EMPLOYEE STOCK OPTION PLANS (ESOPs) FOR STARTUPS IN NIGERIA

/1 Comment/in /by

By Aderonke Alex-Adedipe and Karo Isiorho

DOWNLOAD PUBLICATION

Introduction
In recent times, Startups have increasingly offered stocks as a valuable way of remunerating and motivating their employees to work towards achieving long-term corporate goals. In 2021, it was reported that the Nigerian Exchange Group introduced equity-based incentives to its employees’ remuneration, including an Employee Share Ownership Plan.[1]
This article highlights the relevance of an Employee Stock Options Plan (“ESOP”) as a means of compensating founders and guaranteeing the commitment of key employees.

1. What is an ESOP?
An ESOP provides an employee a right to purchase a certain number of shares in a company at; no charge, a nominal value, or a price below the fair market value (“Exercise Price”) after a specified period of time, during the course of employment (“Grant Date” ).

2. Why should Startups Consider ESOPs?
Most Startups at their early stage require the best talents to succeed. At this stage, they are not likely to have sufficient capital to compensate those talents. By setting up an ESOP as a potential incentive, Startups will incur minimal expenditure on employee compensation while creating a sense of ownership.
For instance, an employee may be offered an annual remuneration of N10,000,000 (Ten Million Naira) but will only be paid N6,000,000 (Six Million Naira) in cash while the balance of N4,000,000 (Four Million Naira) will be compensated with stock options when the company’s value increases.

3. How are ESOPs Set up and Exercised?
A Startup may create a stock option pool at the inception of its business. In this case, the company issues and reserves a pool of shares for its employees, usually prior to an investment round. Oftentimes, investors prefer that the pool is reserved prior to fundraising as it provides some confidence that the founders/initial employees would remain committed to ensuring that the business achieves its long-term objectives.

ESOPs may be included in founders’ and employment agreements, stipulating the number of shares offered, Exercise Price, Grant Date and waiting period before the stock options become exercisable (“Cliff”). Generally, where an employee resigns during a Cliff, he forfeits his right to exercise the stock options. Furthermore, there are vesting provisions which provide a schedule on how the options will be awarded depending on the employee’s performance or the period he remains in employment. This also incentivizes the employee to continue in the Startup’s employment for a long period of time.
At the expiration of the Cliff, the employee may exercise the stock options by purchasing the shares at the Exercise Price as they vest, subject to the terms of the ESOP.

4. Tax Considerations for ESOPs
Under the provisions of the Personal Income Tax (Amendment) Act,[2] all salaries, wages, allowances and other gains from employment, compensation and other benefits are subject to personal income tax. There is however no specific provision on treatment of taxation of stock options. On this basis, the Lagos State Internal Revenue Service (LIRS), in 2017 issued a notice mandating the payment of tax on employee shares or stock options.[3] According to the notice, a gain will be deemed to have been made by an employee where it acquires stock at zero cost or a cost which is below the fair market value of the stock. In such cases, income tax will be assessed against the difference between the purchase price and the fair market value of the stock. In addition, dividends earned on the stock during the vesting period shall be subject to personal income tax.

It is not clear, however, how ESOPs will be treated in other states across Nigeria for the purpose of taxation.

Conclusion

ESOPs are beneficial to both employees and Startups when they are properly considered and structured. It is  important that both employers and employees consider the tax and regulatory implications of setting up ESOPs, especially in instances where the stock is offered to employees by an affiliate company registered in other jurisdictions.

 

[1] Iheanyi Nwachukwu, ‘NGX Group shows Commitment to Improve Corporate Governance, Global Best Practices’ Business Day, September 17, 2021 <https://businessday.ng/markets/article/ngx-group-shows-commitment-to-improved-corporate-governance-global-best-practices/>

[2] Section 3 Personal Income Tax (Amendment) Act, 2011

[3] Lagos State Internal Revenue Service (LIRS), Public Notice on the Taxation of Employees Shares/Stock Option
<https://lirs.gov.ng/assets/docs/TAXATION%20OF%20EMPLOYEES%20SHARE%20STOCK%20OPTIONS.pdf>

TECH REGULATORY UPDATE: REGULATION OF INSURANCE WEB AGGREGATORS IN NIGERIA

/in /by

By Seun Timi-Koleolu and Feyijuwa Akinyanmi

 

DOWNLOAD PUBLICATION

 

Introduction

On February 1, 2022, the primary regulator of insurers in Nigeria, the National Insurance Commission (“NAICOM”) issued the Insurance Web Aggregators Operational Guidelines (“Guidelines”), 2022. The Guidelines serve as a guide for the registration, supervision and monitoring of insurance web aggregators (“Web Aggregators”) in Nigeria and is binding on Web Aggregators and insurers.

