Home Blog

The Implications of Financing Rounds, Cap Table Management and Anti-Dilution

April 30, 2024

The Implications of Financing Rounds and Ownership Dilution

With every funding round, from Series A to B, C, and beyond, your business expands, yet so does equity dilution. Each round introduces new investors, each claiming a portion of your business. While this might appear intimidating, remember that the goal is to enlarge the overall size of the pie. As your business flourishes, your smaller portion of the pie could hold significantly more value than your initial, larger slice.

As you progress through multiple funding rounds, with each round involving the allocation of portions of your business, the percentage of ownership for you and other early stakeholders diminishes—this is known as equity dilution.

Yet, there’s a bright side: while your ownership percentage decreases, the actual value of your ownership could rise. Why? Because each funding round typically elevates the overall value of your business. In simpler terms, owning 50% of a $1 billion company ($500 million) holds less value than owning 20% of a $10 billion company ($2 billion).

Understanding this trade-off between the amount of funding received and resulting equity dilution is crucial. As a founder, it is essential to delicately balance these factors, ensuring that the capital you raise genuinely contributes to enhancing the company’s total value while preserving a satisfactory level of ownership. One way you can do this is by monitoring your startup’s cap table.

So, let’s go back to the basics, before we go on to expatiate on some of the anti-dilution mechanisms you may want to explore as a founder. Let’s explore what cap tables are and how you can monitor your cap table.

Cap Tables, What Are Those?

A cap table, or capitalization table, is a comprehensive record depicting the ownership arrangement within a company. It offers an intricate overview of the different securities issued by a company, including ordinary shares, preference shares, options, and warrants, along with their respective owners. Serving as a fundamental resource, the cap table facilitates the management of equity ownership, tracks alterations, and aids in determining the company’s valuation.

Cap tables serve as crucial and dynamic tools in overseeing a startup’s equity distribution. Particularly, they serve dual pivotal purposes: assessing valuation and gauging the extent of dilution stemming from forthcoming investments. Such insights prove invaluable for ongoing and prospective financing endeavors. A well-managed cap table also facilitates transparency and accountability among shareholders by clearly articulating their ownership proportions. As a structured documentation of a company’s equity landscape, cap tables are consulted by founders, employees, existing and prospective investors, as well as tax authorities and corporate solicitors to aid them in making informed decisions.

It is wise for founders to consistently track and manage their cap table. Effectively managing your cap table as a founder not only guarantees precise ownership monitoring but also empowers you to make well-informed choices concerning equity distribution, fundraising, and valuation.

Essential Steps to Managing Your Cap Table

Compile a List of all Stakeholders and their Stakes:

The initial phase of cap table management involves collecting essential data. This entails identifying all shareholders along with their corresponding ownership percentages, as well as noting any outstanding stock options or convertible securities. It’s crucial to gather precise and current information to uphold the integrity of your cap table. You can get this done by assembling a list of all stakeholders: founders, employees, other shareholders and investors. For each stakeholder, document their name, contact details, and the quantity of shares that they possess. Furthermore, ensure to incorporate any existing stock options or convertible securities into your records.

Select the Appropriate Cap Table Management Software/Create a Spreadsheet

Selecting the appropriate cap table management software is the next step after gathering all requisite details. While creating a cap table through spreadsheets is feasible, the following are useful tools that can help you manage your cap table: Carta and captable.io.

Arrange and Input Data into the Cap table

Now equipped with your selected cap table management software or spreadsheet, it’s time to organize and input the collected data into the cap table. Begin by establishing a new cap table within the software or spreadsheet and inputting the pertinent information for each shareholder.

For every shareholder, input their name, contact details, ownership percentage, and the category of securities that they possess (ordinary shares, preference shares etc.). Moreover, if there are any vesting schedules or other contractual agreements like SAFEs, ensure their inclusion in the cap table. This process will establish the groundwork for your cap table and provide a reference point for future revisions of the cap table.

Validate and Reconcile the Cap table

Verification and reconciliation are pivotal stages in cap table management. Additionally, it is crucial to reconcile the cap table with pertinent legal or financial documents, such as articles of incorporation, stock purchase agreements, and option grant letters. This process aids in detecting any disparities or omitted details that require attention.

While conducting the verification and reconciliation process, it is prudent to seek legal or financial counsel to ensure adherence to applicable laws and regulations. Professional assistance can unveil potential issues and guarantee the accuracy and legal validity of your cap table.

Update the Cap-table Regularly

As your company grows and new transactions occur, it is important to reflect these changes in the cap table. This includes issuing new shares, granting stock options, or updating ownership percentages. Kindly ensure transparent communication of these updates to shareholders, keeping them abreast of any alterations in their ownership or equity entitlements.

Anti-Dilution Mechanisms

Various anti-dilution mechanisms exist to shield against excessive dilution. Below are some of them:

Employment of Preemptive Rights

Preemptive rights afford existing shareholders the opportunity to uphold their proportional ownership in a company by purchasing a proportionate amount of shares in any future equity issuance. Typically granted to investors during funding rounds, preemptive rights serve as an effective means for protecting their stake against dilution.

Anti-Dilution Clauses/ Provisions

Anti-dilution provisions, integral components of investment agreements, shield investors from the erosion of their equity stake. Two prevalent types are the ‘full ratchet’ and ‘weighted average’ anti-dilution provisions:

Other Protective Provisions

Protective provisions grant investors the authority to approve certain actions, such as the issuance of new shares. This empowerment enables investors to forestall dilutive financing rounds or ensure their participation in them. Nevertheless, it’s imperative to acknowledge that while these mechanisms offer protection against dilution, they carry potential drawbacks and complexities. They may curtail a startup’s flexibility and potentially deter future investment, as prospective investors might be hesitant to engage with a company where prior investors possess rigid anti-dilution safety devices.

Hence, it is crucial for both founders and investors to carefully consider the potential trade-offs and negotiate these provisions meticulously.

