While trying to get your startup in place in terms of funding and all other structural plans, it is expedient that founders take up the legal side of their ventures with the utmost priority.
In understanding the whole concept about tech startups and the law, techbuild had an exclusive chat with Udoh Charles Rapulu a Tech Startup, Compliance and Venture Capital Lawyer
A background on how you started?D
It’s been a long and chequered journey. You know, in life you have to spend countless hours finding yourself.
And so my journey into tech law advisory started as a result of my early exposure to law firms that had portfolios of technology companies.
That was in my first few years of practice. It was an intense experience, navigating through dense paperwork, scouring through tiny details of voluminous share purchase agreements, finding and under-lining several lines that violated or seemed to violate the clients’ interests.
And so basically in those early years, I was intensely exposed to far-reaching practical principles related to tech, for example, on cross-border intellectual property protection — the protection of trade names, logos, artistic works, patents in software, musical works, industrial designs, etc
Usually, we went as far as regional intellectual property regulatory bodies, such as ARIPO and OAPI in Africa; international through WIPO; in the US through the USPTO; the EU’s EUIPO, as well as in Nigeria, South Africa and other countries that are not part of the Madrid System or Protocol, the International Patent Cooperation Treaty, etc.
In subsequent years, I also gained experience in broader areas such as investment due diligence and advisory, corporate governance, data protection, capital markets, acquisitions, tax, corporate restructuring, among other areas.
Some of those deals involved publicly traded companies in the financial services sector, large to medium scale businesses, among others.
Very broad exposure, I must say, and demanding, too. I must, however, admit that, as a lawyer, my experience is not tied down to tech or commercial transactions alone; I have also had a series of courtroom experiences, defending clients’ interests.
Very interesting and challenging at the same time. Imagine your client sweating through lines of codes, countless hours, designing out the interfaces, fixing the bugs, those line-by-line quality assurances, the intensity, the nervousness and anxiety of approaching deadlines, and then all of a sudden they deliver a fully functional product, and their clients refuse to pay, or are bankrupt.
You can literally see the red veins in their eyes, the smoldering urge to destroy everything, from the clients to the products.
You know as a lawyer, they will most likely not take to self-self, and so they will naturally lean on your soothing shoulders and hope you provide the right leadership.
That’s when you file the papers and reassure them. They always need that reassurance, that hope, that certainty that their sleepless nights did not sink into a manhole.
But I think the turning point was combining researching and writing about the African startup ecosystem with legal advisory.
I have always insisted that you can’t advise the tech ecosystem adequately if you don’t have a fair grasp of how the ecosystem works.
And so with the writing, I have broadened my limitations and understood not just the regulatory sides of things but also the business, market and financial parts.
For example, my research publications on Flutterwave, Twiga Foods, SWVL, video-streaming in Africa,
Startup Acts, South Africa’s Section 12J, Egypt’s investment laws, have received so much readership that several market entry researchers, founders, prospective recruits, investors, and even M.BA candidates in far-away places like Moldova, Canada, Estonia, etc., have reached out to me to book sessions to get my opinions.
And so, I would like to think that the body of my research work on the ecosystem marked an important watershed in my tech advisory journey.
I can also remember some ecosystem builders reaching out to me to be part of a national drafting committee on a Startup Bill.
They had read quite a lot from my research works, commentaries and articles about the ecosystem. This is one of several examples.
This is important because you can’t properly advise on tech as a lawyer if you don’t understand the ecosystem as it is currently constituted, including the culture, and the web of resources weaving through both the investors and the founders.
And so, because I understand the ecosystem properly, I have been a darling to a majority of my clients. I don’t just bring in the legalese; I also throw in support services from my growing network of founders, investors and other ecosystem participants.
But then, I owe a lot to all the places and organizations I have worked in. And they also owe a lot to me, you know.
I’d like to think I am very resourceful, diligent and extremely passionate about assisting startups, even when the compensation is not commensurate with my efforts.
For example, there is a digital bank I assisted (among many other examples) with procuring a license from the Central Bank of Nigeria.
I (out of the scope of our engagement terms) allowed myself to pass through the rigorous licensing processes,
including as a prospective director; made myself available for some intense security and background checks at the hands of one of Nigeria’s security services.
