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Business Law

Startups Funding & Legal Considerations

startups funding and legal considerations

1. Introduction 

While fund is greatly required at the startup inception stage, it is a major setback suffered by most startups as they have no proven track record of success and investors therefore consider them as high-risk investments. Notwithstanding, there are options of funding available to startups. The aim of this article is to explore the startups funding options as well as highlight some legal considerations.

Startup Companies aim at introducing new innovation in the marketplace which usually offers a new path from what has been obtainable by consumers. Although, one major requirement for startups to introduce and grow their idea is funds.

Having a new innovation in the marketplace that could be beneficial to the economy as well as generate income for the owner of the innovation is not enough if the amount of capital required to kick-start and grow the innovation is inaccessible.

2. What is a startup?

A startup is a young company founded by one or more entrepreneurs to develop a unique product or service and bring it to the market1. These companies usually lack adequate capital to fund their innovation, they therefore, solicit for funds from different sources. These sources of funding are discussed below.

startups funding

3. Sources of funds for startups

There are generally two types of funding that are available to startups. These are debt funding and equity funding.

Debt Funding2: This involves startups borrowing money from external sources to fund the operation of the business. The money borrowed is to be paid back at a future date with interest. A major form of debt funding is loan (bank loans or government loans).

Equity Funding: Startups rely on capital investment from investors. The capital invested into the business by the investors is exchanged for equity/shares in the company. What the investors get in return is not their money back but ownership in the company through the shares acquired. There are different equity funding options that are available to startups.

Before highlighting the various forms of equity funding, it is important to know that a major difference between debt funding and equity funding is that startups who use debt funding only have to repay the loan with the interest. They do not have to give up shares in the company to the lender like equity funding. 

4. Startup equity funding could derive from:

Angel investors: These are wealthy individuals, who could be friends are family. They invest capital in startups in return for equity in the company. Angel investors usually invest at the early stages of startups as they are focused on helping startups kick start the business by providing useful guidance.

Crowdfunding: This is the use of online platforms by startups to raise capital in small amount from a large number of people. There are three types of crowdfunding;

  1. Donation-based crowdfunding:  They are mostly for non-profits projects or humanitarian projects. These donations are not usually paid back to the member of the public who donated.
  2. Reward-based crowdfunding: Members of the public who make donation to these kinds of projects are usually rewarded with products of the project.
  3. Equity crowdfunding: This is offering shares to the investors in exchange for the capital provided or investment made.

Venture capital: These are funds invested by professional investors into startups in exchange for equity in the startup company. This means that startups give up a portion of ownership in the company. Venture capitalists do not involve themselves in the early stage3 funding like angel investors because of the high nature of risk involved. 

While these options are available, it is important to know the stages of funding before approaching investors. The stages of funding are;

  1. Pre-Seed Stage: This is the earliest stage of business development when founders try to turn their idea into an actual business. At this stage most founders use their own resources, friends and family may also contribute. A US 2019 survey showed that personal investments was the first source of capital used by 57% of startup founders4. Startups at this early stage are not advised to seek venture capitalist.
  2. Seed Funding Stage: The startup at this stage is already in operation and requires funding to grow the business. This could include funding for product development, marketing etc. Startups at this stage can seek for fund from angel investors of venture capitalist. 
  3. Series funding Stage: Once a business has developed a product, it will need additional capital for further production and sales. At this point, the business will need one or more funding rounds to achieve this.

5. legal considerations and documentation for startup funding

Regardless of the option of funding chosen by startups, the process involved is usually contractual in nature. It usually involves lengthy and complex transactional documents which may not be fully understood by the startup. Professional/legal advise should be sought by startup to ensure that they understand the depth of these documents and that they are not signing their rights away legally

Some of these documents include:

  1. Term sheet: it is a non-binding document upon which other binding documents are drafted. It outlines how prospective investors can negotiate binding agreements.
  2. Shareholders agreement: it defines the rights, obligations and relationships of shareholders in respect of the company and its management.
  3. Subscription agreements and subscription letters: it stipulates the number of shares that will be issued to the shareholders and the order and timing by which funds will be advanced.
  4. Share sale and purchase agreement: it provides for purchase of shares from existing shareholders who are exiting the company or selling down their stake.
  5. Confidentiality agreement or Non-Disclosure agreement: a founder, in order to protect his idea would require investors to sign a confidentiality agreement before he pitches his idea. This document ensures that information regarding his ideas are not disclosed by the investors to a third party.
  6. Intellectual property assignment agreement: this document ensures that founders intellectual property are protected.
  7. Incorporation documents: this ensure that a startup company is legally formed.

