Startup
29Apr

IP protection: a valuable tool for SMEs’ economic upscale

Small and medium-sized enterprises (SMEs) are the lifeblood of any growth-driven economy. They play a huge role in job creation and economic development. SMEs constitute about 90% of the world’s businesses and generate up to 40% of national income in emerging economies. Despite their enormous contributions to the economy, SMEs are plagued with several issues and access to finance sits at the top of the lists of challenges facing SMEs. SMEs are less likely to obtain loans from the bank than their larger counterparts as they may lack collateral to access such credit facilities. In the face of a global pandemic, the situation is worse for SMEs. While SMEs are fraught with their challenges, the situation is not entirely hopeless. Many entrepreneurs fail to harness a vital aspect of their business that can solve some of the challenges they encounter. This vital aspect is intellectual property.   SMEs and Intellectual Property Intellectual property (IP) is an aspect of a business that every entrepreneur must consider from the very onset of the business as it is one of the most valuable assets for any business. Many entrepreneurs make the mistake of believing that since their business is just kicking off or is small, they do not have to worry much about protecting their IP. Some others are ignorant of the fact that their businesses have assets worthy of IP protection. Another reason entrepreneurs do not consider IP from the onset is that "IP is too expensive" or that IP protection can be considered some other day. The below quote although said in respect to trademarks describes the disposition of many SMEs’ owners:  "We hear this from business owners all the time:   'Oh, we're too small. It's too early. We're still thinking. We'll think about trademarking once we grow bigger...' Let me be blunt with you, this is utter nonsense on so many levels. You must not make trademarking decisions based on where your business is today. You must make these decisions based on where your business will be if it's as successful as you hope it might become''. (The Ultimate Insider’s Guide to Intellectual Property) Beyond being a legal right,  IP is a business asset and tool for organizational and commercial advancement. SMEs ought to prioritize securing their IP rights and regarding IP as a tool for making more money. According to Julian Crump, President of the International Federation of Intellectual Property Attorneys (FICPI), "SMEs that apply for patents, trademarks or designs are more likely to grow quickly and succeed than those that do not." Using IP as a money-making tool is achievable when an organization takes IP seriously and includes it in its overall business strategy. Identifying your Intellectual Property IP extends to several intellectual/intangible assets of a business. These may include literary, musical, and artistic elements of a business that are protectable by copyrights such as client lists, customer databases, manuals, brochures, magazines, and explanatory materials for customers’ benefit. The brand identity (logos, slogans, etc) and goodwill of the business are protectable by trademarks. Other aspects of IP that affect SMEs include designs, patents, trade secrets, etc, and are so valuable that when converted to financial terms are capable of raking in capital for the business. If you have difficulty in identifying your IP, seek an expert legal opinion. Protecting your Intellectual Property
  • Integrating IP into your SME’s overall business strategy. This motivates the business owner or entrepreneur to manage their IP with the same seriousness as they would handle funding, infrastructure, etc, and actively take steps to protect and maximize their IP.
 
  • Register your IP with the relevant agencies. IP such as patents, trademarks, and industrial designs in most jurisdictions require registration for protection to avail. For copyrights, depending on the jurisdiction, registration may not be necessary. Using the Copyright © symbol on your copyrightable works is enough protection.
 
  • Take stock of your IP portfolio by conducting an IP audit. Doing this would help you determine aspects of your business that require IP protection. This will also keep you informed as to what IP to commercially exploit. 
 
  • Be sure that you own the IP in your business. This is achieved by conducting an IP audit. One area small business owners overlook is the aspect of website development. There is the misconceived notion that since they have paid for the web design, they own all the intellectual property rights to that website. However, that is not the case as the general rule is that rights in works contracted to independent contractors are owned by the contractors unless the parties agree otherwise by a written agreement. Also, you want to be sure that none of your materials including your website are infringing on the IP rights of others. 
 
  • Seek expert legal help as it may save you from more costs in the future. Getting sound legal opinion or assistance from the onset of your business is very necessary as this would help you understand the appropriate IP protection measures for your business and its commercial potential concerning IP. 
 
  • Use non-disclosure agreements (NDAs) to protect your IP when dealing with others, including in your employment contracts clauses that prevent your employees from disclosing salient aspects of your business, and protect your IP during a pitch.
 
