Alex is Sprintlaw’s co-founder and principal lawyer. Alex previously worked at a top-tier firm as a lawyer specialising in technology and media contracts, and founded a digital agency which he sold in 2015.
If you're building a startup (or running a growing small business), raising capital can be exciting - but it can also get legally messy, fast.
One of the biggest "make-or-break" concepts for your cap table is pre-emptive rights (also commonly written as preemptive rights).
These rights affect who gets to buy new shares, how much control founders keep, how existing investors protect their stake, and how smoothly (or painfully) your next funding round goes.
In this article, we'll break down what pre-emptive rights mean in New Zealand, where they come from, how they're usually documented, and the practical impact they can have on your next raise.
What Are Pre-emptive Rights (And Why Do They Matter)?
Pre-emptive rights give existing shareholders the first opportunity to buy new shares when a company issues more shares.
In plain terms: if your company is about to bring in new money by issuing new shares, existing shareholders may have a right to "maintain their percentage" by buying their proportionate slice before those shares are offered to outsiders.
A Simple Example
Let's say:
- Your company has 100 shares on issue.
- An early investor owns 20 shares (20%).
- You want to issue 50 new shares to raise money from a new investor.
If that issue happens with no protections, the early investor's ownership percentage drops from 20% to 20/150 = 13.33%.
But if the early investor has pre-emptive rights, they may be entitled to buy enough of the new shares to keep their ownership at 20% (or at least be offered that chance first).
Why This Matters In Real Life
Pre-emptive rights often sit right at the intersection of:
- Investor protection (investors don't want to be diluted unexpectedly)
- Founder control (founders want flexibility to raise money quickly)
- Fundraising speed (extra processes can slow a round down)
- company governance (who gets a say in future equity decisions)
That's why it's important to get clear on pre-emptive rights early - ideally before you hit your first serious funding conversation.
Where Do Pre-emptive Rights Come From In New Zealand?
In New Zealand, pre-emptive rights can come from a few places, including:
- The Companies Act 1993 (depending on how your company is set up)
- Your company's constitution
- A shareholders agreement
- Specific investment documents for a particular fundraising round
In practice, most startups deal with pre-emptive rights through a mix of the company's internal governance documents - especially the Company Constitution and a Shareholders Agreement.
Companies Act 1993: The Default Position Isn't Always What Founders Expect
In New Zealand, the Companies Act 1993 sets a default position for pre-emptive rights in some situations - but it can be modified (or excluded) through your constitution, and the practical position will depend on the terms of your company's documents and share structure.
That's why founders often get caught out by "we assumed we could just issue shares" or "we assumed investors didn't have any rights unless we agreed to them".
If you're raising capital, you want to know:
- Whether any pre-emptive rights apply under your company's constitution and shareholder arrangements
- Whether those rights have been modified or disapplied (and in what circumstances)
- What process you must follow before issuing new shares (including notice, timeframes and approvals)
This isn't the kind of detail you want to discover mid-round while an investor is waiting on documents.
How Pre-emptive Rights Affect Startup Fundraising And Dilution
From a fundraising perspective, pre-emptive rights are mainly about dilution and control.
Dilution isn't always a bad thing - it's usually the point of raising money - but it should be predictable and managed.
What Pre-emptive Rights Mean For Founders
If you're a founder, pre-emptive rights can affect:
- How quickly you can close a round (because you may need to give existing shareholders notice and time to decide)
- How clean your cap table stays (if lots of small shareholders have rights, coordinating them can be painful)
- How much leverage you have in negotiations (investors may push for stronger rights)
- Your ability to bring in strategic investors (pre-emptive rights can force you to "offer around" shares first)
On the other hand, clear rules can also help you: when the process is properly documented, it reduces surprises and disputes.
What Pre-emptive Rights Mean For Investors
From an investor's side, pre-emptive rights are often non-negotiable because they:
- allow the investor to protect their percentage as the company grows
- help maintain economic upside (less dilution over time)
- help maintain influence (ownership percentage can affect voting power)
Investors may also see pre-emptive rights as a signal that the company has good governance - which can make your business more investable.
How Pre-emptive Rights Interact With Different Types Of Fundraising
Pre-emptive rights usually matter most when you're issuing shares. That includes:
- Seed and Series funding rounds
- Strategic investors buying equity
- Internal rounds (existing investors putting more money in)
They can also become relevant when you're issuing options or setting up an employee equity plan, because that can impact dilution too. If you're planning incentives, it's worth thinking about how equity will be allocated and documented (including whether you'll need an Employee Share Option Plan).
How Are Pre-emptive Rights Usually Written Into Your Documents?
Pre-emptive rights are only helpful if everyone agrees on what they actually mean in your company. That's where your documents matter.
Most of the time, pre-emptive rights are dealt with in:
- your constitution (setting baseline rules for issuing shares)
- your shareholders agreement (setting more detailed investor rights and processes)
- your share issue documents (board/shareholder resolutions and offer notices)
If you're growing quickly, it's common to update your documents as part of a raise or restructure - for example, when you're allocating shares in a startup and trying to keep the cap table tidy.
Common Terms You'll See In A Pre-emptive Rights Clause
Even though the language varies, many pre-emptive rights clauses cover:
- When the rights apply: e.g. any new issue of shares (sometimes excluding certain types like employee options)
- Who gets the offer: all shareholders, or only certain classes (e.g. preference shareholders)
- How much each shareholder can buy: usually pro-rata to their existing holding
- Notice requirements: how the company must notify shareholders, and what information must be included
- Timeframes: how long shareholders have to accept or decline
- What happens if someone doesn't take up their rights: can others take the "shortfall", and can the company offer to third parties?