About the Author

Taiwo Lawal Esq. is a corporate and transactional lawyer. With about half a decade’s experience servicing startups (including on transactions regarding intellectual property rights), she is the founder of Unicorn Valley Law, doing what she loves the most- providing bespoke advisory from the “well of water” within her.

Taiwo is happy to read from you and provide bespoke solutions to your startup’s legal and commercial needs. Kindly write her via taiwo@unicornvalleylaw.com or schedule a call via calendly here: (get in touch).

Are SAFEs the Riskiest Investment Notes?

unicornvalleylaw

April 26, 2024

Let’s Expatiate A Bit on What SAFEs Are

SAFEs are almost certainly the most common investment notes in the venture capital space today. For proper context, they were created in 2013 by YCombinator, a Silicon Valley business accelerator as an easy and standardized way out for startups to raise bridge funding before going on to ultimately raise funding via a major priced equity round.

A SAFE is a Simple Agreement for Future Equity. Simply put, it is an instrument where the investor gives money to a startup in exchange for a promise from the startup to give shares to the investor at a future date when the startup raises money on a priced equity round.

When initially introduced by YCombinator, the objective of the SAFE was to ease out the process of investing in an early-stage startup through seed financing, prior to the company proceeding with a Series A venture financing round. The seed round typically served as a bridge to future financing and the SAFE was regarded as a standardized contractual mechanism for issuing shares in that subsequent financing, thereby offering potential advantages to investors who participated early.

At the time of the subsequent financing, the initial SAFE investment converts into shares, offering the investor either a discounted purchase price or a conversion hinged on a capped valuation of the startup.

Save for about two clauses, SAFEs are typically a short and non-negotiable five-pager with the valuation caps and investment amount being the only negotiable clauses. Please take note that this is on a general note, because although a SAFE Note may not be negotiable, investors and startups may desire to negotiate the terms of a SAFE by issuing attendant Side letters which is to be read alongside an issued SAFE.

In contrast to conventional equity (share purchase/subscription) or debt (loan) instruments, a SAFE does not entail an immediate valuation of the startup or establish a maturity date. Rather, it postpones the assessment of the startup’s valuation and conversion into equity until a subsequent financing round or until when a specified triggering event occurs. Following a triggering event, such as a subsequent equity financing round, acquisition, or initial public offering (IPO), the SAFE then transitions into equity in the startup based on prearranged terms.

What Should Smart Entrepreneurs Take Note Of?

Triggering Events for the Conversion of a SAFE Note

Please take note that the conversion of a SAFE note into outright shares owned by a SAFE Note holder is not immediate but upon the occurrence of a later “triggering” event. Examples of triggering events include: the next financing round where the startup sells equity (a priced round) to new investors; an IPO or an acquisition of the company.

How SAFEs Convert into Shares

Upon the occurrence of a triggering event, the SAFE note undergoes conversion into shares. The quantity of shares allocated to the investor is dictated by the provisions outlined in the SAFE note. Often, the inclusion of a valuation cap and/or discount rate results in the SAFE investor obtaining shares at a lower price per share compared to other participants in the ongoing round of financing. Kindly take note that following the conversion, a SAFE note ceases to exist, and the investor assumes the role of a standard equity holder, typically holding preferred stock, also known as preference shares.

Valuation Cap

This is a predetermined fair limit that a company’s valuation is pegged at. It sets the maximum price of shares at which a SAFE can convert into equity. This pre-negotiated sum “caps” the conversion price when shares are issued at a priced equity round.

Discount Rate

This term gives a deal where the price for each share upon a conversion event is cheaper than what future investors will pay. It’s a reward for early SAFE investors, giving them more company ownership for the monies they invested when the company gets valued in the future.

Pro Rata Rights

This is a clause that enables a SAFE note holder to keep his percentage of shares in a company’s share capital when the company eventually raises financing via a priced round. The SAFE Note holder has the option to buy more shares if they want to, but they do not have to.

Conversion Events

A conversion event encompasses three primary scenarios in which investors (a SAFE Note Holder) may realize returns: the insolvency event, the liquidity event, and the dissolution event.

Insolvency Event

This event typically denotes a circumstance wherein a company is incapable of fulfilling its financial obligations, resulting in an inability to settle its outstanding debts. Insolvency may prompt legal proceedings such as administration, liquidation, receivership, or bankruptcy.

2. Liquidity Event

A liquidity event signifies a situation or occurrence enabling investors to liquidate or divest their ownership stakes in a company. This may involve the sale of the company through acquisition by another entity, an initial public offering (IPO), a merger, or any other event facilitating the conversion of investment into cash.

3. Dissolution Event

This event pertains to the formal cessation or winding down of a company’s operations. Dissolution may be voluntary, wherein the company’s proprietors elect to terminate operations, or involuntary, whereby external entities such as creditors or regulatory bodies compel closure. Following dissolution, the company ceases to exist, and its assets are liquidated to settle outstanding liabilities. Any residual assets are subsequently apportioned among the shareholders.

Equity Type

SAFE note holders are typically issued preference shares in a Company’s share capital. Preference shares often carries additional rights and protections when compared to ordinary/ common shares.

Are SAFEs Risky?

The simplicity of a SAFE Instrument coupled with its flexibility in fundraising without immediate valuation and equity allocation makes it an attractive investment structure instrument for startups. For investors, a properly negotiated SAFE poses a potential for high returns on investment. Devices such as valuation caps and discount rates also place SAFE Note holders in an advantageous position particularly in future priced rounds. However, it is important for investors to realize that a conversion event may never be triggered! This means that it is possible for an investor to receive nothing in return for investments stashed in a company. In the event that the company in which you have invested in generates adequate revenue and cash flow to obviate the necessity for future fundraising, and this raise serves as your trigger for a conversion of the SAFE Note into actual equity in the Company, you are at a disadvantage. Also, in the event that the company remains un-acquired by another entity, you will not recoup your investment as you hold no direct ownership stake in the company. These investments carry significant risk, and there exists a remote possibility of experiencing a complete loss of the invested capital. You also have to understand that with a SAFE, as an investor, you have no direct governance control or right of observation over the company you have invested in. You also have no right to receive or audit the financial statements of the company so as to be able to evaluate the health of the company you have invested your money into. A SAFE offers no water tight protection to an investor although it is a note that is fair enough and advantageous to a startup. However, none of this is to dissuade serious minded investors from employing a SAFE to structure their investment in a Company. There is a way an investor set on structuring investments via a SAFE Note can employ certain protective devices which often becomes operational upon the conversion of the SAFE. This device is in form of a ROBUST SIDELETTER.

