PROTECTING AND MAINTAINING CONTROL OVER YOUR STARTUP: A NOTE TO FOUNDERS

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Seun Timi-Koleolu and Qasim Ogunjimi

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Introduction

As startups scale, founders often face a harsh reality—losing control and ownership of the company they birthed to external factors like investors and funding endeavors. In some instances, the loss of control is so profound that founders are ousted from the very enterprises they helped build. Donald Valentine, the founder of Sequoia, a leading venture capital firm, noted that about half of the founding CEOs of their investments are fired within 18 months of their series A funding. Sam Altman, CEO and co-founder at OpenAI, recently joined the list of founding CEOs like Steve Jobs – Apple; Travis Kalanik – Uber; Jack Dorsey – Twitter, who were all sacked by the board of their respective companies, even though he was reinstated due to shareholder pressure and employee uproar,

Given the foregoing, this newsletter seeks to examine the legal mechanisms founders can leverage to maintain some semblance of control and power over their businesses as they scale to prevent or mitigate the risk of being ousted.

MECHANISMS TO MAINTAIN CONTROL

One of the many lessons from the sacking and reinstatement of Sam Altman is that making yourself indispensable to the company and its stakeholders might be the most effective strategy to prevent being ousted as a founder. Some other mechanisms to maintain control include:

1. BOARD COMPOSITION: The primary driver of founders being ousted from their companies is their board of directors. Thus, founders need to pay attention to the composition and dynamics of the board of the company at every point in the lifecycle of the company.

In the startup’s early days, founders typically enjoy full control of the board. However, as the need for capital grows, fundraising from investors often means giving up board seats. This shift challenges the founders’ initial control.

To avoid losing significant control in the company, founders should ensure that they do not give up board seats where it is avoidable. For example, they should only give up a board seat to a lead investor in a financing round while making other investors who demand board seat observers. Founders may also preemptively allocate common board seats at incorporation to help maintain a balance where board seats are taken by investors later. Additionally, founders may also ensure their seats on the board are for life so that they are perpetually involved in company matters. In Nigeria, under the Companies and Allied Matters Act (CAMA)[1], a director may be appointed for life, which implies that such a director may continue to serve in perpetuity subject to removal under the Act.

2. EQUITY STRUCTURE: The share structure of the company should be such that it comprises various classes of shares as may be necessary to prevent loss of control on the part of the founders. In jurisdictions where it is permissible by law, founders may issue themselves weighted shares (shares with multiple voting rights) to maintain ownership and significant control over the affairs of the company. Please note that while weighted shares are prohibited under CAMA[2], founders may issue other restrictive classes of shares to investors like redeemable preference shares, which allows for the redemption of issued shares by the company after a period of time.

3. INVESTMENT AND INVESTOR RELATIONS: To maintain control of their companies, founders should manage investments and investor relations strategically. Startups should steer clear of premature fundraising, raising excess funds, unnecessarily surrendering board seats and advisory roles, or accepting unfavorable investment terms out of desperation. A carefully crafted investment term sheet and agreements that protect the company and the interests of founders are also pivotal in preventing loss of control.

4. CONTRACTUAL ARRANGEMENTS:

The significance of having documented contractual arrangements such as founders’ agreements, shareholder agreements, investment term sheets and agreements, and other related documents cannot be overemphasized. When drafted properly, these agreements help create a framework for the business as significant matters that may affect the control and ownership of the company, in the long run, are adequately addressed.

5. SEEK EXPERT ADVICE: Founders should engage experienced legal advisors who specialize in corporate law. These professionals can provide personalized guidance, review legal documents, and help founders navigate complex legal considerations in their bid to maintain control and prevent being ousted by their companies as they scale.

CONCLUSION

In conclusion, while the focus of this edition of our newsletter is on how Founders may protect themselves and maintain control over their Startups, we must emphasize the significance of good corporate governance in operating the business. We recommend that Founders ensure that they act ethically, responsibly and in the best interest of the company. Furthermore, Founders should ensure open communication and synergy with the board of directors in order to achieve company goals.

