Preference Shares vs Ordinary Shares In New Zealand: Founder and Investor Guide

If you’re raising capital for your startup or small business, you’ll almost always run into the question of preference shares vs ordinary shares.

On the surface, it can sound like a technical “lawyer-only” discussion. But the share type you issue can directly affect:

• how much control you keep as a founder,
• how attractive the deal is to investors,
• what happens if the business is sold (or doesn’t work out), and
• how your dividend and exit proceeds get split.

In New Zealand, shares and shareholder rights are mainly governed by the Companies Act 1993, and the fine detail usually comes down to your company’s constitution and the agreements you put in place around the capital raise.

Below, we’ll break down the practical differences between ordinary shares and preference shares, why investors often ask for preference shares, and what you should lock in legally before you issue them.

What Are Ordinary Shares (And Why Most Companies Start With Them)?

Ordinary shares are the “standard” share type most New Zealand companies issue when they first incorporate.

If you and your co-founder set up a company and split ownership 50/50, you’re usually holding ordinary shares (unless you’ve specifically created different classes).

What Rights Do Ordinary Shares Usually Have?

Ordinary shares typically come with these core rights:

• Voting rights (for example, voting on shareholder resolutions, appointing directors, approving major transactions).
• Dividend rights (the right to receive dividends if the company declares them, and subject to the Companies Act solvency requirements).
• Rights on liquidation (if the company is wound up, ordinary shareholders can share in any remaining assets after debts are paid).
• Rights on a sale/exit (the right to receive a portion of sale proceeds in proportion to shareholding, subject to any agreed preference rights that rank ahead of them).

The key thing to understand is that ordinary shares are usually the “last in line” if you later introduce preference shares. That’s not automatically bad - it’s just the commercial reality of how many investor deals are structured.

Why Founders Like Ordinary Shares

From a founder’s perspective, ordinary shares are simple. They’re a straightforward reflection of ownership and usually keep governance clean while you’re building the business.

But once you start raising outside capital, ordinary shares can be too “plain vanilla” for an investor who is taking on real risk and wants some downside protection.

What Are Preference Shares In New Zealand?

Preference shares are shares that have special rights compared to ordinary shares.

In most cases, preference shares are issued to investors (especially in venture-style raises), because they can provide extra protections or benefits - particularly if the business is sold, raises further capital, or doesn’t reach its goals.

In New Zealand, a company can issue different classes of shares, as long as the rights attached to those shares are properly set out (usually in the constitution and investment documents).

Common Preference Share Rights

Not every preference share is the same. The rights are negotiable, and your documents need to match what’s been agreed commercially.

Some of the most common preference share features include:

• Liquidation preference: investors may be entitled to get paid first on certain “liquidity events” (for example, a winding up, or a sale/exit if your documents define that sale as a liquidation event), often receiving their investment amount back before ordinary shareholders receive anything.
• Dividend preference: a right to receive dividends before ordinary shareholders (sometimes cumulative, sometimes only if declared), subject to the Companies Act solvency test.
• Conversion rights: the right to convert preference shares into ordinary shares (often automatically on an IPO or sale, or at the investor’s choice).
• Anti-dilution protections: protections if future shares are issued at a lower price (this can be complex, and the exact formula matters).
• Redemption rights: a right to require the company to buy the shares back in certain circumstances (where permitted - and typically subject to the Companies Act requirements around solvency and share redemptions).
• Protective provisions / veto rights: investor consent required for certain actions (like issuing new shares, selling key assets, taking on major debt, or changing the constitution).

These rights can be reasonable and market-standard, but they can also dramatically change founder outcomes if they’re not understood upfront.

Preference Shares vs Ordinary Shares: The Key Differences That Matter In Real Life

If you’re weighing up preference shares vs ordinary shares, it helps to think in terms of what happens in three major moments:

• when the company is operating normally,
• when the company raises more money, and
• when the company exits (or shuts down).

1) Payment Priority (Dividends And Exit Proceeds)

Ordinary shareholders usually share in profits or sale proceeds after everyone else who ranks ahead of them.

Preference shareholders are often paid first, especially on an exit - if the preference terms apply to that type of transaction. This is the commercial purpose of a liquidation preference: it reduces investor downside risk.

Founder reality check: if the company sells for a modest amount, a liquidation preference can mean ordinary shareholders receive very little (or nothing), even if they “own” most of the company on paper.

2) Control And Decision-Making

Ordinary shares commonly carry voting rights. Preference shares can have voting rights too, but many are structured with:

• limited voting (only on certain matters), or
• special veto rights (investor approval required for certain actions).

This is why the legal drafting matters. Two deals can both be described as “issuing preference shares”, but one deal might leave founders with plenty of autonomy, while another effectively gives investors control over major business decisions.

3) Dilution And Future Fundraising

All shareholders can be diluted when new shares are issued (unless you have protection or participation rights).

Preference shares sometimes include anti-dilution rights, which can shift dilution risk onto founders and early ordinary shareholders.

This becomes especially important if:

• the business hits a rough patch and needs a “down round”, or
• you raise again quickly before your valuation increases.

4) Complexity And Admin

Ordinary shares are easier to manage and explain to new shareholders.

Preference shares add layers: different classes, different rights, different outcomes depending on exit value. That’s fine - but it does mean you should take extra care with your legal foundations (and avoid DIY templates).

When Should You Use Preference Shares (And When Are Ordinary Shares Enough)?

There’s no single “right” answer here. It depends on your business, the size of the raise, investor expectations, and what you’re willing to trade for capital.

