Commercial and Legal Considerations for Start-Ups when Getting Investment Ready
There are a number of commercial and legal realities that are important in starting up a business in Nigeria. However, many MSMEs unfortunately ignore these matters and usually run into roadblocks after the business has progressed, sometimes with dire financial consequences. Taking care of these matters early-on makes a start-up investment ready and increases the business’ ability to pitch investors. Below are some of the commercial and legal considerations for Start-Ups when getting investment ready:
- Incorporate a Company
Businesses are better run under corporate structures than in the owner’s personal capacity. A company allows a business owner/ operator to separate his/ her business interests from the personal ones. A company also allows the entrepreneur to bring in partners to join in the business – both technical and financial partners, as investors and not simply contractors or lenders. Title to business assets are also better held in the company name so that all business partners have their interests secured in the property. A company is also a better vehicle for seeking funding, investments and loans scaling up is being considered. There are also tax considerations that make a company a better structure to do business with. The recently passed Finance Act 2020 exempts companies with annual profits under NGN25 million from tax liability. It is generally commercially advantageous to incorporate a company when doing business in Nigeria.
- Execute Founders Agreement and/ or Shareholders Agreements.
Joint entrepreneurs and early stage investors are encouraged to enter into agreements (founders agreements or shareholder agreements, depending on which is applicable) which define their rights and obligations to the business and to each other. This is an important early stage endeavour to protect all parties’ interests as the business progresses. Founders Agreements and Shareholders Agreements do this by making explicit each party’s equity interest in the business/ company as well as how much equity the founders are willing to allot to potential investors. These agreements also discuss the….
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