Using a Side letter as a Protective Device

It is the smart investor that issues a sideletter alongside a SAFE. Although most of these rights, unless intentionally customized by your attorney, generally arise upon the conversion of a SAFE, a side letter ensures that the investor enjoys specific privileges and protections through securing additional rights plus the rights made available in a SAFE. The following are examples of the protective devices that may be employed in a Sideletter: right of first offer, right of first refusal, pro rata rights, info rights, board observer rights, and most-favored nation provisions etc.

Tracking How Much Ownership an Entrepreneur Has Sold to Investors

When a company raises funds through SAFE notes, founders may overlook monitoring the portion of their company sold because SAFE notes don’t immediately convert into shares. However, the fact that the dilution of the company’s ownership to investors is not immediately apparent does not negate the impact when a SAFE Note converts. It is wise for founders to consistently track and manage their cap table. The following are useful tools that can help you manage your cap table: Carta and captable.io.

The Legal Implications

While SAFE notes offer simplicity, it is essential for startups and investors alike to grasp their legal implications fully. Clear comprehension of terms like conversion triggers and post-money valuation caps can prevent future disputes. Seeking advice from a seasoned legal advisor is highly recommended to tailor the agreement to meet the parties’ unique needs. An experienced professional can assist in negotiations, ensuring fairness and safeguarding interests.

Looking for personalized guidance for your next investment round? Kindly reach out to us via: hello@unicornvalleylaw.com

About the Author

Startup Valuation for Smart Entrepreneurs

unicornvalleylaw

April 4, 2024

Before we go on to explore models of startup valuation, it is important to highlight that the value of an object represents its tangible worth, whereas its valuation entails a forecast of its perceived worth by individuals or a collective, albeit influenced by various factors. Similarly, many entrepreneurs or startup founders commonly perceive valuation as synonymous with their company’s worth, however, this notion is flawed. Valuation, instead, mirrors a set of projections regarding the company’s future performance, considering a number of very important factors that will be highlighted during the course of this piece. Kindly note that in the context of financing rounds, your startup’s valuation is ultimately reduced to what you and your investors agree that it is.

One of the most popular line you will hear in the startup world is that “valuing a startup is both an art and a science”. This statement holds in it real time truths. Figuring out a startup’s valuation is really like uncovering the treasure map to its potential riches! It’s the intricate journey of putting a price tag on those brilliant ideas and budding ventures.

Ordinarily, within each industry, a fundamental standard prevails which typically dictates the ultimate valuation of the companies that play within each industrial sector. For instance, a local retail enterprise is conventionally valued at a range of 1-2 times its annual earnings in addition to the assets or properties transferred alongside the transaction. Conversely, a technology startup demonstrating significant growth prospects is typically valued at a multiple of its anticipated future earnings, predicated upon its current growth trajectory.

Inflation of Valuation and Vanity Metrics

It is no news that a considerable number of startups exhibit valuations that are disproportionately inflated, stemming from unsubstantiated assertions and fictitious numerical representations. Investors: venture capitalists, angels and the likes are advised to be wary of the vanity metrics sold by the cutely put-together- graphic designs of blue collar wearing founders while navigating their way through fishing for a worthy venture.

It may interest investors to also consider that even the most viral product with heavy traction does not easily translate to real time profits. Let’s consider the case of a popular social media platform (name withheld for privacy reasons) which was reported to have recorded about 85 million users in 2015. At this time (in 2015), it was recorded to hold a valuation of $1billion. Just last year, the same platform was recorded to have onboarded approximately 360 million users while hanging on a $16 billion valuation. Regardless of these huge metrics, the social media platform is yet to record a profitable year, and what this means is that although the venture looks good on paper, its economics may yet not be the most investor friendly.

The lesson here is that vanity metrics, number of likes, downloads, users etc., although are important pointers, do not predict the profitability of a venture. This however, is not to discourage investors, but a factor to be considered. It is the smart investor that interrogates founders on how founders plan to be profitable with their ventures. It is also the smart founder that plans for how his or her venture will not just generate revenue, but also be profitable. The moral in the foregoing pretty much applies to other areas of life too; but let’s get back to this matter of startup valuation.

Nataliya Vaitkevitch_Startup Valuation_Unicorn Valley

Careful of Founders Whose Business Model is Mere Fundraising

Another prevalent occurrence involves a subset of startups that have deviated from the pursuit of sustainable business models, genuine problem-solving, and value creation. Instead, they have adeptly optimized venture financing as an alternative business model, focusing primarily on fundraising endeavors and augmenting their valuation. Essentially, these unscrupulous founders’ real business is fund raising and not genuine problem solving.

In any event, the valuation of your startup holds significant relevance. Lower valuations necessitate a higher relinquishment of equity in the startup to procure investment. Conversely, higher valuations afford greater retention of equity within the company, thereby mitigating dilution and enhancing returns for stakeholders.

It’s been described that valuing a startup is both an art and a science. Determining the genuine valuation of a startup frequently entails gathering insights from comparable companies within the industry. Investors, spanning from venture capital firms and beyond typically assess competitors and industry peers to grasp how a company and its business model align with the prevailing landscape.

Quick one: As a prudent startup founder, you may also consult online databases like AngelList or Crunchbase to directly compare your valuation to similar businesses.

Common Startup Valuation Models

The Berkus Method.