Preference Shares Are Common When…

• You’re raising from sophisticated investors who expect downside protection.
• The investment is significant compared to the company’s current value.
• The business is early-stage, where the risk of failure is higher.
• You want to avoid giving up day-to-day control, but you’re comfortable offering financial priority instead.

Many founders prefer granting economic protections (like a liquidation preference) rather than giving investors additional voting control. The key is getting the balance right and documenting it properly.

Ordinary Shares Might Be Enough When…

• You’re raising from friends and family and want a simple structure (though you still need to be careful about how the offer is made).
• The investment amount is smaller and the investor isn’t asking for complex rights.
• You’re bringing in a strategic partner and the relationship matters more than financial engineering.

That said, even with ordinary shares, you still want clarity around governance, transfers, and what happens if someone leaves. This is where a well-drafted Founders Agreement can save you a lot of stress later on.

A Practical Example (So You Can Visualise The Difference)

Let’s say you raise $500,000 from an investor.

Scenario A: Ordinary shares only.
If the company sells later for $2,000,000 (and ignoring other costs), everyone shares the proceeds based on percentage ownership.

Scenario B: Preference shares with a 1x liquidation preference.
If the company sells for $2,000,000, the investor might first receive $500,000 back (if the preference applies to that exit under your documents). The remaining $1,500,000 is then split among shareholders (sometimes including the investor again if they also convert to ordinary - the detail matters).

This is why founders should model different exit values before agreeing to preference rights. A deal can look fine in a “home run” exit, but very different in a smaller or mid-range sale.

What Legal Documents Need To Be Updated For Preference Shares (And Why This Is Where Things Often Go Wrong)

Issuing preference shares isn’t just a handshake agreement or a note in an email. If the rights aren’t properly documented, you risk:

• shareholder disputes,
• confusion during due diligence (which can delay or derail a raise or sale), and
• outcomes that don’t match what either side thought they agreed to.

In New Zealand, the Companies Act 1993 sets out a framework for shareholder rights and company administration, but the “deal terms” usually live in your constitution and contracts.

1) Your Company Constitution

Your constitution is usually where share classes and attached rights are recorded.

If you’re issuing preference shares (or creating any new class of shares), you’ll typically need a properly drafted Company Constitution that:

• creates the preference share class (if it doesn’t already exist), and
• sets out the rights, privileges, limitations, and conditions attached to that class.

Getting this wrong can cause major headaches later - especially if you try to sell the company or raise from new investors who expect clean, consistent documents.

2) A Shareholders Agreement

Not everything belongs in the constitution.

A Shareholders Agreement usually covers the “relationship rules” between shareholders, including:

• how decisions get made,
• reserved matters requiring investor consent,
• information and reporting rights,
• transfer restrictions (and what happens if someone wants to sell),
• what happens on an exit (drag-along/tag-along style outcomes), and
• practical sale mechanics (and, where relevant, how any preference rights are applied on an exit).

For founders, this agreement is a big deal because it’s often where control and governance are negotiated - even if the preference share rights are mostly economic.

3) The Share Issuance / Investment Document

When you actually issue new shares to an investor, you’ll usually document the subscription and key terms in a Share Subscription Agreement.

This is commonly where you’ll see:

• the amount being invested,
• the share class and issue price,
• conditions precedent (what must happen before completion), and
• representations and warranties (statements the company and founders are making to the investor).

Even if you’ve agreed the headline terms in a term sheet, the subscription agreement is where the legal obligations become enforceable.

4) If Existing Shares Are Being Sold (Not Issued)

Sometimes an investor is buying shares from an existing shareholder (for example, buying out an early founder or angel).

That’s usually documented under a Share Sale Agreement, which is a different pathway from issuing new shares (and it can have different tax outcomes and control implications). This article is general information only, so you should get tax advice on your specific transaction.

5) Think About Privacy And Data Early (Especially If You’re Fundraising)

Fundraising often involves sharing business information, customer metrics, and sometimes personal information (depending on what data sits in your reports).

If your business collects personal information (customer details, mailing lists, user accounts), having a fit-for-purpose Privacy Policy helps you stay aligned with the Privacy Act 2020 and also makes investor due diligence smoother.

This isn’t about adding paperwork for the sake of it - it’s about showing your business is investable and compliant from day one.

One More Important Legal Point: Financial Markets Conduct Rules

If you’re raising funds, you should also be aware that offering shares can trigger obligations under the Financial Markets Conduct Act 2013 (FMCA), depending on who you’re offering to and how you run the raise.

Many small businesses and startups raise under common exclusions (for example, offers to wholesale investors), but the right approach depends on your exact facts. It’s worth getting advice early so you don’t accidentally run a capital raise in a way that creates compliance risk.

Key Takeaways

• Ordinary shares are the standard share type most NZ companies start with, usually with proportional voting, dividend, and liquidation rights.
• Preference shares are a separate class with special rights - most commonly priority on agreed exit/winding up proceeds (liquidation preference), dividend priority (subject to solvency), and conversion rights.
• When comparing preference shares vs ordinary shares, the biggest practical differences are who gets paid first, who controls key decisions, and how dilution is handled in later fundraising rounds.
• Preference shares can make your raise more attractive to investors, but they can also significantly affect founder outcomes - especially in smaller exits.
• In NZ, issuing preference shares usually requires you to properly update your constitution and put the right contracts in place, such as a shareholders agreement and share subscription agreement.
• Fundraising can also raise compliance issues under the Financial Markets Conduct Act 2013, so it’s smart to get advice before you start pitching terms.

If you’d like help structuring a raise, issuing preference shares, or updating your constitution and shareholder documents, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.