You know how tough that can be, especially when you understand the predicaments of startups viz a viz finance
management.
They really need to bootstrap in those early days, and you have to support them.
So yes, I make the sacrifices because I understand how startups work. I also understand that the odds of survival past the first two years are also against them.
And so, you don’t want to wake up one day and get asked to circulate a bunch of employee dismissal letters
on the grounds of redundancy.
It hurts, to see all those founders crawl in on themselves and shutter down; and the employees hurtle around for their next jobs.
In summary, my early exposure to tech-oriented law firms, organizations, and in-house role at a major fintech company as well as countless hours spent tapping on the keyboards, sieving data and producing numerous publications on the African tech ecosystem greatly shaped my experience.
I have most recently also consulted for the UK Royal Academy of Engineering, Global Diaspora Co-operation (where I advise intensely on cross-border data protection, corporate governance), and other organizations.
Is it worth it? Stressful, I must admit. You must have an eye for details and must think analytically, critically and deeply.
Your clients’ businesses, almost always, hang on the cliffs of your advice. But like I said, I am still as early as the tech ecosystem in Africa.
How would understanding the law benefit Tech Startups and Venture Capital?
I don’t think the role of law in managing stakeholder relations can ever be properly quantified. The growling eyes that are beamed deep into your legal documentation once you pass a term sheet over to an investor are the first signal that investors care so much about the legal sides more than they care about the startups.
And so, the law is the thread that weaves through every venture deal and startup activity. I remember vividly the consultations I once had with foreign founders, where we spent countless hours distilling the legal problems plaguing their tech startups.
I found out that as a founder, you can barely function without some proper understanding of how the law
works for tech.
From the name you would want your startup to use, to the logo, to the domain names, to the co-founders, to your first employees and partnerships, to the marketing and advertising, to the board meetings with your directors and advisors, to the term sheets you negotiate with the investors, you cannot run away from the law.
In fact, your lawyer should be your right-hand person. My experience working in-house with a well-funded fintech startup also tells this story better.
The inability to comply with local laws is sadly one of the reasons why startups fail. I mean, Google or Apple can kick your app out of their app stores if you simply fail to comply with their standards on data protection and other policies.
Users can tarnish your image on the internet if you simply choose to go awkward with your compliance practices.
We saw this happen to Uganda’s Safeboda recently. Sometimes, Nigeria is often presented in a very bad image when government agencies there clamp down on tech startups.
Except for a few exceptionally unreasonable instances, you can’t really blame the authorities because some of the
startups have acted beyond the boundaries of the law.
Sadly, law does not admit emotions in evidence; it deals essentially on facts.
Law is important for venture capital in many ways. The tax regimes and policies of governments all shape how venture capital investors function in an ecosystem.
Section 12J in South Africa, before it was recently killed is the reason why there are so many venture capital firms in South Africa. Kalon Venture Partners and Knife Capital, which are some of the prolific startup investors on the continent, are all Section 12J venture capital companies.
Why do tech startups need to protect their Intellectual Property?
Intellectual property is as good as the valuation of your startup. If you sell the name Flutterwave to a company in Botswana, for instance, that company is already half-successful.
Intellectual property is the lifeblood of every tech business and founders should seriously be concerned about it.
Consultation experiences have fortunately taken me to different jurisdictions in Africa, and beyond — Kenya, South Africa, Egypt, the Gambia, Côte d’ivoire, Botswana, Cameroon, Mauritius, Ghana, Switzerland, the EU, US,
etc.
For instance, no amount of protection of your trademark as a tech startup in Kenya will enable you to use the trademark protection when you launch in Nigeria.
This is because Nigeria is not part of the Madrid system or ARIPO, which essentially allows member countries to recognize foreign trademarks in countries that are part of the agreement.
The same situation applicable to Nigeria is also applicable to South Africa and Egypt, the key tech markets in Africa. And so, if a startup makes any mistake understanding how these intricacies are woven, it may lose a great opportunity to retain its brand registered in other countries.
The same principle applies even if you register your company, say in Delaware and have gone through the United States Patent and Trademark Office.
So you have to study international laws on trademark protection applicable to your startup, and that is
where the help of a good tech lawyer becomes important.
