TEN TIPS TO NAVIGATING FUNDING ROUNDS FOR STARTUPS

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BY ADERONKE ALEX-ADEDIPE AND QASIM OGUNJIMI

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Securing investment is a crucial milestone for any startup, but it comes with its own set of legal considerations and challenges. In this newsletter, we share ten tips to help startups navigate the funding landscape with confidence.

Tip 1: Understand Your Funding Options

Knowing your funding options is key. Over time, various financing practices and techniques have been developed and utilized by businesses deriving from the two most fundamental sources of financing – debt and equity. Startups can bootstrap; seek investment from friends and family; approach angel investors or venture capitalists; utilize crowdfunding platforms; or join accelerators/incubators. Each option has its pros and cons, impacting ownership, control, and growth. Understanding the dynamics of these options helps align funding choices with your startup’s goals and trajectory. Please see our previous newsletter on these funding options for further details.

Tip 2: Know Your Valuation

Understanding your startup’s valuation is also essential when entering funding rounds. Valuation determines the value of your company, most suitable funding option, and influences the amount of equity you offer investors. It will be helpful to conduct thorough analysis to assess your startup’s worth based on factors such as market potential, revenue projections, and comparable industry benchmarks. Engage with valuation experts if needed to ensure accuracy and transparency in negotiations with potential investors.

Tip 3: Understand Investor Preferences

Before entering into fundraising negotiations, startups should understand the preferences and priorities of potential investors. Research and analyze the investment thesis, portfolio, and track record of prospective investors to identify alignment with your startup’s goals and values. Startups should also consider factors such as investment size, industry focus, stage preferences, and geographic location when targeting investors.

Tip 4: Conduct Thorough Due Diligence and Prepare for Investor Inquiries

Startups should conduct due diligence on potential investors. This process involves researching investors’ backgrounds, track records, and reputations within the industry. This will also help verify that investors have the financial capability and strategic alignment with your startup’s goals. Additionally, consider conducting legal due diligence to verify investors’ legal standing, potential conflicts of interest, and any litigation history that may impact the investment arrangement.

In addition to conducting due diligence on potential investors, startups should also prepare themselves for the due diligence inquiries they will inevitably face from potential investors. Anticipate the types of questions investors may ask and ensure that you have comprehensive and accurate documentation readily available to support your responses. This documentation may include financial statements, business plans, intellectual property filings, regulatory compliance records, and any other relevant legal documents.

Tip 5: Negotiate Investment Terms Wisely

By negotiating investment terms wisely, startups can establish a solid foundation for growth while safeguarding their interests and minimizing future conflicts. To achieve this, it is important to work closely with legal experts to review and negotiate terms such as equity ownership, voting rights, and other crucial terms. Some key factors to consider when evaluating proposed terms include dilution, control, and potential exit scenarios.

Tip 6: Plan for the Long Term

When engaging in fundraising rounds, startups should not only focus on immediate capital needs but also consider the long-term implications of their decisions. Take a strategic approach to fundraising by considering how each investment round aligns with your startup’s growth trajectory and ultimate goals. Evaluate the potential impact on future fundraising efforts, ownership dilution, and governance structures. It would also be helpful to prioritize building relationships with investors who share your long-term vision and can provide strategic guidance and support beyond capital.

Tip 7: Ensure Legal Compliance in Fundraising Materials

When preparing fundraising documents, legal compliance is paramount. Ensure that your offering documents, such as term sheets, simple agreement for future equity (SAFE),  subscription agreements, offering circular/prospectus, and investor disclosures, adhere to relevant laws and regulations. Work closely with legal experts to draft these documents, addressing key legal considerations such as investor protections, securities exemptions, disclosure requirements, and compliance with anti-fraud provisions.

Tip 8: Don’t Forget About Post-Funding Responsibilities

Securing investment is just the beginning of the journey for startups; it also brings a set of post-funding responsibilities that must not be overlooked. For instance, after closing a funding round, startups must fulfill various obligations, including reporting requirements, governance responsibilities, and maintaining investor relations.

