In starting up a business, it is usually understood by all that the presence of Capital apart from land, labor and entrepreneurship usually determines the question of whether a business will survive its growing phase. Banks have also been clearly shown to be a very risky funding option for Start-ups which are not even accessible for the first 6 months of a company’s operations, hence the need for alternative methods of funding and Investment.
Let’s assume you have developed an IT Software, a physical product or a service package that uniquely solves a problem, but you lack major financing to secure an operating Regulatory license, carry out full-scale production or to even set up a proper office structure.
This article aims to guide you in terms of the options available to you,their pros and cons and how to access these funding options. They are as follows:-
- Register a company :- This will prove very useful in the immediate, mid-term and long-term run because this gives you a structure in terms of Corporate personality to leverage on.
This will also place you in a better position to bargain for funding by being able to offer Equity or Debt Instruments.
If you are a 1-man business,make sure your company has at least a 1Million Naira Share Capital base which usually costs up to 56,000.00 Naira to register(Legal fees inclusive), if there are two of you, the company should have at least a 2 Million Naira Share Capital base which can take up to 97,000Naira to register (Legal fees inclusive).
- Trademark your product :- A Trademark is an Intellectual Property right covering recognizable signs, slogans, designs or expressing that uniquely identify a particular product or service. This right means that your product cannot be legally used by any other entity without your permission. It also means that this right can be leased out as well, which on its own is already an income source. Most importantly, Trademarking your product or service means that they cannot be poached by a potential investor who will have no choice but to talk business with you.
Registration of a Trademark can cost up to a minimum 97,000Naira (Legal fees inclusive) depending on the class of Trademark you are applying for and can take up to 5weeks for a Trademark search, application and approval.
- Hire a Promoter :- Before even starting a company, getting a promoter might be the most important step in getting funding. A promoter is a person(usually a professional) hired to take part in a company’s creation by –
a). Sourcing for Capital.
b). Finding Directors.
c). Securing Business licenses.
d). Preparing the Company’s prospectus which is a document created to provide detailed information about an Investment subscription offer to the public.
Promoters should be preferably lawyers working in collaboration with Stock brokerage firms and a Chartered Accountant who will determine your business feasibility as well as develop your business plan. In other to hire a Promoter, a Promoter’s Agreement should be signed.
A promoter is a Fiduciary (Trustee) of the company be represents and must avoid in particular the practice of self-sealing(which is inflating the price of services rendered to the company he represents).
- Secure a Business/Operating License :- As a start-up it is important to note that not every business can be ventured into without having a license or statutory registration or minimum share capital requirement. If you want to venture into certain areas of Fintech like Online Moneylending, you’ll need a state license and a minimum capital requirement of 20 million Naira. Starting up as a Crowdfunding Intermediary Portal would require licensing from the Securities and Exchange Commission (SEC). Manufacturing and selling a food or Medicinal product would require NAFDAC (National Agency For Food and Drug Control) registration.
It is however understood that licensing and minimum capital requirements can be very expensive for many start-ups, and this is what necessitates the need for the next step outlined in the following paragraph.
- Seek alternative Technical Partnerships/Service Level Agreements(SLAs) for the purpose of securing cheaper licensing where possible :- Technical Partnerships are most favorable to Start-ups in the Tech industry because they can be entered into by either leasing or leveraging on licenses owned by more established companies to engage in a particular business with otherwise unaffordable licensing.
An example of this is where you have a Fintech Software product aimed at speedier payments processing that has been Trademarked but cannot afford the licensing requirement of a 100 million Naira minimum share capital. You can solve this by simply proposing a joint venture with a more established licensed payments processing company like Paystack to use their license for a renewable period of 1 year as a business partner in exchange for their being entitled to a profit sharing arrangement with your company.
This can also work in the form of approaching a licensed Microfinance Bank to secure a joint venture agreement for the provision of Online lending services if your business has a solid lending software program as its product (the Okash lending platform being a good example of this).
In the realm of manufacturing, this can work by proposing a manufacturing partnership with a bigger company for the production of your Trademarked product in exchange for a share of your profits.
- Issue Debentures as a long-term funding option :- A Debenture can be defined as a long-term security issued by a company to creditors to raise capital in the form of a written acknowledgement(usually a deed) of Debt by a company yielding a fixed interest rate and usually secured against the issuing company’s assets.