- Pricing and terms: whether the offer must be on the same terms offered to incoming investors
This is where the detail matters. A clause that looks fine in principle can become a real bottleneck if the timing is too long or the process is unclear.
Constitution Vs Shareholders Agreement: What's The Difference In Practice?
These documents often work together, but they're not the same.
- A Company Constitution is part of the company's formal rulebook and can govern things like share issues, voting, and director powers.
- A Shareholders Agreement is a private contract between shareholders (and usually the company) that sets out how shareholders will manage the relationship, including protections, exits, and decision-making.
For fundraising, the key is consistency. If your constitution says one thing about share issues and your shareholders agreement says another, you can end up with confusion, delays, or disputes.
It's also why you should be careful about copying terms from a generic template - fundraising terms should match your cap table and your strategy.
Can You Remove Or Limit Pre-emptive Rights (And Should You)?
Yes - pre-emptive rights can often be limited, disapplied, or tailored, depending on your company's legal setup and what shareholders agree to.
But whether you should remove them is a commercial question as much as a legal one.
Common Reasons Founders Want To Limit Pre-emptive Rights
In startups and small businesses, founders often want flexibility to:
- bring in a new investor quickly (without running a full offer process to all shareholders)
- issue shares to employees or contractors under an incentive scheme
- avoid "administrative drag" when the cap table has many small shareholders
- keep negotiations clean (incoming investors may want certainty about what they're buying)
Pre-emptive rights can still exist, but with sensible carve-outs - for example, excluding certain employee equity issuances or small share issues below a threshold.
Common Investor Positions (And Why They Ask For Them)
Investors often accept reasonable exceptions, but they'll typically push back if the clause becomes meaningless. They're usually trying to avoid a situation where:
- the company issues a large amount of shares to a new party at a favourable price
- the investor's ownership (and influence) gets diluted
- the investor doesn't even get the chance to participate
This is where good drafting helps you strike a fair balance between protecting early investors and keeping the company fundraise-ready.
Watch Out For Unintended Consequences
If pre-emptive rights are too broad or too rigid, you might face:
- fundraising delays (waiting for response periods to expire)
- deal risk (a new investor walks away due to timing uncertainty)
- cap table tension (shareholders arguing about whether an issue was valid)
- process disputes (was notice properly given, was the price correct, were terms "the same?")
If they're too weak or unclear, you might face:
- loss of trust with existing investors
- shareholder disputes (especially if dilution feels unfair)
- difficulty closing future rounds (because governance looks sloppy)
The goal is a clause that reflects how your startup will actually raise money over the next few years.
Practical Tips For Handling Pre-emptive Rights In A Funding Round
If you're preparing for a raise (or even just thinking about it), you'll save yourself a lot of stress by getting your governance tidy early.
1) Map Your Cap Table And Identify Who Has Rights
Before you start negotiating with new investors, confirm:
- who the current shareholders are
- whether there are different share classes
- what your constitution and shareholders agreement say about issuing shares
- whether any side letters or special terms exist
This is also a good moment to think about whether the company's ownership has changed over time and whether everything has been properly documented (for example, if you've been changing company ownership or doing informal transfers).
2) Build Pre-emptive Rights Into Your Fundraising Timeline
If you know you must offer shares to existing shareholders first, work backwards from your target closing date and allow time for:
- issuing the notice
- shareholder response time
- processing acceptances and payments
- allocating any shortfall
- finalising the issue to the new investor
Time kills deals. A well-run process helps keep momentum and protects relationships.
3) Keep Your Share Issue Paperwork Clean
Share issues usually involve formal company actions, such as director and/or shareholder approvals.
Depending on your setup, you may need things like resolutions and written notices. If you're not sure whether a decision is properly documented, it's worth getting advice before you take money - fixing governance after the fact is harder and often more expensive.
(This also ties into director duties and governance standards under New Zealand law, including duties in the Companies Act 1993 such as acting in good faith and in the best interests of the company, and exercising care, diligence and skill.)
4) Make Sure Your Investor Documents Match Your Company Documents
A very common problem is when:
- an investor term sheet says one thing about rights, but
- the shareholders agreement says another, and
- the constitution doesn't line up either.
Investors don't just invest in your product - they invest in your legal structure and your ability to execute cleanly.
If you're issuing new shares as part of a raise, you might also need to document the investment terms with the right agreements (for example, if you're bringing in investors through a formal share issue process).
5) Get The Drafting Right From Day One
Pre-emptive rights aren't "just legal wording". Small differences in drafting can create very different outcomes.
For example:
- Does the right apply to all issuances, or only equity fundraising rounds?
- Does it apply to employee equity and option pools?
- Can the board issue shares without an offer if shareholders approve a specific round?
- What happens if a shareholder can't be contacted?
Getting these details tailored to your business early helps you raise capital with confidence, instead of renegotiating governance every time you grow.
Key Takeaways
- Pre-emptive rights give existing shareholders the first chance to buy new shares, usually to protect them from dilution.
- In New Zealand, pre-emptive rights can come from your company's legal setup and are commonly managed through a Company Constitution and Shareholders Agreement.
- Pre-emptive rights can have a major impact on how smoothly your startup fundraising runs, including timelines, investor negotiations, and cap table management.
- It's often possible to tailor or limit pre-emptive rights (for example, for employee equity), but you'll want to balance flexibility for the company with fair protection for investors.
- Clean documents and a clear process reduce the risk of delays and disputes during a funding round.
- Because drafting details matter, it's worth getting advice early - especially before you start negotiating with new investors or issuing shares.
If you'd like help setting up or reviewing your pre-emptive rights (including updates to your Shareholders Agreement or Company Constitution) before your next raise, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.