Developed by venture capitalist Dave Berkus to find valuations specifically for pre-revenue startups, the Berkus Method of Valuation is a technique designed for early-stage startups aiming to establish an initial valuation independent of the founder’s financial projections. This method assesses five key aspects of a startup and assigns a value ranging from zero to $500,000 for each area. The idea is to assign dollar amounts to five key success metrics found in early-stage startups. While Berkus Method of Valuation doesn’t consider additional market influences, its restricted scope proves beneficial for businesses seeking a straightforward assessment tool.

Here’s a concise overview:

Berkus Method Table

Berkus Valuation Table — Photo Credit: brex.com

Comparable Transactions Method.

This method is highly favored among startup valuation techniques due to its reliance on precedent. It addresses the query of, “What were the acquisition values of startups similar to mine?” The Comparative Transactions Method searches for past transactions that are similar or comparable, involving target companies for acquisition with analogous business models and comparable sizes as the startup in question.

Let’s use this Brex’s illustration:

For instance, imagine that Rapid, a fictional shipping startup, was acquired for $24 million. Its mobile app and website had 700,000 users. That’s roughly $34 per user. Your shipping startup has 120,000 users. That gives your business a valuation of about $4 million.

You can also seek out revenue multiples for comparable companies within your industry. For instance, in your market, it might be customary for Software as a Service (SaaS) companies to achieve revenue multiples ranging from 5 times to 7 times the net revenue of the preceding year.

Cost-to-Duplicate Valuation Approach.

Just as the name implies, it entails determining the expense of replicating your startup elsewhere, excluding intangible assets such as brand reputation or goodwill.

You calculate by totaling the fair market value of your tangible assets, including research and development expenses, product prototype costs, patent expenditures, and similar items. Please take note that one significant limitation of this method is its inherent inability to fully encapsulate the company’s overall worth. It also overlooks crucial elements that hold particular relevance, such as intangible assets like brand reputation, patent rights, and customer engagement etc.

Venture Capital Method.

Developed by Bill Sahlman, this is the commonly employed startup valuation model for VC firms. Below are two formulas you may employ to progress toward your startup’s valuation:

Anticipated Return on Investment (ROI) = Terminal Value ÷ Post-Money Valuation

Post-Money Valuation = Terminal Value ÷ Anticipated ROI. For a step by step explanation of this model, kindly refer to WallStreetPrep’s explicit explanation on the Venture Capital Method via the foregoing hyperlink. Also, you may dowload this VC Valuation form as prepared by the WallStreetPrep team.

Book Value Method.

The book value method provides an asset-based valuation, akin to the cost-to-duplicate approach but with greater simplicity. Conventionally, a startup’s book value is calculated as the total assets minus liabilities. Essentially, the Book Value method equates the net worth of your startup with its valuation.

Bringing it all together.

While conducting a valuation of your business venture, it is advisable to test or use multiple valuation techniques to be able to come down to a fair valuation of your enterprise. Endeavour to evaluate both the tangible and intangibles of your startup. Tag a valuation on the strength of your team, size of the opportunity, product or service, competitive environment, marketing, sales channels, and partnerships, tangible assets, intangible assets, sound idea, quality team, workable prototype, forecasted revenue and profit, financials, last funding round, current revenue and company performance etc.

About the Author

Arm Your Self With This Knowledge of the Board Room

unicornvalleylaw

March 26, 2024

Dear Unicorn Founder,

Let’s talk Boardroom dynamics this time. Shall we?

Your company’s board of directors are basically the masterminds that call the shots when it involves your company and the workings of its vision. They fundamentally help with the corporate governance of the company. This corporate governing body provide oversight and supervisory functions that set your business policy and strategy in motion.

On a more hands on note, the board of directors of a company get their hands dirty doing work like: business strategizing, fundraising, employee management, onboarding the right management team, developing branding, avoiding legal and compliance issues, and growth and expansion strategizing etc.

Your company’s board of directors are the architects that will either make or break your business – by virtue of the quality of the decisions that they make. Early on in the course of your business, your startup’s board seats will usually be filled by founders. It is however advisable that a startup should only onboard aligned board members as your startup continues to evolve.

Board of Directors vs. Board of Advisors

In the world of corporate governance, although the terms “Board of Directors” and “Board of Advisors” are sometimes used interchangeably, there is a number of fundamental differences between their distinct roles within a startup. The Board of directors serve as the formal governing entity entrusted with pivotal decision-making for a company or organization. Distinguished from an Advisory Board, the Board of Directors hold significant legal sway and bears fiduciary obligations. The Board of Advisors on the flipside comprises external individuals who offer their expertise and guidance to a company’s leadership team and executives. In contrast to a Board of Directors, an Advisory Board lacks legal jurisdiction over the operations of an organization, and its members are not bound by fiduciary obligations towards shareholders. Instead, they function as valuable assets, providing insights and guidance for strategic decision-making processes.

The Right Fit for your Company’s Board of Directors

The composition of a board of directors evolves alongside a company’s growth trajectory. Initially, the board typically comprises the company’s founding members. As the company secures investments, occasional addition of investors to the board becomes customary. With the influx of investors, the inclusion of independent board members becomes imperative to harmonize the interests of cofounders with those of investors.

Types of Board Members and the Interests they Represent

Insider Board Members. Founders are the main individuals that make up the Insider Board members of a Company. The founders and company management hold a fundamental role on the Board as they principally sponsor the interests of the founding shareholders on a typical Board of directors.

Investor Board Members. As your startup progresses and attracts external funding, along with external shareholders beyond the original founders and advisors, the incoming investors will encompass various shareholder categories. Consequently, they will seek representation on your company’s board of directors, these category of board members are termed: Investor Board Members. The level of their involvement on the board should typically correspond with their investment stake and the competitive dynamics of fundraising efforts.

