What is the difference between a founder, director, and shareholder in NZ?

It is common for a founder of a company to be both a director and shareholder of that company. Even if you are not the founder of a company, you may be a director and a shareholder. Each of these roles comes with different rights and responsibilities. If you fail to comply with your responsibilities while performing a role, then you risk:​

These risks are all significant. Therefore, it is essential to know what is expected of you in each of your roles. You have duties not only to your company but to other key stakeholders.​

Founders refer to those that start the business, be it alone or with others. The law does not recognise founders as a legal concept. That is, no law exists defining founders. Instead, it is up to you and the people who call themselves ‘founders’.​

You do not necessarily have to invest in your company to be a founder. However, founders often contribute capital at an early stage in the business. Usually, this is in the form of equity shares, though it can also be a loan. ​

Being a company founder does not automatically grant you certain rights in respect of the company. ​

However, certain founder rights may be granted to you under your company constitution or shareholders agreement. Typically, for example, a founder has an entrenched right to appoint a director (regardless of the percentage of shares held).​

As a founder, you may be an employee or contractor of your company. If you are, you are entitled to receive payment of at least the minimum wage. Often founders will choose to receive their salary in the form of company shares rather than cash.​

A founder is not a legal concept. Therefore, you do not have any legal responsibilities as a founder unless you have agreed to specific responsibilities under, for example, the shareholders agreement or a contractor or employment agreement.​

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The company’s directors and/or the shareholders appoint directors. Your company’s constitution or shareholders agreement typically outlines the appointment process. Absent this, provisions in the Companies Act apply. You must sign a director consent form before becoming a director.​

As a director, you have the right to make certain business decisions on behalf of the company. Often these decisions need to be made in consensus with other directors. ​

Typically, directors make decisions collectively unless the company specifically delegates certain powers to one or more directors. The company’s constitution and/or shareholders agreement typically specifies decision-making. Again, absent this, the relevant provisions in the Companies Act take effect.​

As a director, you may receive payment for your role. Generally, the shareholders will decide the amount or approve the amount proposed by you or the other directors. However, if you are also a founder working in the business, you would generally not receive both a salary and a director’s fee.​

If you are a director, you will have several responsibilities. The most important of these are your director’s duties. The primary duties of directors are to:​

The law applies significant penalties if a director fails to fulfil their duties or acts dishonestly.​

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You become a shareholder in a company if you buy shares in the company. This includes any shares you receive upon the company’s incorporation. You will be a shareholder in the company until you sell or surrender all of your shares.​

Whilst the directors control the day-to-day running of the company, shareholders have the right to vote on key decisions. These include the decision to remove directors in some cases, change the rights attaching to shares or wind up the company. ​

You may also have the right to share in the profit that the company makes.​

You do not get paid for your role as a shareholder. However, you may be entitled to receive dividends depending on the rights attached to your shares. (Not all shares pay dividends, though most do).​

As a shareholder, your only liability is to pay up any amount you have not yet paid for your shares. For example, if you received shares worth $1,000.00 but only paid $1.00, you have a $999.00 liability to the company. You have no other liabilities, meaning that you are not responsible for the company’s debts.​

For the most part, acting in your different roles should not cause problems. However, there are some situations in which: ​

Below, this article outlines examples of situations where you should be particularly careful.​

As a founder, it may be tempting to make risky decisions on behalf of your company that you believe could have significant benefits down the line. However, as a director, you can only make decisions if you think those decisions are in the best interests of the company. If the chance of pay-off is too low, a high-risk decision may not be in the best interests of the company.  Equally, you should also check your shareholders' agreement for any specific approval requirements, as typically, critical company decisions must go to the shareholders for approval.​

One way to raise money for your company is by issuing shares to new investors. As a director, this decision may be in the best interests of the company. However, as a shareholder, you may not be happy about the company issuing new shares given the dilutionary impact that share issue will have on your holding. Typically, an issue of new shares must go to shareholders for approval.​

As a founder, you may want to retain full control of your company and all decision-making powers. However, as your company grows, you may not have the level of expertise required to run your company as well as your shareholders would like. There may come a point where it would be in the best interests of the company to appoint another director to the board who has the required expertise. As a founder, you may not want this. However, your directors’ duties are the most important. You must always ensure that you are acting in the best interests of the company.  ​

It may no longer be in the best interests of the company for a director to stay on if they have:​

If this is the case, your company can remove them as directors.​

This applies even if that director is your partner, your friend or even you. If you do not remove yourself, your company’s shareholders have the right to do it themselves.​

As a founder, you do not automatically have any legal rights in respect of your company. If you are a director of your company, you must always act in the best interests of your company. This duty applies even if it affects you negatively as a founder or a shareholder. If you are a director of your company and have a personal interest in a matter, you must disclose it to the other directors.​

If you have a question about your legal responsibilities as a founder, director or shareholder, LegalVision’s experienced corporate lawyers can assist as part of their membership, which includes unlimited consultations with lawyers and unlimited document drafting, among other benefits. Call LegalVision on 0800 447 119 to learn more.​

A founder is a person who forms and establishes a company. They may elect themselves as a company director or shareholder (or both). Shareholders are the owners of a company and entrust most decision-making to the directors. Directors are responsible for managing a company.​

Yes, a person can be a founder, director and shareholder. However, in fulfilling the duties and responsibilities of one role, you must ensure you do not ignore the duties of another role.​

A conflict of interest can arise where your duties and responsibilities for one role clashes with your obligations in another role. For example, as a director, it may be in your company’s best interest to raise money by issuing shares to new investors.​

However, as a shareholder, issuing new shares is not ideal as it will reduce your percentage ownership of the company. As a director (and shareholder), you must overcome this conflict of interest by acting in the best interest of the company.​