Series Seed Investment Documents for South Africa

Overview

Well done for taking the bold step to start a business. The Series Seed Documents that you will find below this overview are intended to help you get the right company documents in place so that you can focus on making money. We have tried to make this as clear as we can. Please read these documents as you have a legal duty as a shareholder or director to understand these documents.

There are two important documents you must have when setting up a company. The first is your Memorandum of Incorporation (MOI). This is a public document that must be lodged by you with the Companies and Intellectual Property Commission (CIPC) as soon as you can after it has been approved – Don’t forget!

The second document is a Shareholders Agreement. This is a private document which is only available to the Shareholders and Directors of the company and is not lodged with the CIPC. In general the MOI should be the general framework for the way that the Company will work and the Shareholders Agreement spells out in detail what the rights are of each of the parties.

Sometimes a mistake is made and the Company documents contradict each other. For this reason it is important to know which document will win if there is a conflict. This is the order of priority (the top is the most important):

Constitution of South Africa
Companies Act no. 71 of 2008
Regulations published in terms of the Companies Act no. 71 of 2008
Company Memorandum of Incorporation (MOI)
Shareholders Agreement
Company rules

Always remember that the MOI is more important than the Shareholders Agreement!

This Memorandum of Incorporation and the Shareholders Agreement are based on the “Series Seed Investment” documents which are used by investors to invest in new companies in the United States of America. Obviously several things needed to change to make the documents more applicable to South Africa (and more readable) but the general principles are based on business concepts that have been tried and tested in many successful start-up companies over many years.

Once you have the MOI and a Shareholders Agreement in place, you need to either sell the existing shares in the Company to the investors, or issue new shares to the investors. If you are selling existing shares then you will be “assigning” them to the investor. If the Company is going to issue new shares then the Company and the Shareholders conclude a “Subscription Agreement” which will set out how many shares are issued by the Company, the type of shares, who gets them and how much they pay for them.

No copyright

These documents are freely available to the public and may be used by anyone in the world under Creative Commons Attribution 4.0 International License [1], provided they insert the following line onto the front pages of each MOI, Subscription and Shareholders Agreement used: “This document is not subject to copyright and has been kindly made available to the public by Newtown Partners (Pty) Ltd.”

No legal advice given

Finally we are sure that you consider your business to be unique and so it makes sense that you may want to change these documents to better suit your needs. Please feel free to do that, but remember that these documents do not constitute legal advice. You are always better off going to speak to an attorney who will understand your needs.

Release notes

There were a number of changes between version one and version two of the series seed documents. These notes serve to list the major changes. Furthermore, there was a complete redo of the format of the documents for version 2.

Memorandum of Incorporation

Version 2.1 – Improved wording of the percentage of issued shares that is required for specially protected matters in Annexure C.

Incorrect references to sections in the Companies Act were corrected.
Clause 2.3.1: Improved the wording of the clause.
Clause 2.6.1: Voting power of Series Seed will be on an as converted basis – so, if a dilutive issuance (below the Series Seed subscription price) occurs, and the Series Seed holders would be entitled to convert their shares into a greater number of ordinary shares than on a ratio of 1:1, then they would also be able to vote that number of votes at shareholder meetings.
Clause 2.6.2: Enhanced (and shortened) the Liquidation Preference to align with industry practice.
Clause 2.6.5: Clause 2.6.9 An average weighted anti-dilution mechanism was included into the document.
Clause 4.5: Cleared up the discrepancies, which previously allowed shareholders, to sell their shares to each other without first offering them to all the other shareholders, i.e. excluded from the pre-emption clause.
Clause 6.9.1: Improved the wording of the clause.
Clause 10.2.1: Improved the wording of the clause.
Annexure A: Adjusted the definition of ‘Liquidation’ and ‘Liquidity Event’.

Shareholders Agreement

The founder warranties were moved to the subscription agreement.
Clause 2.1.1: Founder Lockup timeframe was changed to match the vesting period.
Clause 3: Vesting of Founders Shares was included. In this clause, the shares vest over a period of 4 years with 25% of the shares vesting after the first year and the remaining 75% vesting proportionally at monthly intervals over the remaining 3 years.
Clause 4: Employee Incentive Scheme was improved.
Clause 5: Minor changes including increasing the duration of the offer period.
Clause 5.3: Changed to 50%.
The Liquidation Preference should only be in the MOI, it was removed from the Shareholders Agreement.
The annexures showing shareholding were improved.

Subscription Agreement

This was essentially redrafted and simplified. A few specific comments:

The warranties were moved into this document.
The annexures were improved.

SAFE Agreement

A SAFE (“simple agreement for future equity) was created as a simple replacement for convertible notes. In practice, a SAFE enables a start-up company and an investor to accomplish the same general goal as a convertible note, though a SAFE is not a debt instrument. A SAFE is an agreement that can be used between a company and an investor. The investor invests money in the company using a SAFE. In exchange for the investment, the investor receives the right to purchase equity in the company in a future equity round (when one occurs), subject to certain provisions set in advance in the SAFE. This agreement is most commonly used during seed investing when both parties want to delay establishing a valuation for a start-up until a later round of funding or milestone.

A new version of the SAFE Agreement has been uploaded.

The calculation regarding the equity in event of the Safe Price is now the industry standard.
A discount rate has been added.
A MFN or Most Favoured Nation clause has been added. This gives the investor the right to amend the SAFE sheet to include more favourable terms of any Subsequent Convertible Instrument.

Term Sheet

We have added a term sheet agreement. A term sheet is generally signed during the negotiation process between the investor and the startup. It aims to outline all the key aspects of the financial investment (funding, corporate governance and liquidation) in a clear and simple manner. Typical it is non-binding and it is signed prior to the due diligence process and commonly includes a period of exclusivity.