In this article, we have highlighted the requirements for obtaining a Web Aggregator’s License as well as other key points in the Guidelines.

What is a Web Aggregator?

A Web Aggregator is a company licensed by NAICOM to own or maintain a website that provides information to the general public on insurance products, prices and features of various insurance companies.

The Web Aggregator’s website enables interested individuals to compare the products, prices and conditions offered by different insurance companies to make an informed decision. The contact information of clients/ visitors of the website (volunteered to the Web Aggregator in exchange for information on insurance products) are then shared with insurers as leads in return for a commission.

Web Aggregators are required to enter into Service Level Agreements (SLAs) with insurers that require their services. They are also required to set up a Leads Management System (a software) for recording, filtering, validating and distributing leads to the insurers.

What is the Procedure for Obtaining a Web Aggregator’s License?
Companies that intend to carry on business as Web Aggregators are required to apply to NAICOM for a Web Aggregator’s License. Insurers/ brokers that intend to carry on web-based insurance business by partnering with Web Aggregators are also required to submit an application to NAICOM for the issuance of a No Objection Letter. The application for a Web Aggregator’s License is to be carried out in the stages as outlined below.

Stage 1: The entity applying for a Web Aggregator’s License (“Applicant”) is required to submit: (i) a No Objection/ approval letter from the Nigerian Communications Commission (NCC); (ii) a letter of appointment issued by the insurer/ brokers appointing the Applicant as a Web Aggregator for its products; (iii) a copy of the SLAs executed between the insurers/ brokers and the Applicant; (iv) the incorporation documents of the Applicant; (v) a board resolution backing the partnership of the Applicant with the insurers/ brokers; and (vi) evidence of payment of a non-refundable fee of N500,000/ $1,1901 [1], to NAICOM.

Stage 2: Upon submission of the documents listed in stage 1 and at the indication of NAICOM, the Applicant will be required to submit further documents including:(i) the CVs and credentials of the principal officers and directors of the Applicant; (ii) snapshots of the content of the Applicant’s proposed website and evidence of domain name registration by the Applicant; (iii) the business plan of the Applicant which shall include the five-year financial projection of the Applicant; (iv) sworn declaration of non-disqualification by the proposed directors of the Applicant; (v) Evidence of procurement of a professional indemnity cover of not less than N20 Million; and (vi) other required documents.

Stage 3: This stage involves a physical verification by NAICOM officials of the Applicant’s head office and IT infrastructure. The Applicant will also be required to pay a license fee of N2,500,000/$5,952. Where the application is accepted by NAICOM, the license will be issued to the Applicant.

It is important to note that a Web Aggregator’s License is valid for a period of 2 (two) years after which it will require renewal.

What are the Eligibility Criteria for the Grant of a Web Aggregator’s License?
1. Share Capital requirement-The Applicant will require a minimum share capital of N5,000,000 and is required to maintain the share capital throughout the license period.
2. Memorandum of Association- the Applicant is required to ensure that the business of web aggregation is included as the main object in its memorandum of association. The applicant is also not permitted to engage in any business other than web aggregation.
3. Principal officer – the Applicant is required to employ a principal officer (subject to the approval of NAICOM). The Guidelines require the principal officer to satisfy the fit and proper persons criteria laid down by NAICOM and to possess a relevant university first degree qualification and IT-related qualification and/ or relevant training experience.

What are the Non-Permissible Activities of a Web Aggregator?

The Guidelines preclude Web Aggregators from exclusively promoting the products of only one insurer. They are also prohibited from displaying on their websites, any information pertaining to the products and services offered by financial or Fast Moving Consumer Goods Companies or other products or services asides from insurance products. Web Aggregators are also prohibited from displaying adverts of any sort, including adverts of insurance products on their websites.

In addition, Web Aggregators are prohibited from using multiple websites or collaborating with other entities (whether licensed or unlicensed) for the generation of leads. They are also precluded from using other social media sites apart from their website for the conduct of business.

