Startups in Nigeria are taking the business ecosystem by storm. A startup is a business or company established to operate as a business entity, often characterized by their innovative, problem-solving ideas, services, or products. In most cases startups are typically small-scale, aiming to solve specific problems or address specific market friction. In that regard we have Agric-Tech Startups in Nigeria, Health-Tech startups in Nigeria; e-commerce startups [Jumia, Konga, Jiji Marketplace comes to mind]; FinTech Startups in Nigeria [Bamboo, Trove Finance, Cowry Wise, Piggyvest]; EdTech Startups, Transportation Startups [Bolt, Uber]; Real Estate Tech Startups [Property Pro NG]; Transportation & Logistics Startups [Gokada]. The list is endless.
In this article we shall address the numerous legal considerations Startups in Nigeria are expected to take into consideration as they begin and expand their operations in Africa’s largest market.
Business Structure and Company Registration
The very first step for any startup choosing to operate in Nigeria is to choose a business structure they will operate under. The most common business structures in Nigeria are sole proprietorship, partnership, limited liability company (LLC), and public limited company (PLC). The choice of business structure will depend on a number of factors, including the size of the business, the number of owners, and the level of liability desired by the founders. Each legal business structure in Nigeria is summarized below:
Sole Proprietorship: This is the simplest form of business ownership in Nigeria. A business operating as a sole proprietorship has single ownership where one specific individual/propriety owns the entire equity in the business. This business structure, while being the simplest, exposes the owner to unlimited liability in the course of its business operations.
Partnership: A startup in Nigeria can operate as a Partnership which is a cooperative structure where two or more individuals share profits and liabilities. In this case there are several considerations to be noted before commencing a startup using a partnership structure in Nigeria, including capital contributions, management, votings and meetings, partner exits, among others. These should be taken care of in a comprehensive Partnership Contract.
Limited Liability Company: The limited liability company is the most common choice for startups, offering limited liability protection to the shareholders in the startup, to the tune of their shares
Once the parties involved settle on a business structure that they want to operate for their startup, then the said Business should undergo registration/incorporation at the Corporate Affairs Commission. Except in few circumstances where parties intend to go into business with their legal names, businesses in Nigeria are required by Law to register their businesses using any one of the aforementioned business structures at the Corporate Affairs Commission.
Intellectual Property Protection
With the global importance ascribed to IP assets, and given that IPs are very valuable assets for Brands, Startups should take steps to protect their intellectual property (IP), such as trademarks, designs, patents, and copyrights. To ensure adequate protection cover, startups should develop comprehensive IP protection strategies to ensure that their IP are all accounted for so they can preclude usage of same by other entities. IP protection can help to prevent competitors from copying the startup’s products or services, and it can also be used to generate revenue through licensing or other arrangements either locally or even internationally. As a startup, you can reach out to an Intellectual Property Law Firm in Nigeria for guidance.
Trademarks: Startups in Nigeria—just like elsewhere—have names, slogans, colour schemes, branded identities, et cetera, all of which act as differentiators from other Brands. It is important Register your startup’s brand name, logo, or slogan to prevent unauthorized use and protect your brand identity. Trademarks are territorial, though, and trademark registration in Nigeria does not offer protection cover internationally.
Patents: Where the Startup has created unique inventions or made notable innovations, it is very advisable to obtain patents for unique inventions or innovations to have exclusive rights to commercialize them. In Nigeria, Patents are protected upon registration for a period of twenty years from date of registration, subject to the payment of annuities.
Contract Drafting
Startups should carefully draft all of their contracts, including contracts with customers, suppliers, independent contractors and employees. It is very important to have well-drafted contracts for your Startups in Nigeria as this will enable you take away the guesswork out of every contractual relationship and have a well-defined structure and terms in place. These are important because it will help clarify rights and obligations of each involved parties, and also help the startups to avoid disputes. To ensure that the startup’s rights are protected and obligations well defined, it is important to engage legal professionals to draft and review contracts (which emanate from the other contractual party), including partnership agreements, employment contracts, vendor agreements, and more.
Legal Agreements
From the founding of a startup, through its life cycle as it solves business frictions for its clientele, start-ups have a lot of relationships to navigate, from that with co-founders, to that with employees and contractors, to vendors, to investors, to their relationship with their users. For all these, it is vital that the necessary legal agreements and contracts at each stage are prepared and signed by all involved parties. As pointed out earlier, this takes the guesswork away from the relationship as regards the righs, obligations and remedies available to the parties in the relationship. Some of these necessary legal agreements for start-ups are explained below:
Founders Agreements: In several instances, startups with more than one founder have started up without setting place a comprehensive Founders’ Agreement to govern the relationship, leading to disputes and exits. Thus, a Founders’ Agreement for a startup in Nigeria is very important for clarity and alignment, establishing clear roles of the involved parties, their responsibilities and expectations of each other. Several other issues are set down in these Founders’ Agreements, including Equity distribution, decision-making processes, conflict resolution mechanisms if and when they arise, Intellectual Property ownership, [Equity] vesting schedules which can help co-founders ensure that the others earn their equity over time and through committed effort, and exit strategies for the founders if and when they wish to exit the startup.
Non-Disclosure Agreement: NDAs hold significant importance for start-ups because these Agreements can help startup founders safeguard their confidential and proprietary information relating to their work flow, products and services. Due to the nature of start-ups, they may, at some point during their existence life cycle, have to pitch their ideas to [potential] investors and Venture Capital companies. To do this, startup founders have to reveal confidential information about their plans and go-to market strategies, and drawing up Non-Disclosure Agreements can help founders secure whatever confidential information they are revealing against unauthorized usage.
