5 legal issues you should consider before launching your startup

Laws and regulations if ignored can hinder the growth of any company. Here are five legal questions every startup should ask before launching.

5 legal issues you should consider before launching your startup

Dealing with laws and regulations is quite difficult especially when you do not understand these issues and how to approach them. If you have an idea that will translate into a startup, we highlighted five issues that you should not ignore.

Few days after ENaira Payment Solutions Limited sent a cease and desist notification to the Central Bank of Nigeria stating "Infringement of Trademark & Violation of Corporate Name — eNaira", we had a conversation in our newsroom about name registrations.

Ben was curious, he thought that "Naira" was a reserved name but during the conversation, a technology lawyer on our team, Oluwapelumi Chisom Omoniyi made us realize that "Naira" was not a "restricted name".

That conversation led me to ask him additional legal questions regarding starting and running a startup, here are his responses.

What should the founding members know about name registration?

The reservation of a name when registering a company is very important. Without a name, a lot of customers won't be able to know you. However, you can have a trading name that is going to be different from the name of your company. For example, my startups trading name may be called Pie but in the corporate registry of the country I'm registering it in like the Corporate Affairs Commission in Nigeria, the name may be Pie Company Limited so you can always stylize your company name.

Also, there are certain names that cannot be registered with a corporate registry either because they are pointing to illegal activity in the jurisdiction or you need permission from a regulator to use such a name.

For example, in Nigeria we have prohibited names, which are names that cannot be used for a number of reasons: either the name has already been trademarked, or the name has been registered or the name is promoting an illegal activity in Nigeria like selling firearms.

We also have restricted names that can only be used with the approval of the CAC. Words Like Group, Holding, Municipal, Federal, State are restricted names.

The CAC now has the registration portal which allows you to reserve a name for sixty days so that you can get your necessary registration documents in order and to ensure someone else doesn't use the name while you are preparing the necessary documents, and You can also carry out an availability search for the name you intend to use.

Aside from name reservation, what else is very important in the foundational process of the registration?

You need to get your Memorandum of Association and Articles of Association ready to present to the CAC. Your MemArt is like the guiding documents for your company. They specify how your shares or equity is going to be administered, the objects (purpose) of your company, how your company is going to vote in meetings, among other things.

Founders should ensure that their Articles allow them to put whatever conditions they would want to put on their shares and also allows them to give Equity when seeking investments. Some Founders adopt what we call model articles (boilerplate or a template) of articles without going through them to see if these templates allow them to even dilute their shares how they please.

They should also follow the process of registering to ensure that the little details such as the share capital of the proposed company are correct as well as the market price of each share.

Pre incorporation documents are also important such as shareholders agreements which specify how the shareholders will act so far it is not in contravention of the Articles.

Intellectual Property Assignment agreements are also important pre-incorporation to ensure that the IP Rights are assigned to the company. Some Founders may decide not to do that to have some leverage during an exit. Founders should also discuss how shares will be allocated and should ensure that during registration, such allocation of shares is properly captured. You do not want to give shares to someone you didn't intend to or to a wrongly named person or give more shares than intended.

Founders should also identify officers who will form part of the management team, their board of directors, and give out proper employment contracts to everyone on the team including themselves! Yes! A lot of VCs raise eyebrows when they don't see a proper employment contract for a founder or co-founders.

Founders should also ensure that they are processing how to obtain the relevant licenses from the regulators especially if they are in a sector heavily regulated like finance.

Why should founding members pay attention to shareholder agreements?

Shareholder Agreements are optional for companies but when the founding members of an enterprise or entity are small, it is always recommended to ensure that each and every shareholder understands their limitations, responsibilities, benefits, and things they cannot do because the Board of Directors already has the mandate to do those things.

They also help to ensure minority shareholders will not feel like they have been treated unfairly as every shareholder will be treated according to the SHA.

These are the reasons why Founders need to have them in place so that each shareholder has an understanding of what they can and cannot do, their shareholding or ownership percentage, among other important things.

How do employee stock options work?

It depends on the scheme that the company wishes to adopt. Some companies adopt schemes in which the employees pay for the shares and the shares a vested in them via a vesting schedule, some schemes stipulate that the equity will be given to employees and consideration for the shares will be taken from their salaries, and some schemes ensure that the option to buy shares vest on a yearly basis at a certain strike price, i.e if Muzan but if Muzan is an employee of the Demon Slayer Corps, who has an option to buy 1000 shares of the company at $5 per share, the Plan usually stipulates that Muzan will be able to buy 25% of those shares after 1 year, after 2 years 50%, three years 75% and so on.

So if Muzan exercises the option at the 2nd year, regardless of the market price of those shares, Muzan will be getting 500 shares at a price of $5. ESOPs tend to be confusing for a lot of people even for me (lol) the most important thing is to pay attention to the ESOP Plan the company has, how they administer it, the restrictions on the shares, what the ESOP Certificate given to the employee states, and whether or not the shares will be given to the employee through a vesting schedule or the employee will have an option to buy among other things.

Read Also: How the proposed startup bill will drive growth in Nigeria's tech ecosystem

What regulations should they pay attention to?

Founders should definitely pay attention to regulations and guidelines released by the regulators in their industries. One hack is to always check their websites for circulars or guidelines they may always release. A Payment Service Provider definitely has to pay attention to CBN, an insur-tech company that has to constantly be in contact with NAICOM.

So founders should always ensure that they have a legal and compliance officer, or they have a firm handling their legal and compliance issues because regulators are now trying to keep up with the fast-paced nature of the tech ecosystem and they are always looking for how to regulate grey areas to protect customers and consumers. I know that regulators aren't in the best of shape but they are building infrastructure quite fast.

So there's no one regulation that guides all, a complaint which has been made by a lot of stakeholders because they want harmonized documents, but the truth is that is almost unachievable so, for taxes, look at the taxation laws and guidelines, for compliance focus on your industry regulator and for the general company and corporate affairs, pay attention to the Companies and Allied Matters Act of 2020, CAC Regulations, and any other documents they put in place. Oh! And some sectors have codes of corporate governance.

Founders should try to pay attention to that as well. Especially for heavily regulated sectors like fintech.

Note: Seek legal advice to ensure that you make the right decisions for your startup.

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