Tip 9: Establish Clear Terms for Investor Exits

When securing investment, startups should establish clear terms for investor exits to mitigate future conflicts and ensure alignment between stakeholders. It is important to define the conditions and mechanisms under which investors can exit their investment, such as through acquisition, initial public offering (IPO), or secondary market sales. Consider factors like vesting schedules, drag-along and tag-along rights, and buyback provisions to protect the interests of both founders and investors.

Tip 10: Seek Legal Counsel Early

Engaging legal counsel early in the fundraising process is essential for startups to navigate the complexities of fundraising rounds effectively. Experienced legal advisors can provide invaluable guidance on the various funding options, structuring investment terms, negotiating agreements, and ensuring compliance with relevant laws and regulations.

Conclusion

Navigating the complexities of fundraising rounds is a critical yet challenging aspect of startup growth. By incorporating the actionable tips outlined in this newsletter, startups can navigate the funding landscape with confidence and clarity.

 

REGISTERING PATENTS IN NIGERIA

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BY SEUN TIMI-KOLEOLU & OLAWALE ATANDA

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INTRODUCTION

A lot of companies, especially in the technology sector, are using inventions to solve everyday issues and with that comes the need to protect the said inventions from being imitated or duplicated by third parties. Whether it is a payment company patenting a point-of-sale device or a robotics company patenting a drone, such patent will serve to protect the interest of the owner of the invention and the integrity of the invention.

In this newsletter, we highlight the important information you need to know about registering a patent at the Trademarks, Patents, and Designs Registry (the “Registry”) in Nigeria.

1. What is a Patent?
A Patent is an intellectual property right granted under the Patents and Designs Act (the “Act”) to protect inventions, creations, ideas, and other intangible assets; and to promote development in these areas.

2. Who Owns a Patent?
Under the Act, the person who is the first to file a patent application or validly claim foreign priority for an invention is known as the ‘statutory inventor’ and considered to be the owner of the patent, whether or not they are the true inventor. Nonetheless, the true inventor is entitled to be named on the application and this right can not be modified by contract.

3. What Right Does an Employer Have To a Patent?
If an invention is made while someone is working or performing a specified job under a contract, then the employer or the person who commissioned the work has the right to the patent for that invention.

However, if the inventor is an employee and their employment contract does not require them to come up with new ideas, but they use resources from their job to create the invention, or if the invention is considered to be of exceptional importance, then the employee is to be compensated fairly for the invention in addition to their standard remuneration. This entitlement to compensation cannot be changed by a contract and can be enforced through legal action.

4. How Can an Invention Qualify for a Patent?
For an invention to qualify for a patent, it must meet the eligibility requirements below.
• The invention should be new (i.e. not similar to any existing product, service or invention) or it should improve on an existing invention.
• It must result from an inventive activity (i.e. it is an invention that could not have easily or obviously been developed by someone in a similar field).
• It capable of industrial application (i.e. it must be functional/useable in some kind of industry or sector of the economy).

It is not merely sufficient that an invention meets the requirements above. Inventions must not fall within those prohibited from being patented by the Act. Examples of prohibited inventions are:
• literary, dramatic, musical or artistic works;
• principles and discoveries of a scientific nature;
• methods of medical diagnosis or treatment;
• biological processes for the production of plants or animals other than microbiological processes and their products; and
• scientific or mathematical discoveries, theories or methods

5. Will a Software Qualify for a Patent?
It should be noted that a computer program in itself may not qualify to be registered as a patent because it is regarded as a “literary work” under the Copyright Act. If, however, as a result of the interaction between a software and hardware, an obvious invention is derived, it is possible that the developer or owner may have a right to apply for a patent.

6. What is the Process for Registration?
The process for registering a patent involves submitting an application to the Registrar of the Registry. The application must include:
• the full name and address of the applicant, along with an address in Nigeria if the applicant’s address is located outside the country;
• the description of the invention, along with any relevant plans and drawings, a claim or claims, and any other information required by law;
• if appropriate, the true inventor may sign a declaration requesting that they be named as such in the patent and provide their name and address; and
• if the application is made by an agent, a power of attorney must be signed and submitted.
Please note that the success or otherwise of such an application will depend on the determination of the Registry as to whether the invention sufficiently meets the criteria set by the Act.

