Understanding Startup Agreements in Nigeria
There has been a rapid growth and expansion of start-up activity in Nigeria particularly in the Tech industry. Based on a report by the FDI Intelligence, a specialist division of the Financial Times, in collaboration with research company, Briter Bridges, Nigeria topped the list of African countries having the highest number of start-ups, with many of them operating within the fintech sector.
Although, there is no specific regulatory law governing startups in Nigeria, a recently introduced bill known as the Nigerian startup Bill (NSB) was approved by the Federal Executive Council on December 15, 2021 but is yet to be passed into law. The bill which serves as an upgrade from the National Information and Technology Development Agency Act (NITDA) 2007, is a collective effort of Nigeria’s tech startup ecosystem and the FEC for the advancement of the digital economy through co-created regulations, the NSB also aims to ensure that laws and regulations are friendly, clear, planned, and work for the tech ecosystem.
Legal Agreements Governing Startups in Nigeria
From the moment a startup is conceived as an idea through to the execution and implementation stages, it is crucial that the founders are aware that their transactions and business dealings with third parties create legally binding obligations on either or both parties. One cannot overstate the need for agreements to protect the interests and rights of both parties and the need for experienced startup lawyers to advise on and draft these agreements.
A startup just like any other company must first of all incorporate a company or register a business name with the appropriate body and obtain the required statutory licences and permits. In Nigeria, the Corporate Affairs Commission (CAC) is the government agency authorised to register business in Nigeria. Others include but are not limited to the Federal Inland Revenue Service (FIRS) and other tax authorities and the Nigerian Investment and Promotion Commission (NIPC) for businesses with foreign participation.
There are different types of agreements founders will encounter at different stages of the life cycle of their business which are necessary for the sustainable growth and development of every startup.
There is the reality and there is the ideal world, in reality once an individual decides to establish a startup, the first thing they are most likely to do is to turn to their nearest and dearest i.e. friends, colleagues, and family members to seek advice and perhaps build a team. They place the foundation of their start-up on trust. They tend to make agreements verbally without any written documentation done, which is quite risky. Moving on without formal documentation is the biggest mistake that an entrepreneur can make which is why many businesses fail within 3 years of starting. For any company, big or small, formalizing the internal procedures is quite important. It is important to clearly document the roles and responsibilities individuals will have on paper.
1). Founders Agreement
A founders Agreement also known as a shareholders Agreement, is a formal legal document that is created between the co-founders of a company. This contractual document, clearly lays out all the ownership, rights, responsibilities, dispute resolution, and other aspects that are quite important to be documented between founders and the company. Thus, it clearly defines the role and expectations of each founding member in order to protect each member’s interests and avoid future conflicts.
Some of the key clauses that are contained in a Founders Agreement includes:
- DECISION MAKING: This should contain how decisions with respect to the company’s management and administration should be made. Should it be done by a majority vote? Who will constitute the majority shareholding? Can decisions be made in proxy? All these questions must be answered in such agreement.
- OWNERSHIP STRUCTURE which should include the percentage or number of equity shares held by each founder or the percentage of the initial contribution made by each founder.
- ROLES AND RESPONSIBILITIES, this helps each founder to know his/her individual responsibilities to prevent any misunderstandings.
- CONFLICT RESOLUTION: In the event of conflict between founders, the most suitable mechanism to be explored to resolve such issues should be stated. In all cases, alternative dispute resolution (ADR) mechanisms are suggested.
- SHARE TRANSFER RESTRICTIONS.
- SHARE VESTING/REVERSE VESTING: The former deals with the vesting of shares on a shareholder upon the fulfilment of certain agreed preconditions such as remaining with the business for a minimum period of time or achieving a certain milestone. On the other hand, in reverse vesting, each founder gets an initial percentage of shares (in the beginning – usually with the signing of the founder’s agreement) but such shares are subject to the fulfilment of certain obligations in the agreement and a buy-back provision which states that if the founder does not fulfil his/her obligations as mentioned per the founders agreement (including if they leave or get fired), then the other founders and/or the company can purchase back any “unvested shares” at a symbolic price for all the unvested shares).