Independent Board Members. As your startup continues to grow, it may be prudent for you to introduce an independent director. Their core attribute of not being synonymous with allies coupled with their being seasoned experts makes them valuable. The role of independent directors is to prioritize the collective interest of shareholders across classes. Independent directors are essentially external directors who play an important role in corporate governance. They provide unbiased advice, perspective, and judgment to the board of directors. Independent directors bring a unique perspective, mainly because they have no conflict of personal interest with the company.

How Can I Incorporate an Individual onto My Startup’s Board?

The procedure for adding new members to a board of directors is governed by the corporation’s bylaws and may vary among corporations. Generally, the board of directors vote to ratify any prospective members during a convened board meeting,

Should you require professional services with respect to the management of your Startup’s Board and required paperwork, kindly reach out to us via: (get in touch) or via our email address: hello@unicornvalleylaw.com.

Board of Directors at Series B

At the outset of your fundraising as a startup, you may be able to retain founder control. However as you journey down several rounds of liquidity injection, particularly at Series B, your founder control ratio with respect to your startup’s board may come to a ratio of 3:2, where “2” connotes two different VC firms or two different sects of investors.

It is also probable that, as you journey down several fundraising efforts, investors will seek to mitigate founder influence on the board, albeit without expressly aiming to assume control themselves. Opting for independent board members serve to fulfill this objective.

Your Company’s Board of Directors at the Series C Financing Round

It should interest you to know that it is highly improbable that as the founder, you will continue to maintain control of the board by the time Series C funding is secured. During Series C fundraising round, new venture capitalists inject substantial funds into the company, often demanding significant representation on the Board. At this stage, it’s customary for the board’s composition to lean towards a ratio of 3:2 or 4:1 in favor of investors over founders.

Investors who participated in Series A and Series B likely did so under the belief in the capability of a startup’s leadership, particularly that of the CEO, to steer the company towards success. The optimal course of action for a CEO at this juncture is to continue executing their duties proficiently and maintain positive rapport. The startup’s focus evolves over time, transitioning from inspiration and vision to team management and operational efficiency. Some founders excel in the earlier stages while others in the latter. As a founder, you may contemplate stepping down from the board at a later juncture. In such instances, it’s advisable to collaborate with the board to identify a suitable successor and gracefully transition out.

About the Author

Pearls of Wisdom from She Who Dominated Wall Street for 30+ Years

unicornvalleylaw

March 25, 2024

She owned Wall Street for 30+ years and here are some of her pearls of WISDOM. Carla Harris is a Wall Street banker, motivational speaker, gospel singer, and author. She is a Vice Chairman, Managing Director and Senior Client Advisor at Morgan Stanley (An American multinational investment bank and financial services company)⁣. She inspires us at Unicorn Valley Law. We thought to link you up with some of her pearls of WISDOM.

How to Navigate Real Estate Transactions in Nigeria

unicornvalleylaw

March 21, 2024

Investment in landed property is no doubt one of the most tangible investment any investor can make. No wonder land is called “real estate”- when done right, it truly is the realest investment one can make. On the flip side, no other investment type has proven to be the trickiest – particularly in Nigeria. Although the sale of landed property is not the only type of land transaction, this piece is set to explore land sale transactions in Nigeria. Land sale generally requires a consciously diligent level of investigation before it is safe to wire funds to the vendor. One of the biggest mistakes many buyers have made is to wire funds to a vendor before consulting a legal practitioner, and other relevant counsel e.g. land surveyors, with respect to the object of the land transaction. There is probably no other commercial transaction where the words: “look before you leap” apply more than real estate transactions- particularly when it involves the sale and purchase of landed property. There is definitely a lot of effort and professional advice that you will require so as to properly verify the land you intend to purchase.

Please take note that land purchase transactions are not just about sending a document to your lawyer for review. It involves airtight due diligence processes, physical inspections, street survey, land survey, title deduction, drafting of requisite documents having in mind the peculiar facts of the case. Diligently verifying the genuineness of the title to a land will enable you to save yourself from being sold a piece of land that is either disputed or has government interest on it.

The following checks will ultimately guide you as a prospective buyer of landed property in Nigeria.

Examine the Vendor’s Root of Title

You want to ascertain what kind of title or interest a vendor possesses. It goes without saying that when a land seller’s root of title is defective, the purchaser ultimately acquires a defective title upon acquisition. A good root of title must confer both the equitable and legal interest of the real estate. From the get go, kindly endeavor to have a holistic description of the land as well as the extent of interest being conveyed by the vendor. The document showing the title holder must clearly state the owner of the land and nothing should cast any doubt on its validity.

An example of a good root of title includes:

Deed of gift,
Duly perfected Deed of Assignment,
Deed of legal mortgage
Land certificate-Title acquired by a subsequent purchaser of registered estate under the RTL (Registration Title Law)
Certificate of purchase further to a court process.
Assent and probate and
Deed of Conveyance etc.

Please note that a C of O, i.e. Certificate of Occupancy can sometimes not be a good root of title, as it is merely a prima facie evidence that raises a presumption that the holder of the C of O is in exclusive possession and has a right of occupancy over a land in question. It is at this point that it must be highlighted that this presumption is rebuttable because it can be displaced by the production of a better title.

Investigate the Capacity of the Vendor

It is important that the proposed purchaser investigates the interest held by the vendor in the land. He must ascertain the capacity in which the vendor is conveying the interest in the title of the land. Some of the capacities in which the seller may be described with respect to the land are: trustee, beneficial owner, personal representative, mortgagee, or settlor.

Probe for Encumbrances

It is a smart purchaser that ensures there is no encumbrance against the proposed land sale. An encumbrance is a burden, interest, lien, hindrance, or claim against a property by a party that is not the owner. An encumbrance may also be a mortgage interest held by a third party e.g. a bank, over the property.

Probe for Third Party Impediments to Free Possession

It is prudent to ensure that a property in question is free from all physical and legal etc. impediments to quiet possession, enjoyment and ownership thereof. A physical inspection of the property is advised so as to ascertain vacant possession and zero impediments that can interfere with the free enjoyment of the landed property.