Lease Agreements: Many start-ups in Nigeria and around the world started out from humble beginnings, usually from shared spaces, like the founders’ apartments, garages, co-working spaces…however as they expand operations it becomes necessary to get their own custom offices where they can situate the head of their operations. This entails leasing space. It is important to sign carefully reviewed lease agreements—for longer-term leases—and tenancy agreements for shorter-term rentals.
Joint Venture Agreements: These agreements are crucial in start-ups because they outline the terms and conditions for collaboration between a startup and external partner or an investor. They typically cover issues like intellectual property rights ownership, duties of each party, funding and sharing of risks and rewards.
There are numerous legal agreements start-ups can factor in like Independent Contractors agreement, Service Agreement, Employment Contracts, Investment Agreement, among others. It is very important they have these agreements where necessary to provide certainty in their relationships with both internal teams and external parties.
Fundraising
As startups solve more problems in the specific sectors they chose to work in and grow, scaling their operations becomes an issue for consideration either from internal considerations, or when external investors come with their calling cards. Startups that need to raise capital should be aware of the legal requirements for doing so and the legal implications of privileges and equity sought for by the investors as conditions for investing in them. In Nigeria, startups can raise capital through a variety of methods, including equity financing, debt financing [through loans sought from financial institutions or private lenders, with agreed repayment terms and percentages], angel investing, venture capital, and crowdfunding.
Compliance Requirements
Compliance requirements for startups in Nigeria vary by industry of operation. However, generally, Startups in Nigeria must comply with a number of legal requirements, including compliance with business regulations set by the Corporate Affairs Commission, tax laws, employment laws, and environmental laws. Failure to comply with these requirements can result in fines or other penalties, so it is very important that these startups understand their compliance obligations across board and comply with them. It is crucial to either have a compliance team in-house to monitor and drive compliance or to outsource same to qualified legal professionals to do this. Our team at Kabbiz Legal & Advisory can help you with your compliance needs. Be that as it may, the following regulatory areas require compliance:
Corporate Affairs Commission: Before or upon commencement of business, startups in Nigeria are required to register their business with the Corporate Affairs Commission and keep the company’s records up-to-date by filing its annual returns, post-incorporation.
Taxation Laws and Compliance: Federal Inland Revenue Service (FIRS) is responsible for tax regulations and startups, like other businesses operating in Nigeria, are required to file their tax returns in accordance with its regulations to avoid penalties.
Data Protection: Due to the fact that privacy and data protection has become a big deal with today’s world, Nigeria, in seeking to keep up, now has its dedicated data protection laws and regulations so the country can have a data protection framework for safeguarding the private data of citizens. Startups in Nigeria that deal with large-scale user data, especially those in the tech sector who control large[r] troves of individuals’ personal data, should be careful to comply with Nigeria’s data protection regulations to safeguard sensitive information and customer data and to avoid sanctions if found guilty of non-compliance. Nigeria’s data protection regime is governed by the Nigeria Data Protection Act, 2023, with the Nigeria Data Protection Commission set up to regulate the provisions of the Act and ensure compliance of same by individuals and companies alike.
Acquisition and Transfer Laws
For startups in Nigeria operating in the tech space where technology and technical know-how is usually transferred between the startups and external partners, the National Office for Technology Acquisition and Promotion Act oversees the registration and monitoring of technology transfer agreements in Nigeria. This law is essential for these startups when they are engaged in technology-related acquisitions and transfers.
Legal Representation for Startups in Nigeria
For every business venture in Nigeria, it is important—from ideation stage to execution, registration and flagging off of business operations—it is important that they secure legal representation. For startups in Nigeria servicing smaller market segments and providing solutions, with—in many cases—eyes of the Market operators on them—legal representation at all stages of their operations cannot be overemphasized. While many startups may tend to shy away from engaging Big Law firms because of high pricing, there are other valuable, smaller Firms with a focus on startup advisory who can help them with legal risk identification, licensing and registrations [at regulatory authorities]; help them with their regulatory compliance obligations, tax advisory; advise them on shareholding rights and equity sharing, and offer Intellectual Property protection of their valuable IP assets.
Permits and Licenses
Depending on the sector of the Nigerian economy where a startup operates, there are usually Sector-specific licenses and permits that may be required of these startups. For some there is need for licences from the Standard Organization of Nigeria [SON]; the National Food and Drug Administration and Control [NAFDAC]; for startups operating in the financial services sector like FinTech startups offering investment advisory, registration with the Securities and Exchange Commission [SEC] is required. For those operating in the Energy sector, there may be need for them to obtain approvals and permits from the National Electricity Regulation Commission [NERC].
Investments for Startups in Nigeria
Startups can choose to invest in viable ventures or businesses. Startups with available capital or funding may choose to actually invest some of their funds into other startups, companies, or into various assets. Startups in Nigeria can do this in a bid to expand their capital portfolio, diversify their revenue streams so they do not rely only on their own profits, or even to gain a foothold in other markets.
Conclusion
There are several considerations startups have to bear in mind as they begin operations. We provided some information in this article to help startup founders streamline the legal requirements their startups are expected to meet up with in the course of operations, and we hope the information was useful.
[This article is provided for information purposes only and does not constitute legal advice. For more information, seek expert counsel or you can reach out to our partner at kingsley.ani@kabbizlegal.com for more expert guidance on navigating the legal considerations in the startup ecosystem in Nigeria.]
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