What fair partnership terms look like
Bringing a partner into your business means signing a shareholders' agreement. Here is what good looks like, the red flags to push back on, and the questions to ask any investor, including us.
Most founders sign one shareholders’ agreement in their life, and they sign it in a hurry. The other side has usually done this many times. That imbalance is where bad deals come from: not from villains, but from small clauses nobody explained.
This guide walks through the terms that matter most, in plain English. For each one: what it means, what fair looks like, and the red flags worth pushing back on before you sign.
1. The stake, and what it is for
What it is. The percentage of the company your partner will own, and what they give in return: cash, work, or both.
What fair looks like. The stake is tied to something specific. “R500,000 for 15%” or “a working online store, booking system and twelve months of product support for 20%”. You can point at what the business gets for every percentage point it gives away.
Red flags.
- A stake with no clear deliverable attached to it.
- A valuation you cannot explain to your own accountant.
- Shares that move to the investor before the money or work arrives.
If part of the stake is for future work, South African law already has a mechanism for this. Under section 40(5) of the Companies Act, shares issued for future services are held by an independent stakeholder and only released once the work is done. Since 27 December 2024 the Act calls this a stakeholder agreement rather than a trust agreement. Read our guide to equity for expertise.
2. Who decides what
What it is. Day-to-day decisions belong to the people running the business. Some big decisions (selling the company, taking on large debt, issuing new shares) usually need shareholder approval. These are called reserved matters.
What fair looks like. A short list of genuinely big decisions that need both of you. Everything else stays with you as the founder.
Red flags.
- A long reserved-matters list that gives a minority partner a veto over ordinary trading decisions like hiring, pricing or suppliers.
- Board control handed to the investor without a clear reason.
- Vague wording such as “any material decision”.
3. Getting diluted
What it is. When new shares are issued, everyone’s percentage shrinks unless they buy more.
What fair looks like. Pre-emptive rights for all shareholders, so everyone gets the chance to keep their percentage on the same terms.
Red flags.
- Anti-dilution protection that only the investor gets, especially “full ratchet” clauses that re-price their shares if a later round is cheaper.
- The right for one party to issue new shares without the other’s consent.
4. Selling shares and leaving
What it is. The rules for how anyone can sell their shares, and what happens if someone wants out.
What fair looks like.
- A right of first refusal: before selling to an outsider, you offer your shares to the existing shareholders first.
- Tag-along: if a majority sells, minority shareholders can sell on the same terms.
- Drag-along: if a clear majority agrees to sell the whole company, the rest must sell on the same terms. Fair versions apply only above a high threshold and at a fair price.
Red flags.
- A drag-along that a minority investor can trigger.
- “Good leaver / bad leaver” clauses where a founder who leaves for any reason, including illness, must sell their shares back at a fraction of their value.
5. Deadlock
What it is. What happens when two shareholders cannot agree on a reserved matter.
What fair looks like. A staged process: talk, then mediation, then a defined way out, such as one party offering to buy the other at an independently set price.
Red flags.
- No deadlock clause at all, which means a court decides.
- A “shotgun” clause where the party with more cash can force the other out at a low price.
6. Restraints and intellectual property
What it is. Limits on competing with the business, and who owns what was built.
What fair looks like.
- Restraints that are narrow: the same industry, a defined area, and a reasonable period after you leave.
- The company owns what was built for it. Each side keeps the tools and know-how they brought with them.
Red flags.
- A restraint on the founder that covers “any business” for years.
- Anything the partner builds for you staying owned by the partner.
7. Information and money flowing out
What it is. What each shareholder is entitled to see, and when profits get paid out.
What fair looks like. Regular, simple reporting (monthly management accounts are plenty for most small businesses) and a written dividend policy agreed upfront.
Red flags.
- Management, consulting or “monitoring” fees paid to the investor on top of their shareholding.
- Loans from the investor at high interest that rank ahead of everyone else.
Ten questions to ask any partner, including us
- What exactly do I get for each percentage point?
- Is any of the stake for future work, and how is it held until that work is done?
- Which decisions will need your approval?
- Do you get any rights that other shareholders do not?
- Do you charge any fees beyond your shareholding?
- What happens if we disagree on something big?
- What happens to my shares if I have to step away?
- How long do you expect to stay a shareholder?
- Can I speak to a founder you have partnered with before?
- Will you put the main terms on one page, in plain English, before the lawyers start?
What you can expect from Serelis
We would rather explain our terms than defend them, so here is what you can hold us to:
- One page, plain English. You see the whole deal on a single page before a lawyer touches it.
- Earned, not promised. Every share we take is tied to cash in the bank or work delivered. If we do not deliver, we do not get it.
- Your name stays on the door. You keep running the business. The few big calls we make together are written down on day one.
- No exit clock. There is no fund behind us waiting for a payout.
- Check our homework. Have your own lawyer read every word. We will answer every question above, and every one they add.
If that sounds like the kind of partner you want, take the Growth Check or tell us about your business.
Sources
This guide is general information, not legal, tax or financial advice. Every deal is different: speak to your own attorney and accountant before you sign anything.