  • Keep your idea a secret until you have had it protected. A secret shared is no longer a secret. Where your business relies on or has trade secrets, take adequate measures to maintain secrecy. 
Failure to consider IP early leaves room for rivals to infringe on IP which may be inimical to the progress of your business. Taking your ideas to the market While it is highly recommended and commendable that SMEs protect their intellectual property, it is also very important that they maximize the commercial potentials of their IP. Intangible assets of a business, IP being one of such, make up about 30-40% of the profit margin of most businesses today. Also, IP “should be seen as a power[ful] tool for economic growth instead of an obscure legal concept.”  Competitive advantage and larger opportunity in the marketplace  A foremost way of benefiting commercially from an SME’s IP is protecting the IP. A lot about protecting IP has been advocated in the earlier part of this article. Trademarks are one of the most important intellectual property rights for SMEs. Protecting your trademark helps to preserve your brand image, as your consumers/customers are not confused when they encounter your goods or services in the marketplace. Also, by registering your trademark, you reduce the risk of another business hijacking your brand prestige. By preserving your trade secrets, you can continuously derive economic benefits from the exploration of such secrets, as competitors are not privy to what makes your business tick. Assignment Assignment simply means the sale or transfer of one’s rights or interest in a thing. An SME’s owner can make a profit from their IP by assigning their IP rights in a particular creation, brand, or invention in return for revenue. In 2005, Chad Hurley, Steve Chen, and Jawed Karim created the video-sharing platform YouTube. In 2006, Google purchased YouTube for US$1.65 billion and now earns the same amount in monthly revenue. Licensing Licensing of IP allows IP rights holders to license out their IP based on agreed terms in exchange for revenue. Licensing may also provide the business owner access to new markets and increase consumer awareness of their goods and services. Licensing may take the form of exclusive, non-exclusive, and sole licensing. Franchising Franchising is particularly very attractive in the aspect of trademarks. Here, the franchisor whose brand has gained prominence or reputation among consumers grants the franchisee rights to market their products or services using the franchisor's brand. A franchise agreement would spell out the terms of the contract. It's a win-win for the franchisor as they acquire revenue just by letting another use their brand. Access to funds Leveraging IP to access venture capital and other financing sources is a viable option for SMEs' owners to profit from their IP. Having a viable IP portfolio attracts and boosts investors' confidence to invest in your business.  Conclusion SMEs play a huge role in the economic development of nations. However, financing is a major challenge plaguing SMEs, with many of them not surviving the first five years of operation. Harnessing IP for business advancement should not be overlooked by entrepreneurs and business owners. The benefits are enormous. Seek expert legal opinion on how to benefit from your IP rights.   Disclaimer: This article is for educational purposes only, and should not be construed as legal advice. Please consult a lawyer for tailored legal advice.
By Intellectual Property, Startup, Venture Capital0 Comments
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new cama 2020
30Aug

THE  NEW COMPANIES AND ALLIED MATTERS ACT 2020, WHAT STARTUPS, SMES AND OTHER  BUSINESSES IN NIGERIA NEED TO KNOW

DOWNLOAD PDF version of this article. In Nigeria, the Companies and Allied Matters Act (CAMA) is the legislation that governs the birth (Incorporation/registration), growth (Restructuring/reorganization), and demise (Winding-up) of businesses and companies. The President of The Federal  Republic of Nigeria, His Excellency Rt. Major Gen. Muhammadu Buhari on the 7th day of August 2020 accented to the new Companies and Allied Matters Act (CAMA) bill passed by the National Assembly which replaced the extant one of 2004. You can download the New CAMA 2020 here. Is this a welcome development, especially for startups, Small and Medium Scale Enterprises (SMEs) in Nigeria? Let’s find out. Before the passing into law of the new CAMA, businesses and companies were required to meet certain regulatory conditions before they can be registered to do business in Nigeria. Some of these conditions create unnecessary bottlenecks for some business owners, delaying registration of their businesses, or worst-case scenario unable to register the business.  The 2017 National Bureau of Statistics (NBS) report showed that about 97.8% microenterprises were unregistered due to regulatory challenges and others. Larger companies also have their challenges as a result of lacunas in the repealed Act. The good news is that some of these unfavorable conditions have been eased off to encourage SMEs to do business in Nigeria and also facilitate the smooth running of larger (private and public) companies in Nigeria. We will be discussing these improved provisions in this article.