Conclusion

It is advisable that companies that already conduct business as Web Aggregators take note of the provisions of the guidelines and apply for a Web Aggregator’s License as instructed by NAICOM. Web Aggregators will also require the services of a licensed Data Protection Organization to ensure the protection of personal data of their clients which will be shared with insurers as leads.

If you require further clarification in respect of the foregoing, please reach out to us at info@Pavestoneslegal.com. Pavestones is a full-service law practice and a licensed Data Protection Compliance Organization in Nigeria.

[1] Exchange rate of N420- $1

REGULATION OF LENDING IN NIGERIA

/in /by

By Aderonke Alex-Adedipe and Eustace Aroh

 

Introduction

The business of lending in Nigeria has evolved from the traditional system to a more flexible and digitally enabled system for a faster and more convenient process. This evolution has attracted extensive participation in the lending sector spurring the growth of the Nigeria Domestic Credit by 16.2% YoY as at December 2021.[1]

In this article, we highlight the various regulations and licenses applicable to lending in Nigeria.

Money Lenders (ML) License

The Money Lenders (ML) license is issued and regulated by the money lenders laws of the various states in Nigeria. Given that Lagos is the commercial hub of Nigeria, majority of the money lenders license holders in Nigeria are registered within Lagos State.  The Lagos State Moneylenders Law[2] is the principal law which regulates money lending in the state and the office responsible for issuing licenses is the Lagos State Ministry of Home Affairs and Tourism. The ML license grants any individual or company the ability to carry on business of money lending in the state within which it is established.

Under the Law, entities such as cooperative societies, banks, insurance companies, pawnbrokers are exempted from obtaining the ML in Lagos State.

Licenses expire on the 31st of December of every year and are subject to renewal provided that the requirements for renewal are met.[3]

Microfinance Banks

Microfinance Banks (MFBs) are financial institutions licensed by the Central Bank of Nigeria (CBN) to provide financial services to microfinance clients (i.e. low-income earners, the un-banked and persons operating in the informal sector). MFBs are regulated by several laws including the Banks and Other Financial Institutions Act 2021 and the Guidelines for the Regulation and Supervision of MFBs 2020.

In addition to providing credit, MFBs are permitted to accept deposits from customers and provide other ancillary financial services.

The geographical operation of an MFB is dependent on the nature of the license obtained from the CBN. There are 3 major categories of MFB licenses to wit: (i) Unit MFBs, which are permitted to operate within certain local government areas; (ii) State MFBs which are licensed to operate within the state they are located; and (iii) National MFBs which are permitted to operate across all states within Nigeria.[4]

Finance Company (FinCo)

Finance companies (FinCos) are financial institutions also licensed by the CBN to provide financing services to micro, small and medium enterprises. They provide customer loans, fund management and credit facilities, asset finance, project finance, debt factoring, debt securitization and other forms of credit facilities, to individuals and companies. They were created to bridge the financing gaps and complement the roles of banks.

The table below highlights several major differences between the 3 major lending licenses in Nigeria.

  MFB FINCO MLs (LAGOS STATE)
Timeline for Registration Usually 10 – 15 months Usually 10 – 15 months Usually 8 – 12 weeks
Lending Limits 80% of the total loan portfolio must be Micro loans (not exceeding N1 million) Limited to 20% of the FinCo’s shareholders’ funds unimpaired by losses There is currently no lending limit.
Official Fees ·         N350,000 + 200 Million Naira (Escrow deposit) for Unit MFBs.

·         N700,000 + 1 Billion Naira (Escrow deposit) for State MFBs

·         N1,300,000 + 5 Billion Naira (Escrow deposits) for National MFBs

 N350,000 + 100 Million Naira (Escrow deposit) N400,000 to N500,000
Interest Rate Limits Nil (Key lending rate at 11.5%) Nil (Key lending rate at 11.5%) 5% monthly [5]
Operational Limitations Unit (Tier 1) -can operate 5 branches within  urban areas of a state.

 

Unit (Tier 2) – can operate 2 branches  in rural/underbanked areas within a state.

 

State MFB – can operate within an entire state.

 

National MFB –can  operate in all the states in Nigeria

 

 FinCos can operate across all states in Nigeria Operations are limited to Lagos State[6].

Conclusion

It is pertinent to note that no particular license is preferred over the other. The suitability of each license depends on the operations and the structure of the applicant and the requirement of the regulator. Applicants are advised to consult with professionals before commencing the application for any license.