Physical Inspection of the Property

Many buyers overlook this critical step. In the event that you are not able to be physically present to inspect the landed property, it is advisable to entrust the inspection to a trusted person, perhaps a trusted relative or tested agent. However way you chose to do it, we advise that you endeavor to have the land inspected.

Conduct a Search at the Lands Registry

Conducting a comprehensive search at the State’s lands registry is essential to determine the authenticity of the title offered to you. You will also be able to find out whether the seller is the authentic owner of the land. Please note that if a piece of land is under government acquisition or in dispute, conducting a search will reveal that to you.

Restrictions

Certain lands are subject to restrictive covenants that govern how and in what manner the land in question can be used or developed. The most common uses of lands are: commercial, residential, agricultural, recreational, and transportation. It is wise to ascertain the permissible uses of land in the area that a purchaser is looking to buy a property in.

Regulatory Restrictions

Please take note that town planning laws and regulations may restrict you from purchasing certain lands, particularly when the intended purpose of purchase of the land is contrary to town planning regulations. Kindly ensure that there are no regulatory restrictions that may impede your proceeding with the land sale transaction.

Confirm if the Real Estate is Family Property

Nigerian culture has a fundamental influence on the manner in which land is conveyed in Nigeria. It is worthy of note that the family head and the principal members of a family are required to consent to the conveyance of a land transaction in the event that the land in question is a family land. It is advisable to learn about the tenable culture of the area in which the land is situated – as any purported sale by a member of a family without the required consent is voidable.

Investigate for Pending Law Suit

This is referred to as the doctrine of lis pendens. You want to ascertain that the land in question is not subject to any pending law suit or dispute. It is important to note that some unscrupulous vendors may intentionally hide some facts and mislead trusting purchasers to purchase a land which is the subject of a lawsuit. This is why it is advisable to conduct a thorough investigation before purchasing real estate.

Bottom-line

Above all, the process of land transactions is never a seamless one in Nigeria. It requires the counsel of a property solicitor, land surveyors and also counsel from the members of the street or area from which the land is situate. Please endeavor to ask the right questions and retain the professional services of all required professionals.

_________________________

About the Author

Taiwo Lawal Esq. is a corporate and transactional lawyer. With about half a decade’s experience servicing startups and providing requisite advisory on real estate transactions (including on transactions regarding intellectual property rights), she is the founder of Unicorn Valley Law, doing what she loves the most- providing bespoke advisory from the “well of water” within her.

Taiwo is happy to read from you and provide bespoke solutions to your startup’s legal and commercial needs. Kindly write her via hello@unicornvalleylaw.com or schedule a call via calendly here: (get in touch).

Creativity is Worth a Million Bucks: How to Protect Your Intellectual Property

unicornvalleylaw

March 20, 2024

Hello Unicorn Founder,

Suppose you create a new musical content and you discover that two years down the line a highly visible individual or company, i.e. the big sharks on Instagram, use your work of art for one of their commercials and this suddenly goes viral with the big sharks gaining real time coins from your musical initiative. Of course, you will be agitated. Not only have these folks used your masterpiece, they have now begun to make real time coins from your genius work product. All things being equal, you want to ensure these folks give an account of all monies made as well as cease and desist from using your masterpiece without your consent. Yeah, this is where intellectual property (IP) protection comes in.

In straight up terms, IP is a set of legal rights that protect your creative work from being used without your consent. This means you get to call the shots on who can use your IP, see it, reproduce it, sell it, display it, and what have you. This invariably means that should a person use your innovation without your consent, you can decide to pursue an appropriate remedy in view of such breach of your intellectual property rights.

As creatives, i.e. a content creator, artist, NFT creator, music artiste, actor, music writer, pianist, painter, scriptwriter, author, abstract idealist, sculptor, entrepreneur, or what have you – your creativity is your currency, but it’s not all about brush strokes, playing of chords, documentation and creation of ideas, another level to these things is protecting and even commercializing what you create. The first level here, one that we are about to explore is how your intellectual property can be protected.

In this piece, we explore what makes up an intellectual property, what types of IP that we have and the protective devices available to protect your genius inspirations and creations as an innovative person. We get to explore all that wisdom on how to protect your artwork and content online, should you also desire to know what to do if your work is stolen, and how to ensure your contracts protect your art/work product, read on to know how to go about this.

Every so often referred to as “IP”, intellectual property is an intangible interest or right of ownership (or possession, or use, etc.) or force field that protects your innovation. Intellectual property is an abstract ownership of an intangible estate and products of human inspirations. The legal world has adopted this terminology to encompass what is popularly regarded as ideas, inventions, designs, and art. For creatives, artists, entrepreneurs and even tech bros and sis’, IP is the heart of your work, and it is protected by law through devices such as copyrights, patents, NDAs, IP protective agreements and trademarks. For those who are serious about their craft, understanding intellectual property rights is really a non-negotiable.

So let’s dive into how you can secure your rights and interests in your genius creations, shall we?

IP Protection for Creatives and Entrepreneurs

The following are some of the devices deployed by creatives and entrepreneurs who are serious about their craft. It is important to take note that each IP protective device offers a different kind of protection to wit:

Trademarks

Trademarks are legal devices employed to protect your unique brand. Every single human on earth has a unique expression endowed by God. It is a smart innovator/ entrepreneur that protects such valuable (and trademark-able) expressions via legal trademarks. Many A-list stars and entrepreneurs trademark their personal names, company slogans, brand names etc. so as to legally differentiate it from all other products of its kind. Commercial entities use a trademark (the symbol is ™) for a word, logo, phrase or unique symbol that represent products or services that they provide. Trademarks establish commercial differentiation just like the Coca-Cola and Nike logos mark out the brands.

Copyrights

If you are an artiste, artist, photographer, musician, singer, music composer, programmer, please clean your lenses and get in here. This form of IP protective device called copyright is the most applicable to the kind of work that you produce. Copyrighting your creative work product protects your intellectual property from being exploited by another party without your consent. Please note that although you cannot copyright an unexpressed or undocumented raw idea, just about anything else can be copyrighted: software programs, photos, paintings, books, films, musical compositions, and video content etc. Copyright laws are designed to protect the creativity and effort you put into developing the product of an original idea.