SINGLE MEMBER/ SHAREHOLDER TO FORM A PRIVATE COMPANY

One person alone can now incorporate a company. Before the new CAMA, S. 18 0f the old CAMA provides for two(2) or more persons to form or incorporate a company. This means that before a company can be incorporated, it must have at least two (2) or more founding members and must not be less than the age of 18 years as provided for in S. 20 (1) (a) of the old CAMA.  The new CAMA under S. 18 (2) allows for a single member/ shareholder to form or incorporate a private company provided that such a company is not formed for illegal purpose S.18(3) and such an individual must not be less than 18 years S.20(1) (a). This is surely good news for startups and young entrepreneurs who wish to commence their own business without having to look for a founding partner or a nominal shareholder. READ ALSO: How Many Founders Should A Startup Have?

LAWYER OR NOTARY PUBLIC SIGNING A STATEMENT OF COMPLIANCE NO LONGER MANDATORY

A lawyer or notary public is no longer needed to sign or notarize a statutory declaration of compliance. S.35(3) of the old CAMA requires a statutory declaration of compliance form (also known as the Form CAC 4) be duly signed by a legal practitioner or a Notary Public, indicating that all requirements for registration have been complied with before a company can be incorporated. Under the new CAMA, this requirement is no longer necessary for the incorporation of a company. The entrepreneur, under S40 (1) ( the applicant) does not need the Form CAC 4 to be signed by a lawyer or Notary Public. Rather, the Statement of Compliance can be signed by the applicant or his agent, indicating that the regulatory requirements for registration of the said business/company have been complied with. It should, however, be noted that S. 40(1) did not invalidate Declaration of Compliance forms duly attested to before Commissioner for Oaths or by a Notary Public as the Corporate Affairs Commission (also known as the Commission) under S.40(3) is duty-bound to accept same to register a business. This means that an applicant can elect that his lawyer attests to a declaration of compliance for incorporation.

REPLACEMENT OF AUTHORIZED SHARE CAPITAL WITH MINIMUM SHARE CAPITAL

S. 27 of the New CAMA replaces the word ‘ Authorized Share Capital’ with ‘Minimum Share Capital’. This means that promoter(s) of a business doesn't need to allocate or pay for shares that are not needed at the time of incorporation. It should also be noted that the minimum share capital for private companies is N200,000 and N2,000,000 for public companies as against the authorized share capital of N10,000 for private companies and N500,000 for public companies under the old CAMA.

COMMON SEAL NO LONGER MANDATORY

The common seal, just like a human signature, is the signature of the company which is usually affixed to authenticate contracts and transactions which the company enters into. Provision may be contained in the Articles of Association of a company that a particular subscriber may retain custody of the common seal to enable it to track the company’s transactions and contract. The procurement of a common seal is mandatory for the incorporation of companies under the old CAMA. The mandatory requirement of common seal for companies has been expunged by S. 98 of the new CAMA. This simply implies that companies may or may not have a common seal and can still authenticate documents that would still be valid. S. 101 and 102 of the new CAMA provides that the electronic signature of the director,  secretary, or authorized officer of the company will suffice. In essence, companies do not need to affix seals on documents anymore. This development is in line with international best practice as most jurisdictions have expunged this requirement from their legislation. Most companies around the world have gone digital, so seals are no longer mandatory for authentication of documents within the territory of Nigeria. However, the provision does not stop any company in Nigeria having business outside the territory of Nigeria to not have a common seal if required. S. 99 provides for companies operating the object of their businesses outside the territory of Nigeria that may need a common seal, can have a common seal. The articles of the company shall regulate the use of the common seal. The company may by a deed authorize any person outside the territory of Nigeria to affix the seal on behalf of the company in any document outside the territory of Nigeria. READ ALSO: Business Name VS Limited Liability Company: How Should I Register My Business With CAC?