 

[1] Section 281 of CAMA

[2] Section 140 of CAMA

DATA PROTECTION: ASSERTING CONTROL OVER YOUR DIGITAL FOOTPRINT

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By Aderonke Alex-Adedipe and Nuratulahi Yishawu

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Introduction

In today’s digital world, we all leave digital footprints online through the activities we conduct over the internet. Over time, these online activities create a record of our online activities. The digital age and the widespread use of technological devices, has brought significant changes to how we communicate, express ourselves and connect with others.
Whilst these online activities constitute valuable data to individuals and businesses it is equally crucial to protect our privacy from growing cyber threats.

This newsletter highlights the value of digital footprints and measures of protecting them against cyber threats.

1. What is a digital footprint?

A digital footprint refers to the trail of data that is left behind when someone interacts with digital systems or platforms on the internet. It includes all the information that can be associated with a particular user or entity online. This information may be shared intentionally, by the user or may be created passively, through website visits and online transactions.

A digital footprint may include various elements, such as social media activity; personal information you provide when registering on any online platform such as your name, address, and phone number; details of what you search for on search engines like Google and Yahoo; website visits including how long you stay and what actions you take; information related to items you buy online, including transaction details; email communication; information about your physical location, details about the devices you use to access the internet, such as computers, smartphones, or tablets, the IP address of the device used to connect the internet, amongst others.

2. What is the importance of having a digital footprint?
The importance of a digital footprint lies in its impact on personal and professional aspects of individuals’ lives, as well as on organizations as described below:

  1. Employability: Employers often conduct online research on job candidates. Some employers are known to request online profile links of candidates to conduct a search. A positive and professionally managed digital footprint can enhance a person’s employability. Conversely, a negative or unprofessional online presence may affect job prospects.
  2. Networking and Social Connections: Digital footprints facilitate social connections and networking. Platforms like LinkedIn, Twitter, and other professional networks rely on users’ digital footprints to connect like-minded individuals, fostering professional relationships.
  3. Personal Branding: Individuals can use their digital footprints to build and promote a personal brand. This is particularly important for entrepreneurs, freelancers, and professionals looking to establish themselves in their respective fields.
  4. Marketing and Advertising: For businesses and organizations, understanding and leveraging digital footprints is crucial for targeted marketing and advertising. Analyzing user data helps tailor content and advertisements to specific demographics, improving the effectiveness of marketing efforts.
  5. Data Analytics and Research: Businesses and researchers use aggregated and anonymized digital footprint data for analytics and market research. This information can provide valuable insights into consumer behaviour, preferences, and trends.

3. How can a digital footprint be managed?
While it may not be possible to completely erase a digital footprint, individuals and organizations can take steps to manage and minimize their online presence in the following ways:

  1. Regularly reviewing and updating privacy settings on social media accounts, email, and other online platforms; adjusting the settings to control who can see your information and what they can see.
  2. Avoiding sharing sensitive personal information, and being cautious about posting private information which could be used to identify you, such as your full address or phone number.
  3. Ensuring the use of strong, unique passwords for online accounts by using a combination of letters, numbers, and symbols, and avoiding the use of easily accessible information such as one’s name or birthdate. Also, regularly updating/changing your passwords and reviewing the activity on online accounts. If a platform offers two-factor authentication, it should be enabled for an extra layer of security.
  4. Limiting third-party app access as much as possible. Only give access to apps that you trust and need, and constantly review and revoke permissions for apps that are no longer used.
  5. The use of a Virtual Private Network (VPN) to encrypt one’s internet connection should be considered as it can help protect information online, especially when using public Wi-Fi.
  6. A periodic online search of one’s name or organization to see what information is publicly available should be conducted. This can help identify and address any information that is intended to be kept private.
  7. Consider the use of separate email addresses for different purposes (e.g., personal, work, subscriptions) to compartmentalize online presence.

