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Business Partnerships; A Necessary Evil – Tosin Omotosho

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Mr A and Miss Z are high school friends and they have a vision to build a social network unique to Africans. They have shared this dream in high school and nurtured it for years. Shortly before graduation from the University, they proceed to register a company Afrinet Limited and  start business right away.

Business is booming as the social network becomes the toast of a large number of African youths.

However, trouble looms as Mr A and Miss Z start having disputes. They cannot seem to agree on crucial decisions and their duties towards the business are over-lapping.

A promising business is being threatened because of personal differences of the co-founders.

 

Does this story sound familiar?

In some climes, people frown at getting into business partnership for several reasons especially lack of trust.

However two good heads are better than one. In spite of failure of business partnerships round the world, there are still those that have survived over the years.

 

What’s the difference?

One choose your business partners carefully, you want to be sure you can both take decisions together as a team. Running a business involves taking lots of decisions.

Two communicate your business model, vision, goals, strategy etc and make sure you are both on the same page. If you believe in a low-cost product for example, and your co-founder believes in a highly priced product, you both have to agree on what product to produce and when.

Three, document what you both agree. Most co-founders are so busy with building a business that they miss this important step. After agreeing on the important aspects, you both need to write it out in detail. Take a step further and make it a legally binding contract. Get your lawyer to prepare a co-founders agreement/partnership agreement/operating agreement.

Signing an agreement doesn’t mean you don’t trust each other, it rather shows that you both want to be accountable to the business and have what you agreed upon stated clearly in black and white.

Partnership isn’t evil, but first things first. In my own opinion, when starting a business, 2 to 4 partners/co-founders are enough. You can admit more partners as you scale up.

What is your ideal number of co-founders for a business? Would you enter a business partnership? Let’s discuss in the comment section.

 

The Author:

Tosin Omotosho is a real estate and business lawyer.  She helps business owners give legal structure to their business and avoid liabilities caused by legal mistakes. An avid reader and writer, She is the Principal Partner, Charis Legal Practice. Contact her here, to read more of her articles, click here.

Legal Business

SMEs: Carefully Navigating The Loan Agreement

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Morenike Okebu, Founder at Reni Legal

If you are an SME owner and you are thinking of taking a loan from a commercial bank, you should read this informative article focusing on the key terms to negotiate. It is necessary to read any legal document before signing it, but reading is not enough, you may have to take things a step further by negotiating the terms to better suit your interest.

One of the documents that most Small to Medium Enterprises (SMEs) will come in contact with is a loan agreement. In many cases, these agreements will come from financial institutions and would be largely non – negotiable. While this is often the case, this is not always the case. Before you get a loan from any commercial institution it is fundamental that you try to negotiate the key terms. Before you sign any legal document, I would always advise that you contact a lawyer; the lawyer should review the agreement and explain to you exactly what you are getting into.

Having said that there are some key terms that you should focus on in any loan agreement.

1. The time frame for repayment: Ensure that you understand and can see clearly spelt out the time frame within which you must repay the amount that you have borrowed. If you have discussed one thing with your bankers, and another thing is reflected in the document, this is a BIG deal. The bankers you negotiated with today may lose their jobs and all your oral assurances may go with them, but you will remain bound by your written agreement.

2. The time frame for demand of late payments: I remember reviewing a loan agreement for a client and the time frame for demanding for late payment was only one week. This was ridiculous, according to the agreement if he missed paying an instalment by one week, the entire sum of money advanced to him would become immediately recoverable and the security he provided would be lost. Ensure you get a fair amount of time. At least a month is reasonable.

3. Waivers of your legal rights: You will find that in many loan agreements, the bank will urge you to waive rights you have under the Conveyancing Act or Property and Conveyancing Law. Kindly consult your lawyer and see how you can waive as few rights as possible.

4. Rights to direct debit unrelated accounts: Watch out for any clauses giving the bank the right to debit accounts that are unrelated to the loan transaction which you or other directors in your company may have in the same bank.

I could write a book about some of the outrageous and unfair clauses included in some of the standard form loan agreements in circulation today. You should obviously pay attention to what happens if you do not timeously repay the loan for example, insurance obligations and so on. Regardless of how desperate you may be for funding, you do not want to do anything that would be counter – productive to your business. Therefore it is important that you negotiate and review your loan agreements properly. If you do it NOW, you will thank me about this later.

Also Read Meet Sivi Malukisa, The Congolese Entrepreneur Whose Food Startup Is Promoting DRC Cuisine

If you have questions about loan agreements and how they are reviewed, you can always contact me. An SME owner needs all the legal help they can get to prevent and avoid mistakes and costly litigation.

 

Author

Morenike Okebu is a qualified Legal Practitioner that graduated from the University of Sheffield at the top of her class. She has several years of experience practicing in leading law firm owned by a Senior Advocate of Nigeria and now is a partner in a law firm GM George – Taylor & Co. which powers her own business, Reni Legal. A law business which focuses on uniquely solving the legal problems facing SMEs and Start-ups. Send an email to [email protected] and she will be in touch.