6. Conclusion

There are different funding options available to startups, knowledge its current stage before approaching any kind of investor is essential and advantageous to the startup. Startups should also seek professional/legal counsel as they are more thorough with contractual documents.

References

1 https://www.forbes.com/advisor/investing/what-is-a-startup/

2 https://corporatefinanceinstitute.com/resources/knowledge/finance/debt-financing/

3 I. O. Nwanna, and U. O. Chiekezie, Venture Capital As A Source Of Fund For Entrepreneurs (2016),  NG-Journal Of Social Development, Vol 5, No 3, June

4 https://clutch.co/consulting/resources/startup-funding-sources-new-businesses

What Constitutes a Legally Binding Contract

Elements of contract
What constitutes a legally binding contract

Nigeria is a common law jurisdiction by virtue of which a legally binding contract in Nigeria must contain the four elements of contract under common law.

Below are the four elements of a legally binding contract under common law:

Offer

In the case of N.R.M.A. & F.C. v. Johnson (2019) 2 NWLR (Pt. 1656), the Nigerian Supreme Court defined an offer as an undertaking or promise made by one party with the intention that it shall be binding when accepted by the party to whom it is made.

Acceptance

In the case of Ashakacem PLC v Asharatul Mubashshurun Investment Ltd 2019 LPELR-56541(SC), the Supreme Court of Nigeria emphasized that for there to be a valid contract, there must be an unqualified acceptance of the offer by the person to whom the offer was made. See also the case of Omega Bank (Nig) PLC v O.B.C Ltd 2005 LPELR-2636(SC).

Consideration

Consideration means something of value in the eyes of the law. An example could be an agreement to pay a sum of money or a promise to perform some action. In the case of Fidelity v Marcity Chemical Industry Ltd v Ors 2022 LPELR-56866(SC), the Supreme Court of Nigeria held that ‘consideration is an essential feature of a valid contract and failure of consideration is a ground for repudiation of contract’.

In the case of Sapara v UCH Board of Management 1988 LPELR-3014 (SC), the Supreme Court of Nigeria held that the presence of a consideration implies the existence of an intention to create legal relations. The Court held further that ‘[t]o make a bargain is to assume liability and to invite the sanctions of the courts.’. In family life, however, most agreements are usually not intended to create legal relations. See the cases of Balfour v. Balfour (1919) 2 K.B. 571 and Pettitt v. Pettitt (1970) A.C. 777, and Jones v. Padavatton (1969) 2 All E.R. 616.

Does a contract have to be in writing for it to be legally binding?

A contract does not have to be written for it to be legally binding. An agreement made orally could constitute a legally binding contract if the four elements highlighted above are present. A legally binding contract can also be implied through the conduct of parties if the elements of a binding contract are established.

Cited Nigerian Supreme Court cases on elements of a legally binding contract:

  1. N.R.M.A. & F.C. v. Johnson (2019) 2 NWLR (Pt. 1656).
  2. Ashakacem PLC v Asharatul Mubashshurun Investment Ltd 2019 LPELR-56541(SC).
  3. Omega Bank (Nig) PLC v O.B.C Ltd 2005 LPELR-2636(SC)
  4. Fidelity v Marcity Chemical Industry Ltd v Ors 2022 LPELR-56866(SC).
  5. Sapara v UCH Board of Management 1988 LPELR-3014 (SC).

Copyright Infringement in Nigeria

Copyright infringement in Nigeria
Copyright Infringement in Nigeria
Copyright Infringement in Nigeria

This post highlights 6 important tips on how to avoid Copyright infringement in Nigeria. Many times, writers are often at a crossroads when writing a piece. They come across materials that shed a ton of light on the particular topic they intend to explore but they do not know if using such material would amount to a copyright infringement or what amount of usage amounts to a copyright infringement. The truth is that there is a 90% chance that every work or material a writer comes across is subject to copyright. Therefore, writers must understand what copyright means.

What does Copyright mean?

Copyright is simply defined as the right granted by law to the author or originator of certain literary or artistic productions, whereby the author is invested with the exclusive privilege of multiplying copies of their work and publishing and selling them, for a fixed period (usually during the lifetime of the author and extends to 70 years after their death). 