ELECTRONIC FILING, ELECTRONIC SHARE TRANSFER AND  VIRTUAL MEETINGS FOR PRIVATE COMPANIES

The new CAMA also made provisions for electronic filing. That is, companies can be registered from anywhere in the country through the registration portal. A certified true copy of electronically filed documents is admissible in evidence and carries the same weight in evidence as to the original document. It should be noted that the official position of the certifying officer is unnecessary to prove the validity of the certified document S.861 (3). Transfer of shares in private companies may be restricted by its articles S 22(2) and it also provides Right of First Offer (ROFO) for shareholders S.22 (2) (a) (b)(c) of the new CAMA, that is shares cannot be sold to third parties by a shareable without first offering to members of the company.  The transfer of shares is done electronically under the new CAMA S.175. S.22(2) of the old CAMA provided that a private company can restrict the transfer of shares in its articles, but did not provide for  ROFO as seen in S.22(2) (a) (b) (c) of the new CAMA. The new CAMA under S.176 (1) provides for electronic instruments of transfer of shares. This simply means that a transferor of shares transaction in a private company, the shareholder does not necessarily have to be physically present before he/she can initiate such transaction in favor of the transferee and the company, having been satisfied that all conditions as to the transfer have been met, shall also enter into her register of member the details of the transferee with the number of shares so transferred. This can also be done electronically.  The new CAMA under S. 240 (2) also provides for remote or virtual General Meetings for private companies, provided that such meetings are conducted following the Articles of Association of the company. This stems from the current disruption caused by the COVID-19 pandemic and a need for uninterrupted operations of companies. S.237 of the new CAMA says AGMs are not mandatory for Small companies.

SMALL COMPANIES EXEMPTED FROM APPOINTING AUDITORS

S. 402 of the new CAMA provides that small companies or any company having a single shareholder are no longer mandated to appoint auditors at the Annual General Meeting (AGM) to audit their financial records. However, for a small company to be exempted, it must satisfy the conditions as provided for under S.394 which are summarised as follows: 
  1. It is a private company; 
  2. Its annual turnover is not more than ₦120,000,000 or such amount as may be fixed by the Commission from time to time; 
  3. Its net assets value is not more than ₦60,000,000 or such amount as may be fixed by the Commission from time to time; 
  4. None of its members is an alien (foreigner); 
  5. None of its members is a government, a government corporation or agency, or its nominee; and 
  6. In the case of a company having a share capital, the directors between themselves hold at least 51% of its equity share capital. 

ENHANCEMENT OF MINORITY SHAREHOLDERS 

S.265 (6) expressly restricts companies from appointing an officer to simultaneously hold the office of the Chairman and Chief Executive Officer (CEO) of a public company. This would create a check and balance for officeholders.

LIMITED LIABILITY PARTNERSHIP (LLP) 

S. 746 of the new CAMA introduces the business concept of Limited Liability Partnerships (LLPs). Under the Repealed Act, partnerships were not considered a body corporate. That is, they do not have a  legal persona separate from their partners. S. 746(1) of the new CAMA now clothes LLPs with legal persona status, a distinct legal person separate from its partners.  For a Limited Liability Partnership (LLP), to be formed, it must have at least two (2 ) partners S 748(1) and S. 753(1) (a) of the new CAMA. If the number of partners falls below two (2) and the partnership business is carried on solely by a partner for six (6) months and beyond, such a partner will be personally liable for any liability incurred by the partnership within that period S. 748(2). Members of LLP must not exceed 20 S. 795 (2)  and partnership interests under LLP are transferable  S.774 of CAMA 2020.

MERGER OF INCORPORATED TRUSTEES

The new Act under S. 849 provides for a merger between two or more associations with similar aims and objects under such terms and conditions as may be prescribed by the Corporate Affairs Commission (CAC) which was not contained in the previous Act. Also, Section 831(ii) provides that without prejudice to S. 849, any two or more associations having the same trustees to be treated as a single association. This implies that registered associations having similar objects (business) or having the same trustees may be merged by the commission to facilitate effective regulation and supervision purposes. The implication is that in the nearest future, the Commission may decide to merge churches as you have banks merging some years back. This may not be good for religious bodies. The Commission is further vested with the power to award fines(no specified amount) for default of any section of the new Act. These powers vested on the Commission may work adversely against the objectives of the new Act if it is not put in check.

REDUCTION OF FEES FOR CHARGES 

222(12) of the new Act stipulates that the total fees payable to the CAC for Charges have been reduced to 0.35% of the value of the charge or such other amount as the Minister may specify. This section introduces a significant reduction of fees for charges at the Commission. 