The moment you create something, you automatically hold the copyright to it. Kindly endeavor to use the copyright symbol which is a typographical mark consisting of the letter C enclosed in a circle © on your copies. The purpose of the symbol is to show that an IP is copyrighted. Please note that although you immediately own the right of copy on your written or documented works, once you create the same, registering your copyright can be of added advantage.

Patents

Next up are patents! Patents protect novel and useful inventions, improvements on inventions or discoveries. So if you have discovered a new device, tool, recipe, production process, machine, or an upgrade to an existing invention, a patent may be the best route to protect such IP. Kindly take note that there are certain statutory requirements that an innovator must meet to be able to obtain a patent for a groundbreaking discovery or novel improvement on existing patented innovations.

NDAs and Technology Assignment Devices

Employers, creatives and entrepreneurs, get in here! Only you understand how much what you have built over the years is critical to your company’s success particularly in defending itself in the marketplace. If you are working on a project that is still under wraps, an NDA (hereinafter defined) can help ensure that your work is not leaked prematurely. Should you have a confidential information that provides a competitive advantage, such as a code, customer lists, trade secret or marketing strategy etc., you want to ensure that you disclose such discriminately after issuing an NDA with a proposed recipient. A non-disclosure agreement (NDA) can prove to be a useful tool that preserves the confidentiality and secrecy of sensitive information.

Very importantly also, employers and hirers of talents and services, kindly note that it is of utmost importance that you assign to your company all work for hire by contractors, all MVPs, tech, software, and all products of employees designed or created during the course of working with you. It is also very advisable to employ the right IP protection clause tailored to the facts of each commercial arrangement that involves the production of an IP. This will definitely keep potential legal battles at bay should any unscrupulous entity become embittered –desiring to hijack products or technologies made for your business venture. NDAs can bind recipients of the same to ensure that such disclosed proprietary information is not misused or disclosed without the consent of the discloser.

What to Do if Your Work is Stolen

If you discover that your artwork is stolen or appropriate against your discretion, we are happy to advise and guide you on next steps. Kindly schedule a call with us via: (get in touch).

Are Your IP Contracts Airtight

Are you on the verge of signing a contract that involves your artwork or innovative work product, it is advisable to review such documents to make sure the terms are airtight and your IP rights are protected. When in doubt, it is always wise to seek legal advice. We are happy to advise and guide you on next steps. Kindly schedule a call with us via: (get in touch).

Bottom-line

Intellectual property protection is essential for artists and creatives to safeguard their creations, preserve economic value, prevent infringement, encourage innovation, build reputation and brand identity, secure collaborations, and expand into new markets. By understanding and leveraging IP rights effectively, artists and creatives can fully realize the potential of their talents and contributions to society.

It is those who have been able to discern the value of their craft that diligently go the extra mile to ensure it is protected. Please note that each type of intellectual property protection serves a different purpose and protects a different aspect of your work. The key is to figure out which ones work for your work product.

If you’re interested in learning more about intellectual property and protecting your artwork, kindly reach out to our team via the details below:

About the Author

…………………………………………………………………………………………….

Help! How Do I Manage The Relationship Between My Cofounder and I?

unicornvalleylaw

March 13, 2024

If you are set to commence your startup’s business operations, one of the factors you are probably considering is how to onboard the right co-founder to co-mastermind your business venture. At this juncture, it is key to take note that as important as choosing the right co-founder is, maintaining the commercial relationship between the two business partners is also key.

A cofounder may be part of the vision of a startup from the get-go, or the cofounder may be onboarded very early on by the original founder because they have skills the founder is lacking. For example, the original founder may possess the original idea or solution, but no software development or engineering skills. Consequently, it greatly benefits the original founder to onboard a technical cofounder early on in the process of launching their startup. But it’s not always easy to find cofounders that are right for the business model or that will truly be the support required for the success of an original founder’s vision.

Choosing the Right Cofounder

Very similar to the process of choosing a marriage partner is how founders decide what they should search for in a cofounder. Choosing the right cofounder is not the easiest of tasks, albeit a rewarding one; when done right. It is advisable for the original founder to conduct an examination on what skills they are lacking. If you are an engineer, you may want to collaborate with a designer or a “visionary/ideator”. If you’re a “vision person” definitely find an engineer and a designer. If you already have engineering and design knowledge under your belt, look for someone who is really skilled at marketing and managing people and can explain your technical talk to the rest of the team.

If you are building a tech startup, it goes without saying that your co-founder should have a technical background – particularly if you do not possess the technical prowess required to build your solution. This will save you a lot of money when you’re bootstrapping, as well as ensure that you deploy a great product.

Asides from ensuring the functionality of the partner you onboard as your co-founder, enjoying working together is very crucial. That you both enjoy working with one another ensures that the relationship is not mechanical. It is also advisable to partner with a cofounder whose temperament complements the temperament of the original partner. If you are the best software engineer, all of that good juice may require a charismatic sales person as your cofounder so that your well-put-together solution really gets to the market and it is accepted by the target customers. You may also decide to onboard an administrator/operations individual to manage the talents and operations of your Company.

Tom Williams, a serial founder, once shared an insight that is noteworthy:

“I’m totally unconvinced that two people can find a person they haven’t known previously, and become an effective co-founder,” Williams states. “I think you’re better off finding the money to hire someone than actually finding a co-founder. The main reason? You probably won’t find someone as passionate as you are about the organization you’re building. And keep in mind, I have no clue who you are or what you’re building so that’s no judgment on you or the idea, just the reality I’ve observed over 20 years of startups.”

Also, decide early on whether what you really want to do is to employ talents or it is really a cofounder you need for the role that you so much require a mastermind to fill.