Pros :- Debentures are advantageous compared to Bank loans because they usually come at a lower interest rate and with no restrictions on range of use for the funds generated through Debentures. Moreso, Debentures come in many types and can be-
a). Secured/Unsecured
b). Convertible (can be converted into Equity shares)
c). Bearer Debentures (Unregistered)
d). Preferred/Ordinary Debentures (giving priority to preferred Debentures in the event of winding up)
e). Redeemable Debentures (can be bought back by the company).
Cons:- Debentures have a major disadvantage of being payable and enforceable against a company even in periods of no income and heavy losses incurred by the company.
- Alternatively, Issue Bonds :- A Bond is defined by the Securities and Exchange Commission (SEC) as Tradable security issued by borrowing companies representing a formal agreement to repay the lender/bond holder the full amount plus interest over the lifetime of the bond which in Nigeria can be publicly placed/listed on an exchange for trading by the public or may be a private placement sold to qualified investors.
Pros:- Bonds can be redeemable by the issuing company before the maturity date at a specified price. The issuer can also pay off bonds and re-issue fresh bonds at lower coupon rates.
Cons :- Bonds can be volatile as they are usually determined for value by interest rate fluctuations.
- Alternatively, offer Private Placements :- A Private Placement is one of the best options for a start-up trying to raise Investment funding.
This involves Investment offers in the form of Debt or Equity share offers to raise funding (usually long-term) made to a limited set of investors without advertisements, usually very savvy and experienced investors that include PFAs(Pension Fund Administrators), Mutual Funds, Portfolio Management Firms, High-Net Worth Individuals (HNWIs) and Venture Capitalist firms.
Pros:- Private placements are advantageous because they are not regulated by the Securities and Exchange Commission (SEC) and come with few bottlenecks except the provision of a compulsory Placement Memorandum which is meant to give adequate information about the issuing company. Private Placements out of the other means of raising capital for companies (Direct Offers to the Public, Offers for Sale, Rights Issues) are thus best suited for Start-up private companies.
Cons :- Private placements have to be made carefully within the definition of the Investment and Securities Act otherwise they’ll be deemed to be unauthorized public offerings. Private placements also are limited by the fact that Private companies cannot have more than 50 members and that most if not all of the Venture Capitalist firms operating in Nigeria are actually offshore-based Venture Capitalists aimed at Tech Start-ups, which means that Private Placements are not easy to quickly bring to fruition and require a lot of leveraging handled by a diligent lawyer who might need to work with an equally diligent stock brokerage firm.
Lastly, under the Companies and Allied Matters Act 2020, any fundraising drive of a company through Share offers must be first made as a Rights issue which means that they must first be offered to already existing Shareholders of the company and Venture Capitalist firms usually aim for Shareholding dilution which has led to takeovers of the company from even its original rightful owners. So as a start-up, you seriously need to weigh your options and take legal steps to ensure the protection of your rights before seeking this Funding option.
- Crowdfunding : – As stated in an earlier article of mine, Crowdfunding is the process of funding a project or venture by raising money from a large number of people through the internet, specifically a Crowdfunding Intermediary Portal.
Crowdfunding is regulated by the Securities and Exchange Commission (SEC) which has since declared illegal any Crowdfunding platform not licensed with it.
Pros :- Crowdfunding can prove very useful in raising capital in a hassle-free manner through a platform with a potential pool of ready funds from people you might never meet in person.
Cons :- Your company must be in operation for at least 2 years to be able to access funding through a Crowdfunding portal.
Secondly, there’s a limit to the amount of funds you can raise through a Crowdfunding Intermediary Portal. For a Medium enterprise, you cannot access more than 100 Million Naira a year, while as a small enterprise you cannot access more than 70 Million Naira a year in funding. Micro enterprises cannot access more than 50 Million Naira a year in funding.
The exception to this is accessing funds as an Agricultural company through a Commodities Investment Portal which can provide funding of up to 1Billion Naira a year.
Conclusion:- It should be noted in all of this that under no circumstance should your business plan be made known without trademarking your product AND having your lawyer prepare a Non-Disclosure Agreement which must be signed by every potential investor a placement offer is being pitched to. It is also important to further consult your lawyer on the best funding option suited to your particular business circumstances as no two businesses are actually the same. It is hoped that the ability to make a better-informed Investment sourcing decision for your business going forward would have been gained from this article.
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