EXEMPTION FROM APPOINTING A  COMPANY SECRETARY FOR PRIVATE COMPANIES 

Under the repealed Act, every company was mandated under S 293 (1) CAMA 2004 to have a Company  Secretary, whilst S.330(1) of the new CAMA makes the appointment of a Company Secretary optional for private companies and mandatory for public companies. This amendment would undoubtedly reduce costs for startups and small companies doing business in Nigeria. Also, the New Act under S. 336, requires only public companies to maintain a register of secretaries and S. 337 and 338 provides for the prescribed particulars of secretaries to be recorded in the register of secretaries. S. 339 (2)(b) of the new CAMA provides that a letter of consent by the person newly appointed to act as a secretary must accompany the notice of such an appointment sent to  CAC.

RESTRICTIONS ON MULTIPLE DIRECTORSHIPS IN PUBLIC COMPANIES 

The repealed Act did not provide a limit to multiple directorships in different public companies as long as the director does not derogate from their fiduciary duties to each company where they act as a director. This position, however, is different under the new CAMA as S.307 (1) of the Act prohibits a person from being a director in more than five (5) public companies at a time.

DISCLOSURE OF PERSONS WITH SIGNIFICANT CONTROL

119 of the new CAMA provides for the obligation of disclosure of particulars of persons in significant control in a company (Public or Private). This provision mandates a company to disclose capacity in which shares are held either as a beneficial owner or nominee. This provision enhances corporate accountability and transparency.  120 defined a substantial shareholder in a public company as a person who holds by himself or through his nominee 5%, of unrestricted voting rights in a general meeting. Substantial shareholders are also obligated to disclose the capacity of their shareholding to the company the share is being held.

BUSINESS RESCUE PROVISIONS FOR INSOLVENT COMPANIES

The new Act introduces a framework for the rescue of corporate insolvency by introducing Company Voluntary Arrangement (S.443 to S.549) and Administration. In a Company Voluntary Arrangement (CVA), the directors of a company may make proposals to its creditors for the best possible ways to settle the company's debts. The proposal will provide for a qualified insolvency practitioner to act either as a trustee or nominee for supervising its implementation. This process can also be initiated by a liquidator or an administrator where the company is in liquidation or administration.
  1. 444 provides for the principal functions of administration: 
  2.  To rescue the company, the whole or any part of its undertaking as a going concern; 
  3. Achieve a better result for the company's creditors as a whole than would be likely if the company were wound up without first being in administration; and 
  4. Realize property to make a distribution to one or more secured or preferential creditors. 
Under administration procedure, control of the company is given to an insolvency practitioner who objectively reviews the profitable and non-profitable aspects of the distressed company and proposes a plan in line with the objectives of administration for the business rescue of the company.  To encourage the success of this business rescue procedure, the Act makes adequate provisions (amongst others) for suspension of enforcement actions by creditors during administration S.480. DOWNLOAD PDF version of this article.

CONCLUSION 

The new Act contains some provisions that encourage the formation and operations of startups. That is for an entrepreneur who wishes to register his business at a small scale can do so without having to go through so many regulatory hurdles. He can initiate the incorporation of a private company from any part of the country because these processes can be done online and a certified true copy of these documents generated from these process are admissible in court. Annual General meetings of small or private companies can be done virtually. The promoter or founder does not need another member before he can register his private company.  Those desirous of forming a partnership with corporate personality can do so because the new CAMA provides for the formation of limited liability partnership and accords it corporate personality. The interest of minority members in a company was also considered and provisions with frameworks geared towards saving companies from corporate insolvency.  It is our collective hope that these new provisions will improve Nigeria's ease of doing business and boost the nation's economy at the same time. You're also welcome to interact directly with the FINT Team. Join our Telegram Group: https://t.me/FINTConsulting or our Telegram Channel: https://t.me/FINTChannel. See you there. Alternatively, you can join our mailing list to stay updated with what we are doing and resources for innovative businesses. DISCLAIMER: This article is written for educational purposes only and should not be construed as legal advice. Consult a lawyer for tailored legal advice. DOWNLOAD PDF version of this article.
By Startup, 1 Comment
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10Jun

Business Name VS Limited Liability Company: How Should I Register My Business With CAC?

