Co-Founder Agreement (New Zealand)

A co-founder agreement is one of the most important documents for any New Zealand startup. Without a written agreement, co-founders are governed by the default rules of the Companies Act 1993 (if they have incorporated a company) or the Partnership Act 1908 (if operating as a partnership). The Partnership Act 1908 imposes default rules that may not reflect the parties' intentions — for example, profits and losses are shared equally regardless of contribution. More critically, the absence of a co-founder agreement means there are no agreed rules for what happens when a co-founder leaves, stops contributing, wants to sell their shares, or cannot agree with their co-founders on a strategic direction. A written co-founder agreement should address equity split, share vesting, roles and responsibilities, IP assignment to the company, decision-making thresholds, founder salaries, dividend policy, exit mechanisms, and the consequences of a founder leaving the company. Investors — particularly venture capital and angel investors — will expect to see a co-founder agreement before they commit capital to a startup.

Share vesting is a mechanism that incentivises co-founders to remain committed to the startup over time by making their equity conditional on continued involvement. In a typical New Zealand startup vesting arrangement, a co-founder's shares vest over a 4-year period, with a 1-year cliff (meaning no shares vest in the first year) and monthly or quarterly vesting thereafter. If a co-founder leaves within the cliff period, they forfeit all unvested shares. After the cliff, if a co-founder leaves, they keep the shares that have already vested but forfeit the unvested balance. The vested shares may be subject to a right of first refusal in favour of the company or the other founders. For tax purposes, the issue of shares to founders at a discount to market value may result in a taxable benefit under the fringe benefit tax (FBT) provisions or the employee share scheme rules in the Income Tax Act 2007. Founders should seek tax advice when structuring their equity arrangements to requires the vesting structure is tax-efficient.

IP assignment from co-founders to the company is a critical step for any New Zealand startup that seeks external investment. Under the Copyright Act 1994, copyright in original works created by an employee in the course of their employment belongs to the employer. However, IP created by a founder before the company was incorporated, or created outside their employment relationship with the company, belongs to the individual founder. To requires the company owns all relevant IP, co-founders should sign a written IP assignment agreement assigning all pre-existing and future IP (including patents, trade marks, copyrights, source code, designs, and trade secrets) to the company. The assignment should include IP created before incorporation as well as IP created during the founder's time with the company. Under the Patents Act 2013, patent rights must be assigned in writing to be effective. A failure to properly assign IP from founders to the company is one of the most common issues identified in due diligence by investors and acquirers and can significantly reduce the company's value or block a transaction.

The departure of a co-founder is one of the most challenging scenarios for a New Zealand startup, and the co-founder agreement should anticipate it. There are typically two categories of departure: good leaver (the founder leaves for reasons outside their control, such as serious illness) and bad leaver (the founder leaves voluntarily, is dismissed for cause, or breaches the agreement). Good leavers typically keep their vested shares but forfeit unvested shares, while bad leavers may be required to sell both vested and unvested shares back to the company or the remaining founders at a predetermined price (often par value or cost). The co-founder agreement should also address the transfer of IP that was in the departing founder's possession, the return of company property, and post-departure obligations including non-compete and non-solicitation restrictions. Post-departure restraints must be reasonable in scope and duration to be enforceable under New Zealand common law. The departing founder's rights to ongoing royalties or profit participation (if any) should also be specified.

A Co-Founder Agreement (New Zealand) does not legally require a lawyer in New Zealand, and individuals and businesses may draft and execute the document independently. The Companies Act 1993 does not mandate legal representation for the creation or signing of this type of document. However, seeking independent legal advice from a qualified New Zealand lawyer is recommended for transactions involving substantial financial value, complex regulatory requirements, or cross-border elements where multiple legal jurisdictions may apply. A lawyer can verify that the document complies with all applicable statutory requirements, identify potential risks specific to the transaction, and confirm that the terms adequately protect the interests of all parties involved. The High Court of New Zealand has jurisdiction over disputes arising from this type of document, and Companies Office may impose additional compliance obligations depending on the nature of the underlying transaction. Professional legal review is particularly advisable where the document will be submitted to government agencies or used as evidence in legal proceedings.