting rights); and
- a share of what’s left if the company is sold or wound up (depending on the rights attached to the shares).
In New Zealand, companies can have different classes of shares. This means you can create shares that look similar on paper (they’re still shares), but carry different rights and restrictions.
So when people compare Class A vs Class B shares, they’re usually comparing two sets of rights, such as:
- Voting rights (eg 1 vote per share vs 10 votes per share);
- Dividend rights (eg one class gets first priority on dividends);
- Rights on liquidation (who gets paid first if the company is wound up);
- Conversion rights (whether one class can convert into another);
- Transfer restrictions (limits on selling shares); and
- Redemption rights (whether the company can buy the shares back in certain situations).
There’s no single “standard” for what Class A or Class B means. The label is less important than the actual rights you attach to each class in your company’s governance documents and share issue terms.
How Share Classes Work Under NZ Law
Under the Companies Act 1993, a company can issue shares with different rights as long as those rights are properly set out and the company follows the correct process.
In plain terms: you can usually create Class A and Class B shares in NZ, but you need to document the rights clearly (often in a constitution and/or in the terms of issue for that share class) and make sure your shareholder arrangements line up with what you’re trying to achieve.
This is also why it’s risky to “DIY” share structures using generic templates. Small drafting issues can create big problems later (especially when investors, lenders, or a buyer starts asking questions).
Class A Vs Class B Shares: The Key Differences Founders Should Think About
When you’re weighing up Class A vs Class B shares, it helps to focus on the business outcomes you actually want. The “best” structure depends on your goals, your co-founders, your investors, and how you plan to grow.
Here are the main levers founders usually care about.
1. Voting Rights (Control)
Voting rights determine who can approve major decisions, like appointing directors, approving certain transactions, or changing the constitution.
One common approach is:
- Class A shares: standard voting (eg 1 vote per share)
- Class B shares: enhanced voting (eg 10 votes per share) or sometimes limited/non-voting
Founders sometimes use enhanced voting shares to keep strategic control while still raising money by issuing ordinary shares to investors.
But a word of caution: multi-vote shares can be a red flag for some investors, and the way you pitch it matters. The legal structure needs to match your commercial reality, or you may end up forced to restructure during a funding round.
2. Dividend Rights (Who Gets Paid And When)
Dividends are profit distributions to shareholders (if the company chooses to pay them and meets solvency requirements).
Different classes may have:
- equal dividend rights (each share class receives the same dividend per share);
- priority dividend rights (one class must be paid first); or
- no dividend rights (less common, but possible depending on drafting and purpose).
If you’re using Class B shares to reward a particular person (like a key employee or strategic advisor), dividends might be part of the conversation. In many startups, though, dividends aren’t the focus early on (because profits are reinvested), so voting and exit rights tend to matter more.
3. Rights On A Sale Or Liquidation (Exit Outcomes)
If your company sells, merges, or winds up, the share rights determine how proceeds are distributed.
This is where founders can accidentally create “fairness problems” without realising it. For example, if one class gets paid out first and the sale price is low, the other class might receive little (or nothing).
These issues usually come up when:
- an investor wants “preference” rights;
- you’re issuing shares to a new co-founder at a later stage; or
- you’re trying to reflect different risk levels (eg someone put in cash while someone else contributed sweat equity).
If you’re not sure what’s market (or reasonable) for your situation, it’s worth getting advice early rather than renegotiating under pressure right before a deal closes.
4. Conversion And Transfer Restrictions (Future Flexibility)
Conversion rights let one class convert into another (for example, Class B converting to Class A on a sale). Transfer restrictions limit who can sell shares and when.
These are really practical tools for business owners. They can help you manage scenarios like:
- a shareholder wanting to sell to a third party you don’t want involved;
- a founder leaving and keeping a meaningful stake with voting power;
- investors requiring a simpler share structure before they invest; or
- bringing a new shareholder into the business without losing control.
In many cases, these protections are set out not only in your constitution, but also in a properly drafted Shareholders Agreement. It’s important to note that some rights (like the rights attaching to a share class) generally need to be set through the constitution and/or the terms of issue, while a shareholders agreement usually deals with how shareholders will exercise those rights in practice.
When Should NZ Startups Use Different Share Classes?
Not every company needs Class A and Class B shares. For many small businesses (especially those not raising external capital), a single class of ordinary shares is simpler and easier to manage.
That said, share classes can be genuinely useful in a few common scenarios.
Scenario 1: You Want To Raise Money Without Losing Control
Imagine you’ve bootstrapped your company, proven demand, and now you’re ready to raise funds to grow. You want to bring investors in, but you also want to keep decision-making with the founding team (at least for now).
A two-class structure can sometimes help you:
- issue shares to investors that provide economic participation (and sometimes protective rights); while
- keeping enhanced voting power with founders.
This can be attractive for founders, but it has to be balanced with what investors will accept (and what’s likely to be required in future rounds).
Scenario 2: Co-Founders Want Different Rights Based On Roles
Founders don’t always contribute equally. One might contribute most of the money, while another contributes full-time work, IP, and industry relationships.
Instead of giving everyone identical shares, you might consider a structure where:
- economic rights are aligned with contribution; and/or
- control rights reflect who is responsible for running the business day-to-day.
In many cases, though, you can address these concerns without separate share classes by using vesting arrangements, leaver provisions, and clear governance rules. For example, a Share vesting agreement can protect the business if someone leaves early.
Scenario 3: You’re Bringing In Key People (But Want Guardrails)
If you’re bringing in a key person (like a senior leader or strategic advisor), you might want to give them an ownership stake while managing risk.
Depending on the situation, you might consider:
- non-voting shares (so they share in upside but don’t control company decisions);
- shares with transfer restrictions; or
- alternative equity-like structures (sometimes these sit outside share classes entirely).