Throughout my career so far, I have advised on IP transactions involving matters as complex as IP rights in 3D printing, game publications, apps, etc.
I have come to conclude that it would only be naïve of founders to launch their startups’ products without the
adequate trademark protection.
I mean, somebody has to talk about the patent — you lose the requirement of originality if you market your products without first patenting it,
Luckily also, I have represented clients in court on IP issues, and I can confidently tell you that IP cases are some of the most complex and tricky in court.
Again, I give you an example: if you publish your trademark in Class 1 instead of Class 9, which is the most relevant to it, you have no priority rights, and consequently no protection, over someone who rightly published in the right class.
To make it clearer, there is this recent Nigerian case of Toyota: someone published a trademark with the name
“TOYOTA” under a class meant for electronics.
A claim by the “real” Toyota that the publication in the class of electronics by another user using exactly the same name resemblance as Toyota was rejected by the court.
Then again, you talk about the patent. Software or algorithms, and computer programs generally, no matter how novel and ingenious the lines of codes running through them may be, are not patentable.
And so, to be able to patent them, you may need to reduce the functionality of those software or algorithms to a series of diagrammatic representations — by way of use of flowcharts and other presentation mechanisms.
You will also have to get the patent claims right, because the quality and the utility of your patent lies essentially in the patent claims, and the claims normally derive their bearing from the detailed technical descriptions.
So IP is crucial for tech startups.
The colour of your brand, the functionality, your trade secrets, your codes, the features of your products, and so on are all part of your intellectual property, and knowing which IP class applies is important.
Understanding the law and fundraising for tech startups?
As regards law and fundraising, the two are interwoven. First, investors care so much about the legal, proper due diligence, shareholders agreement, sound corporate governance practices, etc. When you are raising funds as a startup in Africa, the application of laws will determine who signs the cheque for you.
You have to screen the investors against the list of specially designated persons in use, for instance.
This is especially true if an angel investor is involved. The regulatory authorities will also demand that investors make declarations as to the source of the funds, and produce evidence in support, if need be.
You have to really put in place standard compliance checks in place when receiving funds from investors to avoid being caught in a web of fraud.
That also explains the reason why a majority of the funds targeting the African market come from the same source — the majority North America, and Europe — year on year because those jurisdictions have huge and influential checks on the global movement of funds.
Essentially for founders, fundraising involves more than legal. You have to master great presentation and story-telling skills.
I receive sizable amounts of pitch decks from founders looking for funding from time to time, and I can tell you that the problem is not about how fantastic the product or the idea is, but how you organize your thoughts, your teams, your value propositions and so on.
But the real job begins when the investors call in for extensive due diligence on your startup. They look at the team members, your financial well-being vis a vis its legal sanctity, the agreements you have signed with suppliers and employees, the co-founder’s share purchase agreements and vesting schedules as well as intellectual property ownership, the employee options scheme in place, your general legal compliance practices over-time.
So begin from the outset to build great financial and legal compliance strategies because it is certain that you would need them soon. However, it must be said that fundraising from investors could be easier with Simple
Agreement for Future Equity (SAFE) and other forms of early stage financing.
It usually gets complicated from Series A, upwards, through other forms of late-stage financing. A lot of
terms such as a right of first refusal or pro-rata rights, voting rights, and the rest begin to fiercely come up at those stages.
Overall, negotiating the fundraising term sheet — issues of drag-along/tag-along rights; advanced subscription rights, convertible notes, SAFE, and other conditions to closing — is just a tiny, negligible process in the entire fundraising journey.
In most cases, while negotiating the term sheet or other fundraising agreements, the deals become easier to
close once the parties are agreeable, and depending on the emotions and intentions of the parties, too. But a small dent in the legal or financial health of either party spoils and shatters the intensity of the fundraising exercise.
And so, both parties must take care to ensure that they are legally sound from the outset.
With your cross border experience, have there been significant differences with tax compliance across continents?
A lot of differences. In fact, this is the primary reason why African startups are headquartered in destinations such as Delaware, the British Virgin Islands, Cayman Islands, Switzerland, Germany, London, Singapore, California, Mauritius, the UK, even Dubai, among others.
