[vc_row][vc_column][vc_column_text]Here are some of things we have learnt.
If you are looking for a partner to build a tech business, the contractual foundations of your tech business are as important as building the product itself. At the core of a business relationship between tech founders is a Founders’ Agreement. It is not always the case, but most investors assume that tech startups looking to raise money have at least 2 Founders, who have the core technical and product skills required to grow the company to move the company to the next stage and that both have share incentives in the company. That makes sense because tech entrepreneurship tends to be tougher when only one person is primarily responsible for every aspect of a company’s growth strategy. If that one person is not a technical founder, the company never get off the ground or even raise financing.
A Founders’ Agreement is still useful for many reasons. First, because, it makes clear the rights, responsibilities, liabilities, and obligations of each Founder. Clarity of purpose is extremely important (but still underrated) by many Founders. Sometimes it is not the kind of thing you recognize without someone mentioning it. Clarity on the roles and responsibilities of a Founder in meeting growth and product targets is very critical to succeeding at fundraising. Many venture capital investors would be concerned about Founders who do not have a keen sense of the value they bring to the table or with Founders who cannot demonstrate an understanding of their roles in building a tech business.
A Founders’ Agreement also ensures accountability. Based on what we see in the market, the reality appears to be that accountability is easier achieved when spelt out in a legally binding document. More Founders need to realize that highly talented and visionary people, at every level, require some level of focused talent management. A Founders’ Agreement when drafted properly does just that. Many of the successful global tech companies we reviewed had some form of Founders’ Agreement when setting out.
A Founders’ Agreement provides the entire team with legal protection. Most startup teams start out with friendly relationships, but founder conflict is statistically the highest cause of startup failure – up to 65%. If problems arise, a Founder’s Agreement would be invaluable for resolving these issues and in the worst case, ensuring that Founders are protected under the law. This could be in terms of claiming property or income to which one is entitled or also avoiding legal liability. In all, a Founder’s Agreement would also ensure that the company does not fail unnecessarily.
Share vesting is now a more crucial element of managing founder-to-founder relationships. The imperative is particularly great, given current economic conditions and an increase in migration of Africans to Canada or other countries that are viewed as offering better compensation for talent and guaranteeing better living conditions. We generally recommend that all Founders’ Agreements include share vesting clauses. Vesting clauses are technical and it is important to seek experienced legal counsel when structuring a vesting clause for a Nigerian tech company.
In a recent case which we advised on, a co-founder who decided to relocate to another country, refused to relinquish the shares in his possession even though he was no longer going to be active in the Company. In this particular case, the vesting clause was not properly structured and as such the leaving founder, whose position was not very reasonable for the company at the time, operated from a position of strength, making the company unattractive to investors and almost leading to the failure of the company.
Founders who have their affairs properly structured send a strong positive signal to investors and are more likely to inspire the confidence of investors. At every stage of investment, the level of confidence that Founders inspire is critical and may be very decisive during fundraising.
Additionally, when building a tech business, a Founders’ Agreement is the most effective way to protect the intellectual property assets of the Company. From experience, we know that venture capital investors are unlikely to put money in a business that does not own the intellectual property with which it operates its business, especially if that intellectual property is in the possession of a leaving Founder.
From experience resolving Founder disputes, we know that resolving founder disputes can be emotionally draining and time-consuming. The reality is that a Founder dispute is unnecessary most times. Not having a properly-drafted Founder’s Agreement should not be the reason your company does not succeed.
Ademola Adekunbi is a Legal Analyst at Balogun Harold and can be reached at ademola@balogunharold.com.[/vc_column_text][/vc_column][/vc_row]
