Legal Education for Startups – David Etido.

I will love to take this sequentially so that everyone whom I presume is entrepreneurs or business startups here may know where there are at the moment in terms of securing themselves and their businesses legally.
We all know that the whole essence of human relationships is the exchange of value. The value may be exchanged for different considerations, such as love, favors, altruistic satisfaction, other goods and services (Trade by Barter) and most importantly “MONEY”.
I will be working on the assumption that we are all here because we exchange or plan to exchange the value we create for MONEY.
So firstly, on this journey, it behooves on you to discover the value you want to create and exchange for money in the society. It may be goods or some services.
Also, once you determine the value you want to give in the society the next thing you will do is to determine whether you want to do this on your own, or with a friend, partner or investor. I will write on the effect of your decision here as we progress.
Secondly, once you start exchanging value for money, you effectively start doing business, and the requirements of the law set it to regulate you.
Now, the very first thing the law wants from you to do is to get registered. At this point, you have to decide how you want to be registered, whether as a business name or a company, being that these are the two major types of corporate vehicles in Nigeria.
The most common corporate vehicles among startups are the Business Name. As the name sounds this registration brings to the knowledge of government the name with which you are doing business and the details of the Proprietors or partners.
A Business Name is not separate from the individual, and this means that any liability of a Business Name is borne directly by the Owner/Partners. I.e. If a Business Name owes 10 million, the owners or partners are personally liable to pay that debt.
A Company, on the other hand, is the most standard vehicle for carrying out business in Nigeria. It aids for better structuring, acquiring other businesses, sustainability and very important for achieving a separate legal personality.
Having a separate legal personality means that the Company is separate from the individual owners, and all liabilities of the Company will in most cases be borne by the company and not the individual owners. A company may be incorporated to make a profit of not for profit.
The best and most common company for startups is the Private company limited by Shares. which embodies the above description, and is easier to operate.
On doing business alone or in partnership; doing business alone or in partnership will really influence the choice of corporate vehicle.

  1. Where you are doing business alone, you can register a Business Name, but you cannot register a company. A company must have at least two adult members.
  2. Where you are partnering with people, you must first decide whether you want them to come in and they agree to come into the business as employees, consultants, temporary investors or as permanent partners.
    a. Where any other person is coming into the business as temporary investors you may have a contract regulating your business relationship with the person, while you register your business as a Business name, with your name alone or open a Company with other persons.
    b. Where any other person is coming in as a long term investor, you can either open a company together or register a business name.
    c. Investors such as Venture Capitalists, Angel Investors, and PE firm will also invest mostly in a Company Limited by Shares. I will speak on other corporate issues this set of people look out for in an investee company subsequently.
    At any point, your business involves any other person, other than yourself, whether a brother, sister, best friend, girlfriend/boyfriend or Fiancé, the first steps you must take before registration and setup are to put down details and covenants governing your relationship into writing. This should be done, not later than three months after an overt act of collaboration has started.
    What this entails is that if you currently doing business jointly with anyone, you ought to have either registered the business as a company (The process of registration as a company ensure the putting down of some of these issues ) or you have a Shareholders Agreement, Partnership Agreement. Another necessary agreement is a confidentiality agreement (ND/NCA).
    A Shareholders Agreement (SHA) is best suited for people who intend to open a Company in the future. But at the inception of the business, they may utilize an SHA to regulate their relationship and provide explicit directions on how things such as Percentage ownership of shares, powers of appointment, removal or directors and other issues may be decided in the future.
    A partnership agreement is the bedrock of a Business Name. Where two or more people own a Business Name, it is extremely important to have a Partnership Agreement, its content is similar to the SHA but should fundamentally include clauses on Profit Sharing, voting and decision making, the exit of partners, entry of new partners, management, etc.
    If you are doing a regulated business, you must make sure that you obtain all necessary licenses and approvals before commencing operations. This is critical because in most instances, operating without those licenses may amount to a criminal offense. E.g NAFDAC Registration, SON MANCAP, Financial Services License, Pharmaceutical License, Payment System registration with CBN, etc
    The tax regime for Business Name
    Another key issue that Startups do not consider early enough is the issue of Intellectual Property. Intellectual Property are those ideas, designs, names, patents, which are not capable of being felt or touched, but is of so much value to the owners as it either helps in identifying the business of the owner (e,g Coca-Cola), conducting the business (e.g Distribution Model) or it’s the business its self (e,g Uber).
    Key types of Intellectual Property and how it may be protected in Nigeria:
  3. Names, logos, and designs used on labels, goods, adverts and business materials to identify your business should be registered in Nigeria as a Trademark in the Trademarks Registry. This is in addition to your Company or Business Name registration.
  4. Inventions, which are new and capable of being applied in an industrial process can be protected by registration of Patent. (e.g You have created a new machine that can sweep and arrange a room by itself) This can be registered in the Patent and Designs Registry in the Ministry of Trade, Commerce, and Industry
  5. Any combination of lines or colors or both and any three-dimensional which is intended to be used as a pattern or model to be used in an industrial application (e.g the design of a car) can be registered in the Patent and Designs Registry in the Ministry of Trade, Commerce and Industry as a Design.
  6. Any Idea, artistic work, writing, songs, or film has automatic protection under the Nigerian Copyrights Law. Nevertheless, such works should also be notified to the Nigerian Copyright Commission so as to serve as evidence of its existence and date of production.
    Strongly note: Your intellectual property right can be a key consideration of the percentage of interest you can own in a business
    Another way of protecting intellectual Property rights is through the signing of Non-Disclosure/Non-Compete Agreement (ND/NCA). This is one of the first document you should have. The ideating entrepreneur should endeavor to sign ND/NCA with any partner, investor, employer at the early stage of the business. The ND/NCA ensures that the parties keep all information received in the course of the business confidential and do not use it by themselves or through third parties.
    The non-compete aspect ensures that parties do not engage in businesses that are similar or competing with the business of the entrepreneur.
    Investors and PE firms are more interested in companies that have good corporate governance and sustainability matrix. So whenever you are looking up to receive grants or funding, you have to set yourself up corporately to have proper management, reporting and disclosure systems
    I don’t want to speak much on this as it tilts more to the professional advisory, but for the basics, you should first be incorporated as a limited liability company. No one ones to invest and assume liability for your acts.
    Others will include:
    your Board of Directors should not be made up of only your family members, no one would invest in that
    Your Board of Directors should not have gender diversity i.e shouldn’t be all male or all female
    *Should have gender diversity
    Your Board of Directors should have an expert in that field of business
    Your Company should have provisions for sustainability, auditing and disclosures, etc
    Let’s talk about crowdfunding!! A good way of raising funds for your business is via Crowd Funding, though Nigerian Law is currently advised to crowdfunding for startups as it will require being a public company and registration with SEC. But I personally believe it is an innovative fundraising model, and there are legal ways around the restrictions. I am willing to work with Startups who intend to utilize this route to raise capital. For a fee off course!??

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