Organizations can also manage their digital footprint by employing a combination of strategic planning, monitoring and proactive management steps such as:

  1. Regularly conduct a digital audit of all online platforms where the organization has a presence to ensure the information available aligns with the organization’s values.
  2. Regularly update and review the organization’s website content and endeavour to optimize website content for search engines (SEO) to control what appears in search results.
  3. Use monitoring tools and analytics to track the organization’s online presence as well as setting up alerts for mentions or discussions related to the organization.
  4. Regularly assess the effectiveness of digital strategies and adjust as needed.
  5. Implementing strong cybersecurity measures to protect sensitive data.
  6. Regularly educate and test employees on data privacy and security best practices.
  7. Ensure compliance with relevant data protection regulations such the Nigeria Data Protection Act and other data protection regulations.

Conclusion
In conclusion, managing and mitigating a digital footprint is essential for individuals and organizations in the contemporary digital landscape. While complete eradication of a digital footprint may be impractical due to the complexities of online interactions, a strategic and proactive approach can significantly minimize potential risks.

ARTIFICIAL INTELLIGENCE IN NIGERIA: LEGAL AND REGULATORY GUIDANCE

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BY SEUN TIMI-KOLEOLU AND OLAWALE ATANDA.

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Introduction

In recent times, Nigeria has distinguished itself in the area of technology through skilled tech talent and homegrown innovative tech products and services. Artificial Intelligence (AI) is one essential technology that is gaining ground in the Nigerian technology landscape. The Nigerian government is investing in AI research and development to drive innovation, productivity, and future jobs. Initiatives like the National Centre for Artificial Intelligence and Robotics (NCAIR), the recently unveiled Nigeria Artificial Intelligence Research Scheme (NAIRS), and the 3 Million Technical Talent (3MTT) Program underscore the government’s commitment to AI development. AI, simply put, is the leveraging of computers and machines to mimic the problem solving and decision-making capabilities of the human mind. [1] The utility of AI cuts across various spheres and is used in several forms such as in speech recognition, disease control/diagnosis, virtual assistants/helpdesks, stock trading, and lately, in natural language processing such as Open AI’s Chat GPT. AI is also used in other technologies such as robotics, blockchain, and internet of things.

In this article, we provide guidance on some of the key laws and regulations companies utilising AI should consider in their operations in Nigeria.

Are there any specific laws on AI in Nigeria?
There is currently no specific legislation on AI in Nigeria, however, there are general and sector-specific laws that AI companies should be aware of.

1. General Considerations

• Data Privacy and Protection.
Data privacy is perhaps the most significant consideration when utilizing AI. This is because AI uses an enormous amount of data to train the AI algorithm so that the output produced is accurate. These training data may include personal data that is protected under the Nigerian Data Protection Act, 2023 (NDPA) and Nigeria Data Protection Regulation, 2019 (NDPR).
It is important that collection, storage, and processing of personal data conforms to data protection laws in force in Nigeria. For example, companies must ensure that: they seek the consent of owners of personal data (“data subjects”); have in place a privacy policy,
terms of use, and data protection policy; and regularly audit their data protection practices through a Data Protection Compliance Organization.

These regulatory requirements are not exhaustive and companies are advised to have a Data Protection Officer who will be responsible for monitoring compliance with data protection laws.[2]