This is a great example of where Class A vs Class B shares is only one tool in the toolbox. The best approach depends on what you’re actually trying to incentivise and protect.
How Do You Set Up Class A And Class B Shares In NZ (Without Creating A Mess)?
This is the part many founders underestimate: it’s not enough to “decide” you want Class A and Class B shares. You need the legal plumbing to match your plan.
Getting the structure right from day one can save you a lot of time (and legal fees) later, especially when you raise capital, apply for lending, or prepare for a sale.
Your company constitution is one common place where share class rights are set out (or at least referenced). However, a constitution isn’t the only way to implement different share class rights in NZ: rights can also be set out in the terms on which a share class is issued, and must be properly recorded in the company’s share register and related company records.
For many startups and small businesses, adopting a constitution is still a smart move because it allows you to tailor rules around:
- share issues and transfers;
- pre-emptive rights (rights of first refusal);
- director appointments; and
- different share class rights.
Getting a Company Constitution drafted (or reviewed) is often one of the first practical steps when implementing different share classes.
Step 2: Define The Rights Attached To Each Share Class
Don’t rely on labels like “Class A” or “Class B” to do the work. You need to clearly define the rights attached to each class, including:
- voting rights;
- dividend entitlements;
- rights on liquidation or sale;
- conversion rights (if any);
- redeemability (if any); and
- transfer restrictions.
This is also where founders should think about future rounds. If you expect to raise capital, consider whether investors will push for a restructure later and how painful that will be.
Step 3: Update Your Cap Table And Issuance Paperwork Properly
Whenever you issue shares (whether Class A or Class B), you need to do it properly. That means following any required approvals under the Companies Act, your constitution (if you have one), and any agreed shareholder processes, and making sure records are correct.
In practical terms, this may include:
- board resolutions and/or shareholder resolutions approving the issue;
- share subscription documents (especially where money is being invested); and
- updating the company’s share register accurately.
If you’re raising funds, it’s common to document the investment with a Share subscription agreement, so the terms of the share issue are clear from the start.
Step 4: Align Your Share Class Rights With Your Shareholder Relationship Rules
Share class rights and shareholder relationship rules should work together. Otherwise, you can end up with a structure that looks good in theory but falls apart as soon as there’s disagreement.
This is where a well-drafted Shareholders Agreement is often essential, particularly if you have:
- more than one founder;
- outside investors;
- a plan to grow quickly; or
- any concern about what happens if someone wants to exit.
A shareholders agreement can cover the “real world” stuff like decision-making rules, deadlocks, restraints, confidentiality, and what happens if a shareholder leaves. However, it usually shouldn’t try to override the formal rights attaching to shares: those rights generally need to be reflected in the constitution and/or the terms of issue so they’re legally effective and show up cleanly in due diligence.
Common Risks And Mistakes With Class A Vs Class B Shares
Different share classes can be powerful, but they can also create complications if they’re not set up thoughtfully.
Here are some common issues we see when founders are thinking about Class A vs Class B shares.
Over-Complicating The Structure Too Early
If you’re pre-revenue (or still validating the idea), adding multiple share classes can sometimes create complexity without a clear benefit.
It can also make later changes harder. For example, restructuring share rights usually requires formal processes and can trigger disagreements, especially if shareholders feel the change affects their rights.
Sometimes, simpler tools (like vesting, good governance rules, or a clear founder agreement) achieve the same goal with less friction.
Mismatch Between Constitution, Terms Of Issue, And Shareholder Documents
If your constitution, your terms of issue for each share class, and your shareholder arrangements don’t match, you’re setting yourself up for confusion and disputes.
This tends to become a serious issue when:
- you try to raise capital and investors do due diligence;
- a shareholder exits and the buyout terms are unclear; or
- there’s conflict and each party points to a different document.
Consistency across your documents is a big part of being “protected from day one”.
Not Planning For Founder Exits Or Changing Roles
Even if you’re best friends now, businesses change. People burn out, move overseas, have family commitments, or simply want different things.
If someone holds a high-vote share class and then stops contributing, that can create long-term governance problems.
This is why founder arrangements often include vesting and “good leaver/bad leaver” provisions, and why it’s worth getting professional advice before you lock in voting structures that are hard to unwind.
Forgetting Your Other Legal Foundations
Share structure is only one part of your legal setup. If you’re raising investment or scaling quickly, you’ll usually also need to have the rest of your business legally tidy, such as:
- clear customer or supplier contracts;
- employment documents if you’re hiring (like an Employment Contract); and
- privacy compliance if you collect customer data (including a Privacy Policy under the Privacy Act 2020).
Investors and buyers often look at the whole picture, not just your cap table.
Key Takeaways
- When comparing Class A vs Class B shares, the real issue is the rights attached to each class (like voting, dividends, and exit rights), not the labels.
- Different share classes can help founders balance raising capital with maintaining control, but the structure needs to match your growth plans and investor expectations.
- In NZ, share class rights should be properly documented (often through a constitution and/or the terms of issue) and kept consistent across your share register, issuance documents, and shareholder arrangements.
- A well-drafted Company Constitution and Shareholders Agreement are often key to making Class A and Class B shares work in practice (with the shareholders agreement typically governing how shareholders interact, rather than “creating” the share rights themselves).
- Common pitfalls include over-complicating your structure, creating inconsistent documents, and not planning for founder exits or changing roles.
- Share structures work best when they’re part of your broader legal foundations, including employment and privacy compliance.
If you’d like help setting up (or reviewing) your share structure, constitution, or shareholder documents, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.
This article is general information only and isn’t legal advice. For advice about your specific circumstances, talk to a lawyer.