Works that can be protected by Copyright in Nigeria

Works that can be protected by Copyright in Nigeria

In Nigeria, the legal framework i.e the law that protects copyright is the Copyright Act LFN 2004. Section 1(1) of the Copyright Act listed the various types of works that are eligible for copyright which are as follows:

What acts would amount to copyright infringement in Nigeria?

By section 14 of the Copyright Act, copyright is infringed by any person who without the license or authorization of the owner of the copyright-

(a) does, or cause any other person to do an act, the doing of which is controlled by copyright;

(b) imports into Nigeria, otherwise than for his private or domestic use, any article in respect of which copyright is infringed under paragraph (a) of this subsection;

(c) exhibits in public any article in respect of which copyright is infringed under paragraph (a) of this subsection;

(d) distributes by way of trade, offer for sale, hire or otherwise or for any purpose prejudicial to the owner of the copyright, any article in respect of which copyright is infringed under paragraph (a)of this subsection;

(e) makes or has in his possession, plates, master tapes, machines, equipment or contrivances used for the purpose of making infringed copies of the work;

(f) permits a place of public entertainment or business to be used for a performance in the public of the work, where the performance constitutes an infringement of the copyright in the work, unless the person permitting the place to be used is not aware, and had no reasonable ground for suspecting that the performance would be an infringement of the copyright;

(g) performs or cause to be performed for the purposes of trade or business or as supporting facility to a trade or business or as supporting facility to a trade or business, any work in which copyright subsists.

To simplify Section 14, the following acts amount to an infringement of copyright

  1. making copies of works protected by copyright or publishing same; 
  2. importing articles that infringe on copyright;
  3. displaying in public an article that infringes upon a copyright, 
  4. distributing or offering to sell or do anything in a similar line that will negatively affect the author’s ability to earn on the work.
  5. possession of works protected by copyright to make copies without permission 
  6. anyone who permits a place of entertainment or business to be used to perform work that infringes on a copyright 
  7. anyone who performs any work which has copyright.

How to avoid copyright infringement in Nigeria as a writer:

You can avoid copyright infringement in Nigeria by understanding the copyright law

With the ease of access to materials on the internet, it is easy to fall victim to copyright infringement. While there is no exhaustive list of what to do to avoid infringing on a copyright, taking the following steps can help prevent infringing on existing copyright.

1. Understand the copyright laws

You might be familiar with the saying “ignorance is no excuse of the law”. This statement is very true when it comes to copyright. Your lack of understanding of the copyright laws only works to your disadvantage as a writer. In the event you infringe upon a copyright, you cannot claim ignorance as a defence. Therefore, you must understand the way copyright works. A good way to start is by reading articles on copyright from a legal standpoint and familiarizing yourself with the copyright laws in your country. 

2. Assume every work is subject to copyright

A good rule of thumb will be that you should assume all works you come across have copyrights. This will save the you the trouble of unintentional copyright infringement in Nigeria.  

3. If you must, seek permission before using any work that isn’t yours

Generally speaking, it is advised that you should not use any work that isn’t originally yours. The reason for this is that you can’t be accused of infringement if you didn’t use the work in the first place. However, if you must use a work, ensure you obtain the permission of the author of the work.

4. Fully understand the rights granted when permitted to use a work

Similarly, when granted permission to use a work, thoroughly digest the right given and the conditions attached thereto. It is important that you read and understand the Terms of Use before using any work to avoid copyright infringement in Nigeria. 

5. Check for a copyright license, when using work sourced on the internet 

The internet is by far the largest library when it comes to sourcing materials, the quick access to limitless resources makes it many writers’ go-to sources. It is therefore good practice that whenever you source material online, you ensure you identify the copyright attached to the materials you come across.

6. Consult a lawyer

The importance of consulting a lawyer can never be over-emphasized especially if you are in the business of writing or content creation. Whenever you are unsure as to whether or not your action would amount to infringing existing copyright, consult a lawyer. Although lawyers do not come cheap, it costs far less to consult one than defending a copyright infringement lawsuit.

You can avoid copyright infringement in Nigeria and save yourself from unnecessary lawsuit if you follow the above tips.