7. What is the Duration of a Patent Registration?
A successful patent application is valid for 20 years from the date of the filing of the patent application, however, annual fees must be paid during the 20-year validity period otherwise the patent will lapse.

8. What are Alternatives to Grants of Patents?
If an invention does not fit the criteria for registration, there are other ways to protect it including by properly drafting terms and conditions for use of the invention and clearly
stating the inventor as the proprietor of the invention. Please click here to see our article on qualifying for a patent for more tips.

 

CONCLUSION

Patent applications can be complex and involve several steps. Therefore, it is advisable for applicants to seek legal expertise for expert advice and guidance throughout the entire process.

CENTRAL BANK OF NIGERIA EXPOSURE DRAFT ON THE REVISED REGULATORY AND SUPERVISORY GUIDELINES FOR BUREAU DE CHANGE OPERATIONS IN NIGERIA

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BY ADERONKE ALEX-ADEDIPE AND SHARON OKPO

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INTRODUCTION

The Central Bank of Nigeria (“CBN”) on February 23, 2024, issued a circular addressed to all Bureau De Change (BDC) operators and stakeholders in the financial services industry. The circular introduced the draft revised regulatory and supervisory guidelines for BDC operations in Nigeria (“Draft Guidelines”), and it is intended that the Draft Guidelines will significantly enhance the regulatory framework for the operations of BDCs as part of the ongoing reforms of the Nigerian foreign exchange market.

In this article, we highlight some of the introductions to the regulatory framework for BDC operators presented for consideration in the Draft Guidelines.

  1. Who Can Participate in the Ownership of BDCs?

The Draft Guidelines provides a list/categories of persons or entities who are prohibited from engaging in the ownership of BDCs, whether directly or indirectly. Such persons or entities include:

  1. Banks and other financial institutions, including holding companies and payment service providers;
  2. Existing employees of financial service regulatory and supervisory agencies;
  3. Existing employees of regulated financial service providers;
  4. Governments at all levels, and public officers of the Federal Republic of Nigeria;
  5. Non-governmental organizations, co-operative societies, charitable organisations, academic and religious institutions;
  6. Non-Nigerian natural persons, whether resident in Nigeria or not;
  7. Non-resident non-regulated companies;
  8. Telecommunication services providers;
  9. Sanctioned individuals and entities;
  10. A shareholder in another BDC (whether directly or indirectly); and
  11. Any other persons which the CBN may from time to time designate.
  1. What are the Permissible and Non-Permissible Activities?

Unlike the existing Guidelines for the Operation of Bureau De Change in Nigeria (“Prevailing Guidelines”) which only provide for non-permissible activities, the Draft Guidelines clearly provide for both permissible and non-permissible activities as follows:

a. Permissible activities: a BDC may-

    1. acquire foreign currency from the sources listed in the Draft Guidelines;
    2. sell foreign exchange;
    3. open foreign currency and naira accounts with commercial or non-interest banks;
    4. collaborate with their banks to issue prepaid cards; and
    5. serve as cash-out points for international money transfer operators (IMTOs).

 b. Non-permissible activities: in addition to the list of non-permissible activities provided for in the Prevailing Guideline, the Draft Guidelines makes the following additions-

    1. maintaining any type of account for any member of the public, including accepting any assets for safe keeping/custody;
    2. taking deposits from or granting loans to members of the public;
    3. retail sale of foreign currencies to non-individuals except for BTA;
    4. acting as custodian of foreign currency on behalf of customers;
    5. borrowing sums which in aggregate exceed the equivalent of 30% of shareholders’ funds unimpaired by losses;
    6. acting as custodian of foreign currency on behalf of customers;
    7. engaging in forwards, futures, options, or other derivative/speculative transactions;
    8. obtaining foreign exchange from other sources other than those listed in the Draft Guidelines;
    9. dealing in gold or other precious metals;
    10. financing political activities; etc.
  1. Where can BDCs Source Foreign Currencies?