- PRE-EMPTION RIGHTS: This will ensure that existing shareholders have the first right in the participation of issuance of new shares.
- NON-COMPETE: This ensures that the founders do not compete directly or indirectly with the company. However, Section 59 of the Federal Competition and Consumer Protection Act prescribes that a non-compete clause/agreement shall be allowed except in situations where the duration exceeds two years.
- INTELLECTUAL PROPERTY RIGHTS: This is to ensure that such rights are vested in the company and not in a single individual /founder.
- ACCESSION PROCEDURE: where new parties are to be added to the founder’s agreement / additional shareholders to the startup.
2). Non-Disclosure/Confidentiality Agreement:
The NDA is one of the ways startup founders can protect their intellectual property and methodology of business execution. It is a legally binding contract that establishes a confidential relationship between parties and where there is a breach, it is actionable in court. Such parties include friends, business partners, employees and anyone who is privy to such confidential information. For companies seeking funding from potential investors, such NDAs are commonly used before discussions. NDAs could be mutual or one sided. The former is used where both sides agree to share confidential information while the other is used when only one party is sharing confidential information.
Sometimes, a non-circumvention clause may be included in an NDA. A non-circumvention clause is a clause which restricts the use of information shared for any other purpose or transaction other than the agreed business use/transaction.
3). Independent Contract Agreement:
This is otherwise known as the work for hire agreement. This form of agreement is made to govern independent contractors or freelancers who have been employed to perform certain tasks or specific projects for the company. Such agreements should include the type and scope of the work, cost of performing such work, mode of termination of the contract, intellectual property rights in the work done, the status of such an individual as a contractor or freelancer as opposed to an employee.
4). Service Agreement:
This is a contractual agreement which must be entered into by every entrepreneur with its customers. This is one of the most important documents for every startup founder as it defines the terms of the business relationship. It further states the duties, obligations, and responsibilities of the parties towards each other concerning a proposed transaction. Also, it clarifies verbal agreements and misunderstandings between the parties.
5). Employment Agreement:
An employment agreement is a legally binding agreement between an employer and employee stating the terms and scope of employment such as salary, benefits, vacation time, etc. This has the effect of minimising the chance of future disputes. The employee will be aware of what is expected in terms of performance standards or unacceptable behaviours at work.
6). Investment Agreement:
Not all startups get all the funding required from internal sources. Some startups need to get third party investment. These investments have to be guided by investment agreements. These agreements contain clauses stipulating how the investor gets a share of the ownership of the company in exchange for money. The investor can be a new shareholder, an external investor or even an existing shareholder.
7). Lease Agreement:
At the commencement of business, startups usually operate from a home office to save costs. However, as time goes, and revenue comes in, space becomes tight and there is a need to expand. When the right opportunity comes along, one is faced with two options, to either purchase outrightly the property, subject to funds or to enter a lease agreement. If you decide to rent a commercial property, you need to sign a lease agreement with the lessor.
A lease agreement governs the use of the rented property for commercial purposes.
8). Joint Venture Agreement/Partnership Agreement
A joint venture is a business arrangement whereby two or more businesses collaborate to pool their resources on new business activity, generally characterised by shared ownership, risks, returns and governance.
A joint venture agreement describes the following and much more:
- Each party’s contribution to the joint venture and what goals it plans to achieve,
- The revenue allocation to each member of the management structure,
- Any Restrictive covenants
- The exit strategy
As a small business/start-up, there is a scarcity of resources which might be technical and/or financial. A joint venture, with the collaboration with other companies and their resources, the startup might become a success.
Written By:
** Uchechi Ofoegbu – Associate Trainee, OAL
** Opeyemi Oyedele – Associate Trainee, OAL
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