Term Sheets in Nigeria - Venture Capital

A Nigerian tech start-up was preparing to close a Series A funding round with a venture capital investor, who had provided successive Term Sheets for review. Unfortunately, the founders only engaged legal counsel after signing the Term Sheet and after receiving drafts of the definitive documentation.

Upon reviewing the Term Sheet, our legal team identified several unfavourable provisions that could jeopardize the company’s valuation, governance, and operational growth. For one, the founders had significantly undervalued the company having not taken into consideration a number of factors, including strategic partnerships that enhanced the company’s market position, and ongoing development of innovative products with strong revenue potential.

Amongst others, the Term Sheet: (a) granted the investors disproportionate returns, with terms that were more aggressive than what is standard in venture capital term sheets; (b) allocated excessive board control to investors, limiting the founders' ability to influence key decisions; (c) allocated a substantial portion of the investment amount to fees and costs, leaving insufficient working capital for the company’s operations and growth plans; (d) required the company to re-domicile to a foreign jurisdiction, potentially introducing operational and compliance challenges specific to Nigerian companies; and (e) contained widely-drawn full-ratchet anti-dilution clauses, which could significantly dilute the founders’ equity in the event of future down rounds.

Approach & Outcome

Despite the Term Sheet being signed, we were able to articulate a compelling rationale for renegotiating certain key provisions of the Term Sheet with the investors, ensuring alignment between the investors’ goals and the company’s long-term success. Amongst others, we are able to: (a) renegotiate the valuation to preserve founder equity and increase investor confidence in the company’s potential; (b) make adjustments to board composition to ensure a more balanced decision-making framework; (c) revise liquidation preferences and anti-dilution clauses to reflect standard venture capital terms; and (d) renegotiate a removal of the re-domiciliation requirement, thereby helping the company to maintain the company’s focus on its core markets.

Key Takeaways

This case highlights the critical role of legal counsel in navigating term sheets in Nigeria. Engaging experienced lawyers early in the fundraising process and before signing a term sheet ensures founders avoid unfavourable terms, reasonably protect their equity positions, and maintain control over their company’s strategic direction.

This publication is not intended to provide legal advice and is not prepared with a specific client in mind. Kindly seek professional advice specific to your situation. You may also reach out to your usual Balogun Harold contact or contact us via support@balogunharold.com for support.