It is important that when looking for a cofounder, your motives are in the right place. Ensure you are not just looking to use another individual. Taking advantage of a person’s talent or devising a means to use “free labor” is definitely a wrong motive that can turn sour in the near future.

Founders and Operating Agreement, Do I Need One?

It is not unusual for folks to say statements along the lines of; “we are friends, why do we need legal cofounder agreements?” But no matter how good the relationship with your business partner is, you both will inevitably run into differences along the line.

Although onboarding a cofounder may seem like just another relationship with a good friend, it really is not. It may interest you to know that cofounder fallouts are the number one early startup extinguishers. Very recently, Mark Zuckerberg’s cofounder, Eduardo Saverin, slammed him with a law suit with claims that Mark squeezed him out of the business.

If you were asking, yes, you can completely lose the ownership of a solution you built ground up if you do not have adequate legal and protective devices in place.

Bottom Line

Please note that fallouts among cofounders can be completely avoided, mitigated or anticipated and rightly covered via tactful legal and commercial devices engineered into a cofounders’ and operating agreement by a specialized corporate lawyer.

When clashing opinions arise, a carefully drafted founders and operating agreement then comes in handy. It is really the smart founder that documents all the important guidelines and framework of the business partnership between them and their cofounder. In fact, without a founders and operating agreement, a business may be doomed for chaos, the chaos that could have been tactfully avoided. Should a business partnership unavoidably go down the drains, the dispute resolution terms of a tactfully crafted founders and operating agreement is able to guide on what happens upon the exit of a cofounder.

Essentially, it is advisable to think things through and have all the required legal devices in place even before delving into the commencement of business relationships with cofounders and other partners.

About the Author

Taiwo Lawal Esq. is a corporate and transactional lawyer. With about half a decade’s experience servicing startups, she is the founder of Unicorn Valley Law, doing what she loves the most- providing bespoke advisory from the “well of water” within her.

Investment Readiness – Investor Concerns That Founders Should Consider

unicornvalleylaw

March 11, 2024

Hello Unicorn Founders,

We understand how important capital is to the establishment of a business. You know, capital is somewhat like a trigger; while your God-given solution is as a loaded gun. In trying to secure the required liquidity for your creative enterprise, we recommend that you consider the following to “get into the mind of a potential investor”:

Deal Economics. Nothing is impossible to come by in our world of today, but I do not know of any actual homo sapiens that does not want to be profitable. Even God is keen on profitability. Founders therefore have to understand that every investor wants to get “a big enough slice of the pie” to make their proposed investment in your business venture worthwhile on a risk adjusted basis. Essentially, as a founder, you want to make sure you have done your due diligence on the financial aspects, traction, scalability, workability and metrics of your solution. You want to examine the various financial components of your solution to wit: sales, revenue, purchase price, valuation, cash flows, expected returns, cost of capital, and other financial metrics relevant to your business venture – to ensure that your venture does not just generate revenue, but it is in fact profitable. This is crucial because it provides the basis for decision-making to examine the feasibility, performance and the attractiveness of a proposed deal. With respect to risk assessment, deal economics is key because it enables investors to identify, examine and allocate risks in their decision making process. Deal economics also helps with reaching a startup’s valuation. In a lot of words, what is in it for potential investors?
Governance, Management and Control. A father who is invested in his child’s education definitely wants good ROI evident in the child’s results and brainpower. To this end, it should not shock any soul when such father is on the child’s toes – ensuring the child applies himself to coming out in flying colors. The same principle applies here. A person who has skin in the game is more likely to be very concerned about the game in question. A typical investor wants to know that monies invested are appropriated judiciously and appropriately. An investor typically wants to have a say in critical decisions. Wisdom is then required to know when and where to draw the line on an Investor’s ability to make a decision in an investee company. However, an investor requesting for a board seat or an observer seat at your Company’s decision making table is not unusual.
Exit and Liquidity. When trying to raise funding for a business venture, founders have to pay attention to their business model and the attendant funding model that works best for their business. It is worthy of note that should a startup desire to opt for venture capital, such founder has to have at the back of his or her mind that venture capital is exit-focused. A founder who has conducted his or her due diligence will be able to clearly communicate exit opportunities to potential investors; particularly as stakeholders are keen on maximizing their chances to recoup their returns in all possible exit scenarios, even if they have to force such situation to occur.
Investor Rights & Protection. Particularly when it comes to venture capital financing, financiers want to ensure that the terms of a future financing deal does not contain clauses that diminish the value of their prior investment or lead to a later investor enjoying a superior liquidity position, without paying adequately for that superior right. This is the reason why many investors introduce “A Most Favored Nation” clause, or an “MFN” clause to protect an investor by giving such investor the same rights and benefits received by later investors- if those rights and benefits are more favorable than those originally agreed. This way, the initial investor is given comfort that such investor will not be disadvantaged compared to other investors in subsequent rounds- thus maximizing the investor’s potential returns.

Essentially, founders have to be sure their “big idea” is monetize-able and profitable, to say the least. Possessing actual “traction” before an investor comes onboard is even a bigger plus. It is advisable to pay attention to the deal economics, governance, investor rights & protection as well as exit opportunities before you, as a Unicorn Founder, meets a potential investor.

About the Author

Taiwo is happy to read from you and provide bespoke solutions to your startup’s legal and commercial needs. Kindly schedule a call via calendly here: (get in touch).

12 Page 1 of 2

The Implications of Financing Rounds, Cap Table Management and Anti-Dilution

Are SAFEs the Riskiest Investment Notes?

Startup Valuation for Smart Entrepreneurs

Arm Your Self With This Knowledge of the Board Room

Pearls of Wisdom from She Who Dominated Wall Street for 30+ Years

How to Navigate Real Estate Transactions in Nigeria

Creativity is Worth a Million Bucks: How to Protect Your Intellectual Property

Help! How Do I Manage The Relationship Between My Cofounder and I?

Investment Readiness – Investor Concerns That Founders Should Consider

Register your Business in the US

EDITOR PICKS