• Intellectual Property.
AI intertwines with Intellectual Property (IP) in the sense that the algorithm that powers the AI and the device or system through which the AI is accessed or used may be subject to IP protection. IP protection here involves the lines of code that form the AI algorithm. These codes are considered copyright under Nigerian law and ownership vests in the author of the code automatically once it is published. This means the copyright owner (in this case, the company) need not take further steps to register the copyright, however, the company may elect to file a copy of this code at the Nigerian Copyright Commission (NCC) for the purpose of obtaining a certificate which is evidence of copyright ownership. This will create an advantage for the company in the event a dispute arises regarding ownership, time or other relevant data in relation to the code. In addition, it is advisable for companies to register the name, logo, or tagline (or a combination of these) of the AI system or device as a trademark at the Nigeria Trademarks, Patents, and Designs Registry. This gives the company the exclusive right to use and license the use of these trademarks. Furthermore, companies should also register the AI device (e.g. an AI-powered smart home assistant, virtual reality googles, etc) as a patent, and the designs or dimensional features of this device as an industrial design.[3]

Companies are also advised to ensure that the trade secrets of the AI business are protected through Non-Disclosure Agreements signed between the company and its employees, contractors or anyone who would come into contact with these secrets.

2. Specific Considerations

• Licensing
Companies providing AI-powered services in regulated industries need to adhere to the licensing requirements within those sectors. For example, a company providing financial services such as an AI-enabled loan or banking service will be required to obtain a financial
license from the Central Bank of Nigeria. Likewise, a company providing AI-powered stock trading services will be required to register with the Securities and Exchange Commission.
• Registrations
Companies that enter into technology agreements with their foreign parent company or a foreign third-party are required to register the agreement (usually in the form of a Technology Transfer Agreement [TTA]) with the National Office for Technology Acquisition and Promotion (NOTAP). A benefit of this is that the company would be able to access the official foreign exchange market to pay for the license fees for the use of the technology.

Conclusion
The considerations outlined in this article are not exhaustive. Alongside the points mentioned above, AI companies should also be mindful of crucial aspects like company formation and structuring, fundraising, tax obligations, and labor relations. It is imperative for AI companies to seek legal counsel to gain a comprehensive understanding of these matters.

[1] What is Artificial Intelligence – IBM https://www.ibm.com/topics/artificial-intelligence
[2] For a detailed reading on data privacy and protection obligations for companies, please access our article here https://pavestoneslegal.com/important-data-protection-obligations-and-practices-for-companies-in-nigeria/
[3] Kindly note that technological devices (and their associated names, logos, or taglines) must first meet the eligibility requirements of the Trademarks, Patents and Designs Registry before they can be registered as a trademark, patent or design, For more on these requirements and IP rights, please access our articles here:
(i)https://pavestoneslegal.com/doing-business-simplified-does-your-invention-qualify-for-a-patent-in-nigeria/
(ii)https://pavestoneslegal.com/requirements-and-procedure-for-registration-of-trademarks-in-nigeria/
(iii) https://pavestoneslegal.com/intellectual-property-licensing-in-nigeria

THE RISING IMPORTANCE OF ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) PRINCIPLES TO THE BUSINESS ENVIRONMENT

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THE RISING IMPORTANCE OF ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) PRINCIPLES TO THE BUSINESS ENVIRONMENT

BY ADERONKE ALEX-ADEDIPE AND SHARON OKPO

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INTRODUCTION

Following the increased commitments by nations to achieve the objectives of the Paris Agreement and attain net-zero carbon emissions, there has been a corresponding increase in the consideration of environmental, social and governance (ESG) approaches by private investors in making investment decisions. Therefore, more funds are being allocated to projects and businesses that encourage and foster ESG sustainability, and businesses and technology leaders are now required to be more deliberate about their ESG policies as a functional approach to doing business.

In this publication, we highlight the concept of ESG, and how companies can better position themselves to attract investments from ESG-conscious investors.

What is ESG and ESG Investing?

ESG simply refers to a set of standards established within an industry to assess how companies operate in relation to the world around them, the people they interact with, and how responsibly they govern themselves. They are non-financial indices used to assess a business’s practices and performance with respect to various sustainability issues. The main aim of these ESG policies is to ensure accountability by companies, and establishment of processes to effectively manage a company’s impact in the eco-system in general, such as its carbon footprint, and treatment of employees, business partners and other relevant stakeholders within its industry.

