There are always legal implications on how a start-up is funded and these decisions make or break a company. For start-ups looking for capital to build a growing company, the terms of the funding should be fully understood, as well as all the operational, tax and compliance requirements that may come with the funds received
Almost any time that start-up companies are securing startup funding, there's requirements for an Investment Contract that lists out the terms under which capital is given. This investment contract will govern much of how your startup will be able to operate after the investment, and it will dictate the terms of relationship with investors moving forward. It is vital to fully understand anything contained within these agreements.
At Greystone solicitors we assist our clients to better understand their obligations under a funding agreement and to ensure that the startup funding is in their business’ best interests.
We advice on the various types of startup funding;
Venture capital funding exchanges equity in the company for the investment, which means that it requires complex contracts and contentious valuation processes before any money comes in. Legally, venture capital funding is the most complicated type of startup funding, but it also generally offers the largest investments. If you are considering venture capital funding, you must weigh the costs and benefits of giving up large stakes of the company in exchange for capital.
Angel investors offer capital much in the same way that venture capital firms do, but they are generally much smaller operation. The relationship with the angel investor can be challenging when there are disagreements about how to best tackle problems facing the start-up company. Legally, contracts with angel investors can vary greatly but at Greystone solicitors we provide legal advice before signing these contracts to ensure that you know exactly what your startup is getting into.
Crowdfunding as a start-up source of funding is gaining popularity in Nigeria especially on online platforms like Kickstarter and Indiegogo. Individuals contribute money, often in exchange for pre-ordering a product or other awards. At Greystone solicitors we assist with the significant tax and other legal implications that should be considered involved in soliciting crowdfunded capital. If a start-up offers rewards or products to people giving money and do not follow through as promised, that can fall afoul of consumer protection laws and be sued for breach of contract. In addition, it’s important to have your company solidly incorporated with the Corporate Affairs Commission (CAC) before participating in crowdfunding, or tax and legal consequences could fall on you as a founder personally.
Small business loans tend to be smaller amounts, and they require you to account for exactly how the money will be spent. Usually, startups have trouble getting funding this way for unproven ideas, but when it is awarded, the advantage is that you do not have to give away equity in your company. Unfortunately, this option is really only available if you can quickly turn the investment into a revenue stream, as you’ll need to pay back the loan installments—often right away. Unless, you fully understand the terms of the small business loan, you risk a tough lending period or even losing your assets to the bank before your startup is off the ground.
At Greystone solicitors we assist clients overcome one overriding challenge when trading equity for capital and that has always been evaluating the startup’s Valuation. Your company’s current worth determines what percentage of shares the investor will be awarded in exchange for the capital given. Because this will ultimately have a major impact on control of your startup, it’s important to work out a fair valuation with investors, no matter how early-stage the investment. Sometimes, fair valuation isn’t possible, especially in early stage startups. In these cases, convertible notes can provide an acceptable alternative. Convertible notes are a financing vehicle that allows startups to raise capital while delaying valuation until a later date—usually during a new round of funding when objective valuation is easier to assess. These notes are structured as loans that convert to equity upon maturation. Because investors are taking on an unspecified valuation there is some risk involved, which means these investors often require special assurances, discounts or warranties.
At Greystone solicitors we familiarize start-ups seeking funding with the Nigerian Capital Markets Regulations and Compliance codes. When you are soliciting funding, you must comply with all Nigerian Securities and Exchange commission guidelines and other securities laws from the very beginning. This includes making proper disclosures, complying with all tax laws, making regular reports to investors and the SEC, and dealing with all other compliance issues. Far too many startups fail to consider the implications of securities law on early issuances of stock, which can have lasting and costly consequences.