The Draft Guidelines also make provisions on where BDCs may source foreign currencies from. BDCs are allowed to source foreign currencies from:

  1. Tourists
  2. Returnees from diaspora
  3. Expatriates and residents with foreign exchange inflow from work, travel, investments, or their domiciliary accounts;
  4. IMTOs, embassies, the Nigerian Foreign Exchange Market (NFEM)
  5. Hotels that are authorized to buy foreign currency
  1. What are the Conditions for Sale of Foreign currencies?

In order to legally sell foreign currencies, BDCs must ensure the following:

a. Purpose of the sale- the sale must be for at least one of the following purposes:

    1. Personal Travel Allowance (PTA) or Business Travel Allowance (BTA), provided that in the case of BTA, the person receiving it on behalf of an entity shall not be entitled to PTA within the same period;
    2. Payment of medical bills or school fees;
    3. Repurchase of unused Naira from a non-resident from whom the BDC has sourced foreign currency during the course of his/her visit.

b. Payments for the sale shall be by transfer to the BDC’s naira account;

c. A beneficiary of BTA or PTA must receive up to 25% of the amount requested for in cash, and only 75% of the amount requested transferred electronically to the beneficiary’s Nigerian domiciliary account or prepaid card. Where however the amount requested is the equivalent of $500, the beneficiary may receive it in cash.

  1. What are the Licence Categories?

Prior to the introduction of the Draft Guidelines, there had been no categorization of BDC licences. The Draft Guidelines however introduces 2 distinct licence categories thus:

  1. Tier 1 BDC– authorized to operate across the country. BDCs in this category are permitted to open branches (which is restricted under the Prevailing Guidelines) and appoint franchises subject to CBN’s approval.
  2. Tier 2 BDC– authorized to operate only in one state or the FCT. It may however have up to 3 (three) locations (a head office and two branches) within the state subject to CBN’s approval.
  1. What are the Provisions Regarding the Establishment of Franchises?

As stated above, only Tier 1 BDCs may be allowed to establish franchises and have multiple locations across the country, subject to the CBN’s approval.

In maintaining a franchise, the franchisors are required to adhere to the following standards:

  1. each franchisor is required to have a franchising policy approved by the CBN;
  2. franchisors are primarily responsible for monitoring the operations of their franchisees to ensure alignment to the franchisor’s standards;
  3. the franchisees must be registered limited liability companies, with “BDC Franchisee” in their names;
  4. a franchisor cannot appoint a franchisee in a state where it does not have a branch;
  5. the franchisee shall be bound to the same IT, AML/CFT/CPF, and other regulatory policies applicable to the franchisor;
  6. there can only be a maximum of 10 franchisees in one state; and
  7. the franchisor shall be responsible for submitting consolidated reports to the CBN on its operations and those of its franchisees.

CONCLUSION

The Draft Guidelines and the provisions are potentially subject to amendments following the receipt of comments and input from relevant stakeholders in the financial services sector.

REGULATORY UPDATE: THE IMPOSITION OF EXPATRIATE EMPLOYMENT LEVY ON COMPANIES

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BY SEUN TIMI-KOLEOLU AND EBIKENIYE BEST

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INTRODUCTION

On the 27th day of February, 2024, the Federal Ministry of Interior issued the Expatriate Employment Levy (EEL) Handbook which requires companies with expatriate workers to pay a levy. This EEL is in addition to the already existing immigration requirements which we had earlier highlighted in our previous newsletters.

In this newsletter, we have provided more information on the EEL.

1. What is the EEL and its objectives?

EEL is a mandatory financial contribution to be made by employers who employ expatriate workers. In the EEL Handbook, the government has stated that objectives of the EEL includes:

a. To promote skill transfer and knowledge sharing from expatriates to local employees.

b. To balance economic growth and social welfare. The EEL ensures that while the expatriate workers contribute to the development of the Nigerian economy, the rights and opportunities of local employees are not compromised.

c. To enhance collaboration between public and private sectors.

d. To address demographic shifts. The EEL encourages businesses to prioritize local retention acquisition and invest in workforce development initiatives while safeguarding Nigeria’s long-term economic prosperity.