ESG is built on three pillars:

  1. Environmental: this refers to a company’s impact in the environment, and includes practices addressing issues such as use of resources, carbon footprints, waste management and renewable energy, climate action and risk mitigation, biodiversity, etc.
  2. Social: this relates to a company’s influence in and risk to the society, and includes employee welfare, prioritizing corporate social responsibility, human rights, community engagements, etc.
  3. Governance: this takes into consideration the strength of the company’s corporate governance structure, and its ability to act transparently and honestly, manage risks effectively and ensure the protection of the interests of all stakeholders.

ESG investing involves investments in companies which are determined to be committed to sustainable ESG practices. It has become the main form of sustainable financing. Investors have shifted their primary concerns from returns on investments, to how businesses steward these investments in relation to their environment and their commitment to the individuals they interact with.

Investment trends show that ESG-tailored investments have gained more traction over the years as investors are more biased towards companies that have optimal ESG performance. According to Thomson Reuters, at the beginning of 2021, sustainable investments/assets accounted for 35% of all managed assets worldwide and, at an annual growth rate of 15% over the last two years, ESG assets are expected to exceed $53 trillion by 2025. Businesses can dig into this growing pool by creating policies and procedures that align with ESG principles.

What are the Inherent Benefits of Adopting ESG Principles to Businesses?

Incorporation of ESG principles in businesses has become crucial to maintain a company’s health and competitive edge. The following are some of the benefits of incorporating ESG principles in core business activities-

  1. It largely assures improved access to capital and the attraction of responsible and ethical investors.
  2. It also drives innovation and gives the business a competitive advantage. Companies who adopt sustainability measures can easily envision new market opportunities, develop new products and technologies, and meet ever-changing consumer demands.
  3. It positions the business for long-term sustainability and resilience.
  4. It plays a role in aligning the business with global sustainability goals and setting the business in the global scene.
  5. It contributes to the attraction of new customers for business growth.
  6. It has also been known to effectively reduce operating costs such as energy bills.
  7. Incorporating ESG principles into the core operations of the business also plays a role in boosting employee motivation and increased productivity.

How can Businesses Attract Investors through their ESG Initiatives?

Below are some of the key actions which businesses can take to attract investors through their ESG initiatives-

  1. Identify which ESG issues matter the most to your business and the business’s stakeholders. This will involve the consideration of the business operations, financial performance, risk profile, etc. in a materiality assessment.
  2. Develop a clear and persuasive ESG outline that aligns with your business’s mission and values. This outline should show how sustainability, social influence and good governance are embedded in your business operations and growth plans. This will help investors to appreciate your business’s potential to create value in the long-term and mitigate risks.
  3. Adopt ESG data management tools. There are various ESG data management tools and software that assist in the collection, analysis, and reporting of ESG-related information suited to your business priorities and requirements.
  4. Incorporating transparent ESG reporting measures and disclosures. This is crucial in developing investors and consumers trust and the business’s credibility. Businesses can adopt reporting standards such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), or the Task Force on Climate-Related Financial Disclosures (TCFD).
  5. Prioritize social impact. Implement fair labour practices, support local communities, ensure workplace safety, etc.
  6. Establish and implement strong corporate governance practices.
  7. Collaborate with ESG consultants and advisory firms to guide on ESG best practices and help identify on areas for improvement.
  8. Engage and network with ESG-focused investors.
  9. Continuous improvement in the ever-evolving ESG field is important to keep abreast with emerging trends and best practices.

CONCLUSION

ESG has gained significant prominence in the business environment determining how businesses operate and interact with stakeholders. It is important to note that there is no one-size-fits-all approach to ESG implementation. Businesses are advised to understand the peculiarities of their business and the climate wherein they operate and engage the services of ESG consultants/advisors to formulate a viable ESG policy that is suited for the business.