 

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Legal Business

The Founder’s Quagmire: Finding The Right Share Formula – Morenike Okebu

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When you want to start a business, particularly a small one on a small scale, you will be faced with what I call the founder’s quagmire. You will have to decide whether you would own the business alone or whether you will give shares of your business to other people (partners). If you choose to give away shares of your business, you would need to decide how many shares you would give away and the terms upon which you would give them away.

First of all, you need to understand that there are rights attached to shares, particularly voting rights. The fact that you have the most shares in your company does not necessarily mean that you have full control of your company. Therefore, in determining how many shares to give away, you should also narrow down the number of people you give shares to as each shareholder ordinarily has a voting right.

At a company meeting, by virtue of your ordinary shares you are ordinarily entitled to just ONE vote. This means if your company has 4 shareholders with you owning 70% of the shares and the other three persons owning 10% each, there would be 4 members of the company with rights to 4 votes. If a decision you made comes to a vote and the 3 other members of the company vote against you, your decision would not stand.

Also Read: Coverdor: An insurtech providing digital insurance experience targeted at millennial and emerging generation

This is why founders should be reluctant to give away ordinary shares unless they have carefully chosen their partners. Founders should also ensure that they seek legal advice on the appropriate type of shares to give the persons they want to involve in their business. Shareholders agreements are useful in situations like this to ensure that the founder retains a certain level of control over the business and the decision making powers in respect of the company.

It is not necessary that all the shares you wish to give away to potential partners are given to them instantly. There are ways you can set conditions for vesting shares which would require the potential partners to reach milestones before the shares are vested in them. In the alternative, you can create different classes of shares within your business and only award a certain type of shares to the potential partners.

Before you give away shares of your business ask yourself these questions:

  1. How many shares do I want to give away?
  2. What type of shares do I want to give away?
  3. When do I want to give the shares away?
  4. How much control of my business do I want to retain?
  5. How many shares do I want to retain for future investors.

These questions will get you off to a good start in determining the correct ‘share formula’ for your business.

Written by 

Morenike Okebu is a qualified Legal Practitioner that graduated from the University of Sheffield at the top of her class. She has several years of experience practicing in leading law firm owned by a Senior Advocate of Nigeria and now owns her own business which focuses on solving the legal problems facing SMES and Start-ups called Reni Legal.

Email: [email protected]

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Legal Business

Startups: The Ideal Partnership Agreement

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Image: entrpreneur.com

Today, I was thinking about the number of friendships turned businesses that have been destroyed because of one simple thing – no partnership agreement. We have all been there, you have this eureka moment! You want to share it with your friend and both of you decide to go into business together. This is fantastic! This is worth celebrating! However, along the line disagreements slip in, he wants it that way and you want it this way. He’s wondering why you didn’t ask him before you hired the new manager, on and on and at the end of the day one partner leaves the business with hurt feelings and the greater loss is that you lost a good friend.

This should not be your story. Why? Because you are reading this article *chuckle*

I know that in the past I have mentioned the importance of having a partnership agreement, but I need you to understand that not just any partnership agreement will do. You need one that covers everything that is important to your partner and everything that is important to you. There is nothing like a generic partnership agreement because people are not generic. A generic agreement cannot cater to your unique needs and preserve your friendship.

Simply put, at the point where you decide to do business with your friend, you should get a lawyer. If your friend is a lawyer, get another lawyer so it can be clear that the agreement is independent. A good lawyer should help you with the agreement but these are a few things you need to agree on which can be reflected in the agreement:

  1. Who is managing the company?
  2. If there is conflict in decision making who has the final say?
  3. How much is each person investing?
  4. How are you sharing loss?
  5. Who pays for company registration, etc
  6. Who makes hiring decisions?
  7. Who makes spending decisions?
  8. What kind of account would your business run? Must you both be signatories? Which bank?

When someone comes to me requesting for a partnership agreement, they receive a LONG list of questions and issues which I request that they discuss with their partner before I ever put pen to paper. There are instances where some of my previous clients have called me that they had a disagreement with their partner, but the partnership agreement I drafted for them already covered the situation so it was easily resolved. This is the goal! Avoiding litigation and conflict! Anticipating the conflict beforehand and resolving it. Another thing I always do is speak to BOTH partners. I know you think you know your best friend and you can answer all the partnership questions on his behalf, but it is important that the lawyer speaks to him or her too and confirms that you are both on the same page, in legal words, confirms that there is consensus ad idem.

In summary, the partnership agreement you need to get off to a good start is one that fully takes into consideration the needs and interests of both partners. It is one that also anticipates future conflict and resolves them.

Also Read: Interview With The Founder And Textile Designer At The Adirelounge, Cynthia Asije

 

Author

Morenike Okebu is a qualified Legal Practitioner that graduated from the University of Sheffield at the top of her class. She has several years of experience practicing in leading law firm owned by a Senior Advocate of Nigeria and now is a partner in a law firm GM George – Taylor & Co. which powers her own business, Reni Legal (www.renilegal.com). Reni Legal is a law business which focuses on uniquely solving the legal problems facing SMES and Start-ups. For more information on partnership agreements please contact me on [email protected]

 

 

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