Hello FINT, thank you for your answer to our number of founders' question. Now we want to take the next step to register our business. Should we register it as a business name or as a company? Answer: After validating a business idea, the very next step should be formalizing its existence by registering it with the appropriate authority. In Nigeria, the Corporate Affairs Commission (CAC) is saddled with this responsibility. There are different vehicles under which a business idea could be structured. Section 21 of the Companies and Allied Matters Act (CAMA) lists several options. But we will focus on two major options; Business Name and Limited Liability Company. The points below will help you in answering the question.  

Type of Business Idea 

Deciding between a business name and a limited liability company depends on the business idea. Some businesses, like law firms, can only be registered as a business name. In the same way, some businesses like those into FinTech can only be registered as a company. Business Name VS Company funding Image by Tumisu from Pixabay

Venture Capital

If you do not intend to secure venture capital, that is bringing in investors, you can go ahead with a business name. If otherwise, then you need to register a company so you can issue equity to investors.

External Funding

Businesses hoping to secure external funding like grants, whether from the government or private should consider registering as a limited liability company. Generally, and in most cases, grants are not given to an individual, but rather to a formal entity reflecting the cause for which the grant was granted.

Government Bids

If you do not intend bidding for projects with the government, whether federal, state or local, you can go ahead with a business name. If otherwise, then you need to register a company. Government agencies will not acknowledge the bids unless it is a limited liability company. 

Sole Proprietorship

Business names work best for a sole proprietorship. So, if you are running a one-man or one-woman business, and you simply want to structure things in order to get access to benefits like a corporate account, then a business name suffices. If you opt for a company, you must comply with the mandatory requirement of a minimum of two (2) shareholders. Although, there can be more than one proprietor for a business name registration, so it is suitable even for partnerships. However, once there are more than twenty (20) partners, then it needs to be registered as a company. Exceptions include law firms and accounting firms.

Contributions and Ownership Stakes

Business partners who want their contribution to the business to be clearly spelled out in public documents and also reflect their ownership stakes are better off registering as a company. As earlier stated, although business partners could still register as a business name, there must be a legal document that clearly addresses these points.

Separate Legal Entity

With a business name, there is no separate legal entity. You (and your business partners) are simply carrying on business in the name registered with CAC. This means that all risks and liabilities are borne personally by the business owner(s). With limited liability companies, whether private or public, there is a separate legal entity. That is, the company itself is an artificial person that is distinct from the shareholders/members. Thus, all risks and liabilities are borne by the company and not personally by the shareholders.

Business Continuity

A business name lacks continuity because when the owner dies, the business also dies. This is not the case with companies as it is a separate legal entity existing independent of its shareholders/members. Moreover, ownership of shares can be transferred, while ownership of a business name cannot be transferred as it is not a separate legal entity. Business Name VS Company own properties Image by Nattanan Kanchanaprat from Pixabay 

Own Properties

This follows immediately after separate legal entity, because only a person, artificial or natural can own properties in Nigeria. What this means is that a business name cannot buy properties nor own shares. A limited liability company can own properties, take up shares in another company and also own a business name.

Capacity to Sue or Be Sued

Business names cannot sue or be sued. The individual(s) behind them are the ones who can sue or be sued. Companies can sue or be sued, without involving the shareholders/members. This is however subject to the principle of lifting the veil, especially when criminal matters are involved.

Formality and Costs

Registering a business name is less formal and does not require much documentation. Ideally, just the application form, receipts and IDs. business owners can register a business name themselves, saving on costs. A limited liability company is more formal, both during registration and even when in operation. Things like annual general meetings, board resolutions, etc are some of the mandatory formalities. A lawyer is needed to register a company, this means more costs.

