Common regulatory mistakes startup founders should avoid

An innovative idea does not always translate to a successful startup. Several factors are responsible for the success or failure of a startup.

Unfortunately, startup founders often discount the importance of legal structure and business strategy. And in some cases where regulation is yet to catch up with innovation, they would only seek legal and business advice after launching their product or during fundraising.

The problem with that is: they might have already committed to obligations that may not be in their best interest, and some obligations are irrecoverable.

Below are 10 mistakes founders make that could hinder the success of their startups in Nigeria.

1. Incorporating the wrong entity or in the wrong jurisdiction

Incorporating the wrong entity or in the wrong jurisdiction could prevent you from getting funding or launching your product.

For instance, incorporating in Nigeria would enable you to operate effectively in the country. And it's always best to incorporate a company limited by shares instead of a business name. Because investors won't put their money in an entity that's not a company.

Some venture capital (VC) firms, however, prefer startups to incorporate a holding entity in a jurisdiction that has favourable judicial systems, low taxes and minimal foreign exchange exposure. Delaware, Mauritius, and the Cayman Islands are some of the ideal offshore jurisdictions for such holding entities.

2. Unclear terms of business deals between the co-founders

American academic Noam Wasserman studied 10,000 founders for his book "The Founder's Dilemma" and submitted that 65% of high-potential startups fail because of founder conflict. And what drives founder conflict include money, power and control, care and closeness, and respect and recognition.

Documents such as founders’ agreements, shareholders agreements, directors’ charters and articles of association can prevent these disagreements or resolve them. But merely downloading a template without a lawyer to walk you through the terms of the documents is worse than not having them at all because the laws in the templates might not apply to your situation. And that could fuel rather than quell the dispute.

A good dispute resolution agreement specifies the appropriate laws and courts or tribunals where disputes would be settled.

3. Choosing a wrong name

Much has been said about the importance of a business name; however, you may not get it right the first time. Google's name ab initio was BackRub, Amazon was Cadabra, and Nike was Blue Ribbon Sports.

But it's egregious to pick the wrong name for your company or app — another company's name, domain name or a name that already exists as a trademark. It is advisable that before settling on a name, you search the Corporate Affairs Commission (CAC) and the trademark registry for its availability.

Also, conduct a simple search on Namecheap or GoDaddy and other domain name registrars to confirm the domain name you want is available. You can save time by using Namecheck.

4. Inadequate protection of intellectual property

Failure to protect your intellectual property might lead to the failure of your startup. If you've developed a unique product or service, you should ensure you protect your copyright, trademarks, patents, and designs. Confidentiality agreements should also be executed to protect trade secrets.

5. Lack of good employment contract

Don't hire without an employment contract that clearly states working hours, salary and other compensation benefits, termination notices, share vesting (if applicable), and other terms of employment such as confidentiality, intellectual property ownership/assignment and non-compete agreements.

These agreements could be included in the employment contract or issued as a standalone agreement. They are critical to the continued existence of your business. For instance, a clause specifying the owner of any intellectual property created by an employee while working for the company would prevent disputes and theft.

6. Incurring liabilities from freelancers

Startups usually employ the services of freelancers and consultants who are legally classified as independent contractors. Independent contractors provide services for a company but are not entitled to employee benefits, cannot act on behalf of the company, and are responsible for liabilities they incur while performing projects for the company.

Without contracts clearly defining the difference between employees and these independent contractors, startups could incur the liabilities of their independent contractors.

7. Unfair contractual obligations

Don't enter into any oral or written contracts or agree to certain arrangements via email, without seeking legal advice. These innocuous agreements can lead to big issues in future such as loss of earned revenue, loss of intellectual property rights and even loss of control over your company.

8. Failure to comply with sector-specific regulations or laws

There are some industries, like fintech and healthcare, where a product cannot be launched without obtaining the appropriate licences. If a company launches a product without getting regulatory approval, that company could lose its ability to do business in Nigeria.

On the flip side, there are instances where there's a lack of proper licences and you have to devise alternative solutions to ensure you have legal standing. But this is tricky and risky because the regulatory agency can sanction these ingenious solutions anytime. Therefore, you must incorporate proper risk management policies into your overall business strategy.

9. Tax evasion or payment of unreasonable taxes

Most startup founders rarely pay attention to their taxation. And tax evasion — failure to pay your taxes — could result in criminal liabilities.

On the flip side, some companies taxes they shouldn't be paying.  For example, companies that make under ₦25 million in a year are exempted from value-added tax and company income tax. It is advisable you understand your tax obligations even before you start making any money or profit.

10. Lack of good (or even nonexistent) T & C and privacy policy

While most users will not take time to read your terms and conditions and privacy policy, having them on your website and app protect you from liabilities.

One or a combination of these mistakes and any innovative startup could come crumbling down. Therefore, every startup founder must seek proper advice before venturing into business. If you're launching a startup, then, please, start it properly.

This is a guest contribution from Kofi Apori, Tech & Finance Partner at Acorn & Mustard. He can be reached via – kofi@acornandmustard.com and @kofiapori