Funding is a critical phase in the growth and sustainability of any startup, especially for those that have achieved post-revenue or money-generating status. While securing funding can be a significant milestone, it is crucial to navigate the legal considerations to ensure compliance, protect investors, and foster a thriving business environment. In this piece, an exploration of the fundamental legal aspects that startup founders should be aware of when seeking funding in a post-revenue/money fund scenario will be made.

  1. Choice of Funding Type:

In the post-revenue stage, startups have several funding options to consider. Common sources include venture capital, angel investors, private equity firms, bank loans, and crowdfunding platforms. Each funding source may come with specific legal agreements and requirements, making it essential to understand the implications of each choice.

  1. Investment Agreements:

When dealing with investors, startups typically enter into investment agreements. These contracts outline the terms and conditions of the investment, including ownership stakes, voting rights, dividend distribution, exit strategies, and potential investor control over company decisions.

3. Securities and Financing Laws

Startups in post-revenue/money fundraising have to pay close attention to the securities and financing laws within the jurisdiction of their operations. For instance, in Nigeria, the relevant provisions of the Startup Act, the Securities and Exchange Commission Rules as well as the Anti-Money Laundering laws and impacts have to be considered.

4. Regulatory Compliance:

Post-revenue startups must be diligent about regulatory compliance. Securities laws and financial regulations may vary based on the funding source and jurisdiction. Failure to comply with these laws could lead to severe penalties, legal disputes, or even the loss of funding for start-ups. Also review for mention local content, code of governance as well as restriction on foreign ownership in certain sectors.

5. Intellectual Property Protection:

Strong intellectual property (IP) protection is vital for start-ups seeking funding. Investors often assess the value of a company’s IP portfolio, which may include patents, trademarks, copyrights, and trade secrets. Ensuring proper documentation and registration of IP assets safeguards the company’s competitive advantage and enhances its investment appeal.

6. Due Diligence:

Investors conduct thorough due diligence to assess the financial and legal health of a company before committing funds. Businesses should be prepared to provide comprehensive and accurate records of financial statements, legal contracts, tax documents, and any potential legal disputes. Any discrepancies or undisclosed legal issues may jeopardize funding opportunities.

7. Compliance with Shareholder Rights:

In cases where funding involves selling shares to investors, companies must respect shareholder rights. This includes timely communication, annual general meetings, voting processes, and equitable treatment of all shareholders. Understanding and adhering to corporate governance principles is vital for maintaining a positive investor relationship.

8. Tax Implication of Transaction:

Startups in post-revenue/money fundraising have already started operations and making profits. Therefore, the tax implications of the startups’ transactions have to be given consideration as they will likely attract payment of capital income tax, income tax, capital gain tax, stamp duties, etc directly arising from the transactions

Conclusion:

In the post-revenue/money fund phase, securing funding can be a game-changer for startups looking to scale and expand their operations. However, navigating the legal considerations associated with funding is equally crucial. By understanding the basics identified above, startups can position themselves for success while building a solid foundation for future growth.

Written bMuhiz Adisa for The Trusted Advisors

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