Investors, about 80% of whom are based offshore Africa, tend to be concerned when it comes to where you headquarter your company.
They even use this singular parameter to screen you out of a potential investment or demand that you
restructure your company in a favorable overseas destination before they can make any investments.
I have interacted with founders in Tunisia and Morocco, and they will tell you the difficulties they face setting up foreign accounts in their countries to receive funds.
The fees, the time cost, and most times outright refusal from government authorities are overwhelming even though you have progressive legislation in support of startups there.
Generally, the rate of corporate, and even personal income tax is high across Africa (outrageously high in South Africa).
At one time, we had to file applications for pioneer status tax incentives in Nigeria under the Nigerian Industrial Development (Income Tax Relief) Act (“IDITRA”).
We got rejections because the government just wants you to pay tax. Companies in their first year of business or operations in Nigeria are given Pioneer Status for a duration of three years, with the potential of a two-year extension.
I took comfort in the fact that there were only about 35 standing beneficiaries of the pioneer status tax incentive in Nigeria as of March 2020, out of which only 1 is an ICT firm and 6 are agro-businesses, even though more than 125 applications for the grant of the incentive were filed during the period.
Nigeria also has a free tax regime for businesses with an annual turnover of NGN25m, provided you keep filing for tax on an annual basis. This is mostly for small businesses and not suitable for tech startups with high growth potential.
Other jurisdictions like Kenya and Uganda have also introduced digital tax, which is currently plaguing startups.
That’s why I advise most startups to consider setting up in Mauritius, if they must set up at all in Africa, otherwise destinations offshore Africa are usually the best deal.
If you are into blockchain too, the US may not be the best option because of the intense fraud and tax scrutiny going on against crypto-based companies.
There is a range of other options such as the British Virgin Islands, Estonia, among others. But governments across Africa have to really work around tax regimes for tech startups.
Tunisia, Senegal, Algeria, Mauritius, and Rwanda have proven that this can work. What they did was suspend startups from paying tax for a period of say 5 to 8 years. And you can see how foreign investors are flocking to those areas.
As a reminder, South Africa used to do this under Section 12J of the country’s income tax, which has now been killed by the invocation of the sunset clause.
Kenya also has a pending Startup Act, but unfortunately, it did not talk about tax incentives for tech startups.
Generally, the corporate tax rate is high in Africa — as high as 30% in Nigeria, Cameroon, Uganda, Tanzania, Kenya, Namibia. etc.
This is also coupled with other forms of taxes such as sales, or value-added taxes (as high as 7.5% in Nigeria, for instance) as the case may be.
It’s really frustrating and hindering smaller ecosystems from growing. That is why I think Mauritius is one of the smartest countries in Africa.
Why would I do a non-oil business in countries like Equatorial Guinea with tax as high as 35% while I can as well go to Egypt at 22.5%, or Tunisia at just 15%.
Equatorial Guinea doesn’t even have the population to begin with. This is why the recently mulled 15% global minimum tax rate is a welcome development.
Unfortunately again, the proposed 15% tax regime is for multinationals with billions of dollars in revenue thresholds, not tech startups. In other words, it is a way of continuing the exploitation of smaller countries by the world powers
Why do small businesses and startups need to infuse legal concerns in their operations?
You cannot avoid law as a small business or startup anywhere in Africa. In fact, it is the reason why most do not succeed here.
From my experience, most startups are usually reluctant to engage the services of lawyers, and this comes back to haunt them.
Insert your lawyer in the product development/engineering team. Every agreement you enter into must be put into writing and signed by both parties.
You must see the other party’s signatures before proceeding. Do not proceed without having the certainty of a signed agreement.
Approach every corporate-startup partnership from a position of strength. Do not give away your intellectual property for crumbs because of promises that parties have not yet signed. Lawyers should be your partner in progress.
Go for a startup lawyer that understands the nuances of running a startup and not just any lawyer.
Do not go for lawyers that will frustrate your deals because they simply are too legalistic to understand how startups function.
Startups are all about concessions, knowing when to make it and when not to is the difference between a good and bad startup lawyer.
Featured Image: Charles Udoh, Tech Startup, Compliance and Venture Capital Lawyer
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