Financial Bill 2020

The recent financial bill grants tax concessions to companies with annual profits below ₦25 million. This concession does not apply to business names. Finally, if you choose to register as a company, you also need to decide on private or public. If private, you need to check CAC guidelines for the minimum share capital allowed for your type of business. Also, only a maximum of 50 shareholders are allowed in a private company, otherwise it needs to be registered as a public company instead.  We hope the above points will help you in deciding on an appropriate structure for your business idea. Do not make the mistake of opting for the cheapest option (a business name) when it does not adequately reflect the nature and risks of your business idea. It could become an expensive mistake. Simply consult a lawyer to check out all of these and help you make an informed decision. You're also welcome to interact directly with the FINT Team. Join our Telegram Group: https://t.me/FINTConsulting or our Telegram Channel: https://t.me/FINTChannel. See you there. DISCLAIMER: This article is written for educational purposes only and should not be construed as legal advice. Consult a lawyer for tailored legal advice.
By Startup, 1 Comment
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24Feb

How many founders should a startup have?

Client: “Hello, please, we would like you to register a company for our business. But before that, we would like to document our agreements in a Founders Agreement.” FINT: “Awesome! FINT is happy to incorporate your company. So, how many founders does the business have? Client: “At the moment, we are five, (5) with the possibility of a couple more joining us.” FINT: “Five?!” As with all things in the startup ecosystem, there are no hard and fast rules on the number of founders a startup should have. Thus, rather than giving you a cut and dry answer to the question in focus, we will analyze some points to consider when faced with the question of how many founders should a startup have? Remember though, the fewer the better, for both your sanity and your startup’s success.

Venture-Backed vs Bootstrapped

This should be your first consideration if you are considering more than one founder for your startup. Investors look out for certain things when deciding to invest in a startup. Where a startup does not fit any of their criteria, chances of getting a signed cheque is slim.  Usually, investors prefer to deal with at most two or three founders, their perfect choice is the two founder startup. It helps to cut down on the decision-making process since all founders' opinions need to be factored in. Moreover, having more than three founders paints a negative picture of weak leadership to investors. They will prefer to stay away. An additional point to make here is that investors do not automatically become founders, regardless of how huge their stake in the startup is. If however, your business is bootstrapped, you could probably get away with three and more founders, so far things can be properly managed. SideBar: There’s a Mumbai based startup, Housing.com which originally started with twelve (12) cofounders. Yes, you read that right, 12!

Protect Founder’s Equity

In a future piece, we will discuss in detail how to divide equity amongst co-founders. For now, let’s consider how the number of founders can affect founder's equity. Put quite simply, the more founders, the lesser the stake a founder holds in the company. And the lesser the stake, the lesser the motivation to stay committed to the startup. In addition, the more founders, the higher the chance that someone would jump ship. One way to manage commitment is by vesting. This will help prevent a situation where a nominal founder who does nothing walks away with valuable equity based on the sweat of others. Yeah, that’s why it is sometimes called sweat equity. We will definitely ensure there is a vesting clause in the founders agreement the client in the opening story asked for.

Hedge Risks

Your first thought after reading above subheading is most likely financial risks. What about health risks? It’s common knowledge that most startups founders burn the midnight candle, sometimes till daybreak. Occasional late nights are allowed, unfortunately, most founders get stuck in this bad habit which is detrimental to their health or optimal productivity. On the risk of discouragement, regardless of how difficult situations maybe, where there is more than one founder, the chances of operations coming to a standstill because someone at the top is in despair, is low. The more founders, the lower the chance. As a support system, when one founder is indisposed, the others will be able to step in and hedge the risk of discouragement. On business development risks, solo founders are forced to drop a ball as they juggle building a customer base and building/iterating the product. With more than one founder and effective distribution of skill sets in place, the startup can easily hedge the countless risks challenging its success. After all, one shall chase a thousand, two shall chase ten thousand. 

Other Founding Contributors

Okay, we have been chanting “the smaller, the better” for a while now. What then happens to those who have made a significant contribution, even from ideation? Simple! They get their deserved sweat equity. Topping it with a founder title is not necessary. What the startup needs are the appropriate skill sets for the appropriate positions. We conclude this piece by emphasizing that “too many cooks spoil the broth”. Protect founder's equity, hedge risks and stay attractive to investors by keeping the founders circle as small as possible. Would you like to chat with the FINT team? Stop by on our Telegram group and ask your questions! Also, let us know what other topics we should write about. You're also welcome to interact directly with the FINT Team. Join our Telegram Group: https://t.me/FINTConsulting or our Telegram Channel: https://t.me/FINTChannel. See you there. DISCLAIMER: This article is written for educational purposes only and should not be construed as legal advice. Consult a lawyer for tailored legal advice.
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