2. Who is eligible for the EEL?
The EEL handbook provides that the EEL is payable by private-sector industries that employ foreign workers, such as construction, information and communication technology (ICT), telecommunication services, agriculture, oil and gas, banking and finance, maritime and shipping, healthcare, etc. Accredited staff of diplomatic missions and government officials, however, are exempted from the payment of EEL. This exemption shall not apply to dependants of diplomatic missions who are confirmed to be engaged in any employment while resident in Nigeria.

3. How long is an expatriate required to be resident/employed to qualify for the EEL?

To qualify for EEL, an expatriate is required to have been resident/employed for a period of 183 days within a year. This duration is calculated as an aggregate of 183 days in one (1) fiscal year. Also, expatriates on short-term employment/assignments are exempted from the EEL where they are employed for a period less than 183 days within a year.

4. How much is the EEL?
Companies eligible for EEL are required to pay $15,000 for directors and $10,000 for other categories of expatriates. These companies are expected to pay the EEL on an annual basis.

5. What is the deadline for compliance with the EEL requirements?
The deadline for compliance with the EEL is April 15, 2024. Companies are expected to begin the registration for their expatriates working with them, as the effective date of the EEL is March 15, 2024.

6. Are expatriateson cross-border assignment and secondment cover by the EEL?
Yes. Employers of expatriates who work temporarily in a foreign country are liable to pay EEL where such expatriate occupies a quota position in a company operating in Nigeria.

7. What are the reporting and compliance requirements?
Employers are expected to maintain comprehensive records of their expatriate employees, which may include, the employment contract, salary details, work permits, etc. They are also required to provide updated information to the Government agency with specified timelines, such as payroll cycles, employment contract renewals, etc. and any change in expatriate employment conditions. In addition, the employers are required to file all necessary reports within the timeframe set out in the Handbook. In ensuring compliance, it is the responsibility of expatriates to ensure that their personal information and employment details are accurate with the regulatory agency.

8. Which regulatory agency is responsible for the EEL and its functions?
The Nigeria Immigration Service, a government agency that is responsible for controlling persons entering and leaving Nigeria shall in addition to its duties under the Immigration Act, 2015 be responsible for the following:

a. Determining which expatriates fall within the purview of the EEL;

b. Enforcing the levy in line with the provisions of the Immigration Act, 2015 and the extant Nigeria Visa Policy; and

c. Utilizing the data generated from the EEL project to enhance Nigeria’s national security and economic interest in line with relevant legal provisions;

d. Conducting compliance audits to verify the accuracy of reported information;

e. Crosschecking reported information with data from other sources, such as immigration records, tax filings, etc.

9. What are the offences and penalties?
The offences and penalties covered by the EEL Handbook are:

a. Failure of a corporate entity to file EEL within 30 days – the corporate entity shall be liable to a fine of three million naira (N3,000,000);

b. Failure to register employee within 30 days – the entity shall be liable to a fine of three million naira (N3,000,000);

c. Falsification of information on EEL – the entity shall be liable to a fine of three million naira (N3,000,000). In addition, any person (individual or corporate entity) who makes or causes to be made to an immigration Officer, any return, statement or representation which he knows to be false shall be liable to imprisonment for a term of 5 (five) years of a fine of one million naira (N1,000,000) or both; and

d. Failure of a corporate entity to renew EEL within 30 days – the entity shall be liable to a fine of three million naira (N3,000,000).

Conclusion
The introduction of payment of EEL has received mixed reactions, with a substantial number of people concerned that this would discourage foreign investments in Nigeria. Notwithstanding the introduction of the EEL and the concerns, Nigeria remains a country with opportunities (in view of its large population and resources) which would benefit investors. To take advantage of these opportunities, we advise that investors wishing to invest in the Nigerian market, carry out sufficient cost-benefits analysis; and engage professionals to carry out due diligence, in order to have a good chance of enjoying favourable returns in the Nigerian market.