Business Name Registration in Nigeria

registration of business name in Nigeria
Business name registration in Nigeria

The concept of starting a business is an idea that many people like. While some go all out by investing heavily in a big enterprise, others go down the conservative route and start small. Whether you start small or big, there are certain laws that govern the operations of businesses in Nigeria. The principal legislation governing business name registration in Nigeria is the Companies and Allied Matters Act (CAMA) 2020. Please note that CAMA 2020 has repealed CAMA 2004.

There are different types of businesses that can be registered in Nigeria under the provisions of CAMA 2020. They are as follows: 

  1. Business name
  2. Limited Liability Partnership (LLP)
  3. Companies

The type of business to be registered depends on relevant factors. For instance, the nature of the business, available capital, and the number of persons involved could be relevant factors.

In this post, let’s focus on business name registration in Nigeria.

Business name registration in Nigeria

Business name registration in Nigeria is covered under Part E of CAMA. It is a much simpler form of doing business with fewer requirements when compared to a registered company or a limited liability partnership. As a result, the business name is a very common type of business registration in Nigeria. This is particularly common with small-scale businesses. Some of the reasons why this form of business is very common are as follows:

  • It is easy to manage.
  • low registration cost.
  • It has a simpler registration process.

It also enjoys protection from parallel business name registration in Nigeria. This means that once your business name is registered, others would not be allowed to register the same name. In essence, your business name becomes unique after registration.

Business names that must be registered in Nigeria

The CAMA 2020 mandates the following categories of business names to be registered:

Jointly owned businesses that do not bear the true name of individual partners

In other words, business names that do not consist of the surnames of all partners without any other addition. Such additions could be the first names of the individual partners or the initials of their first names.

For instance, two people decided to start a business. One is called Ahmed Obi and the other is called Wale Oni. Consider the circumstances below to get an idea of when registration would be required:

  • Assuming that their business name is called Obi & Oni, registration of the business name is not compulsory.
  • If their business name is called Ahmed Obi & Wale Oni, registration is not compulsory.
  • If their business name is called Obi & Oni Electronics, registration is required.

CAMA also provides some exceptions where registration may not be required.

Exceptions to circumstances requiring business name registration in Nigeria are as follows:
  • Where the addition to the surnames merely indicates that the business is being carried on in succession to a former owner of this business.
  • If two or more of the partners have the same surname, registration is not compulsory. For instance, you could have ‘Onis’, ‘Johnsons’, etc.
  • Lastly, where the business is carried on by a receiver or manager appointed by the court, registration would be unnecessary.

Businesses owned by individuals that do not bear the true name of the owner

The business name doesn’t consist of the surname of the owner without any addition. Such addition could be the first name or the initials of the first name of the owner.

Companies/Corporations whose business name does not bear their corporate name

Lastly, companies/corporations whether or not registered under the CAMA whose business name does not consist of their corporate name without any addition.

Procedure for business name registration in Nigeria

1. Business name availability check

Business name availability check in Nigeria
You could do a prior check on the CAC online platform.

The first step in registering a business name is to check for the availability of the proposed business name. Applicants will suggest two proposed names in the alternative for registration of the business. If one of the suggested names is available, CAC would reserve it for a period of Sixty (60) days.

To reduce the likelihood that your suggested name would be unavailable, you could do a prior check on the CAC online platform.

2. Fill out the prescribed CAC Form(s)

Complete the business registration form prescribed by the CAC. The prescribed form must be duly signed and contain the following details:

  • Business name or names if it is carried on under two or more names;
  • General nature of the business;
  • Full address of the principal place of business;
  • Full address of any other places of business (branches), if any;
  • Date (or proposed date) of commencement of the business;
  • Details of the owner of the business or each partner in the case of a firm.

3. Payment of fees

Make the required payment for the CAC filing fees. This can be done at the bank or online through the CAC payment portal. 

4. Upload documents

You will upload the registration form alongside the proof of payment of the requisite fees. You would also attach a valid means of identification of the business owner or each partner as the case may be. 

The CAC will review the submitted documents. CAC would then notify the applicant of its decision on the business name application.

A certificate and certified true copy of the certificate would be issued by the CAC

CAC would issue a certificate of registration to you if your business name application is successful. You could also request a certified true copy of the certificate at CAC.

*It is however advisable to consult a lawyer before starting the process of registering your business*

You might also be interested in knowing about the required taxes for Nigerian Entrepreneurs.