 

 

[1] https://www.ceicdata.com/en/indicator/nigeria/domestic-credit-growth

[2] Cap M7 2009

[3] For more information on this, please read our article here.

[4] For more information on this, please read our article here.

[5] Under the Lagos State Ministry of Home Affairs regulations

[6] In practice, moneylenders are able to provide credit beyond Lagos state through the use of technology

A GUIDE TO SETTING UP THE BOARD OF A COMPANY (INCLUDING STARTUPS) IN NIGERIA

/1 Comment/in /by

By Seun Timi-Koleolu and Adedolapo Arisoyin

 

DOWNLOAD PUBLICATION

 

The Board of Directors (the “Board”) of a company play a crucial role in its success or failure; more often than not, successful companies are headed by effective Boards. The Board of a company is responsible for providing entrepreneurial and strategic leadership, and also serves as a link between investors, shareholders, and the company. Although this is one aspect that is typically overlooked by startups and small businesses in structuring their operations, it plays a key role in building long-lasting businesses.

The applicable legislation for the conduct of Board meetings in Nigeria is the Companies and Allied Matters Act 2020. Boards are also to be guided by the Articles of Association of the Company and the Nigerian Code of Corporate Governance 2018 issued by the Financial Reporting Council of Nigeria (the “Code”) which sets out best practices for all companies operating in Nigeria including startups (the “Company”).

We have set out below useful information with respect to setting up a Board in Nigeria and
holding Board meetings.

1. What is the role of the Board? The Board is to exercise oversight and control over the Company, to ensure that the management acts in the best interest of the shareholders and investors whilst sustaining the prosperity of the Company.

2. How is the Board to be structured? The Code recommends that the Board of a Company is of a sufficient size to effectively undertake and fulfill its business and to constitute a quorum. The Board should comprise of a mix of the following directors:

(i) Executive Director (ED) – The ED should be an employee of the Company, involved in the operations of the Company who provides support to the Managing Director;

(ii) Non-Executive Director (NED) – The NED should contribute his/her expertise and independent judgment on issues of strategy on the Board and should not be an employee of the Company;

(iii) Independent Non-Executive Director (INED) – The INED should bring a high degree of objectivity to the Board for sustaining stakeholder trust and confidence should not be an employee of the Company; and

(iv) Managing Director (MD) – The MD should be an employee of the Company involved in its daily operations with good knowledge of the Company’s business.

3. Can a Foreigner sit on the Board of a Nigerian Company? Foreigners can sit on the Board of a Nigerian Company.

4. How do you call a Board meeting? A director/ the company secretary (acting on the instructions of a director) may at any time summon a meeting. A statutory notice of at least 14 days, is to be provided by the company secretary of the meeting to all the Board members with the board pack (containing all necessary documents for the meeting). Such notice can, however, be waived upon a unanimous agreement of all the directors to waive this right.

5. What documents are necessary? It is good practice that the agenda of the meeting and all other documents to be used during the meeting is provided by the company secretary to all the directors before the meeting or alongside the notice of the meeting. It is recommended that a Board Charter be provided to all directors to define their roles.

6. How frequently should a Board meet? To effectively perform its oversight function and monitor management’s performance, the Board is advised by the Code to meet at least once every quarter.

7. How should the meeting be conducted? There should be a quorum to start the meeting. CAMA stipulates that a quorum is formed when at least 2 directors are present out of a total number of 6 directors. Where the directors are more than 6, one-third of the directors should be present. The Chairman is to conduct the activities of the meeting as itemized in the agenda. The minutes of the meeting should be taken and sent to the directors on a timely basis.

8. Should Board members receive remuneration? The Code recommends that EDs should be paid per their contract of employment, while the NEDs and INEDs be paid sitting allowances and compensation for other expenses incurred.

9. Is diversity encouraged on the Board? The Board should show diversity in age, gender, and experience.

10. Are sub-committees required? The board is encouraged to form sub-committees to make decisions on various aspects of the Company, such committees may include; the audit, risk management, and remuneration committees. Each committee should comprise of at least 3 members who are directors.

Conclusion

The benefit of setting up a competent and independent Board is immeasurable and greatly outweighs the cost. The presence of a Board in a Company gives it a competitive edge, and also boosts investors’ confidence, as it implies that the Company has guidance and unilateral decisions can not be made by individuals without recourse to the Board. It is, however, important that Board members are selected with care to ensure they add good value to the Board.