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Startups: The Ideal Partnership Agreement

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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]

 

 

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

5 important features to make your contract legal and valid | Tosin Omotosho

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Contracts are a big part of commercial transactions. As a matter of fact, your company is set up to sell either physical goods or intangible services. That is a contract of sale. Apart from the basic contract of selling, your company will enter series of contracts, so it is important to note what makes a contract legal and valid.

A contract is a legally binding agreement between two or more parties and for it to be valid; it must have these essential features.

Firstly, there must be an offer by one party and acceptance of that offer by the other party (ies). For example, Worldwide Nigeria Limited (a fictitious company name) needs a legal adviser for their company; they reach out to our law firm Charis Legal Practice and make us an offer. We accept their offer and we both agree on scope of our services which they need, the duration of the transaction and other important details (acceptance).

We have a written contract containing all the necessary details of our business arrangement which representatives of the company and the law firm sign.

Secondly, there must be consideration, meaning a party will give the other party something in return for the stated benefits. Each party has a benefit to be gained from the other party and in exchange for that, it has obligations to fulfill towards that party. As in our example above, W Nigeria Limited agrees to pay #X million naira as fees in exchange for the legal services our law firm will provide.

Please note that consideration doesn’t have to be money all the time, as long as it is something of value. For example, trade by barter where an interior decorator may exchange his / her services for the services of a digital marketer.

Thirdly, there must be an agreement or consensus. This is the bedrock of all contracts.  Both parties must agree on all the necessary details that the contract entails. It is at the point of agreement that they sign the written contracts.  As a matter of fact, there is no binding contract until the parties have agreed.

So W Nigeria Limited and Charis Legal Practice agree on the terms of the contracts e.g fees, mode of payment, mode of delivery, duration, scope of services etc, and include it in a contract.

Next and of utmost importance is that a contract must be for a Lawful purpose. You can enter a contract to do something lawful only.  An agreement between two people to defraud another person or give kickbacks for example cannot be a contract  as it is not for a lawful purpose.

Finally, the parties must intend to create a legal relationship. This means they both agree that if a party doesn’t do what he or she agreed to under the contract, the court can compel that party to comply. The relationship between Charis Legal Practice and W Nigeria Limited is a lawyer client relationship and if any of the parties fails to carry out their obligations under the law, the law will take it course.

 

There you go, these are the five essential building blocks of a legal and valid contract.

Do you have a question? Do type them in the comment section or send me an email here and I will respond as soon as I can.

Also Read InvestSure: Inspired by the need for investors to manage fraud risks that can be unforeseen – Mbulelo Mpofana

Author:

Tosin Omotosho is a business lawyer.  She helps business owners give legal structure to their business, implement best legal practices and avoid unnecessary liabilities caused by legal mistakes.  With a career spanning more than a decade, she has been lawyer to organisations in the agriculture, advertising, real estate and technology industries among others. An avid reader and writer, she is the Principal Partner, Charis Legal Practice, a law firm based in Lagos. Contact her here, follow her here on instagram to get more helpful legal tips and to read more of her articles, click here.

 

 

 

 

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SMEs: Before you sign that deed of guarantee | Morenike Okebu

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As an SME business owner, I know that you would need to take loans sometimes. These loans come in all sorts of variations. However, in some instances, you may not be the one who needs the loan, a friend, a colleague or well meaning neighbour could approach you to sign a deed of guarantee at the bank in order to help them get a loan. This article is aimed at helping you understand exactly what you are doing when you sign a deed of guarantee.

So what is a deed of guarantee?

In the case of Wardens & Commonalty of Mystery of Mercers of the City of London v New Hampshire Insurance Company (1991) 3 J.B.F.L. 144 Phillip J relied on a definition of a deed of guarantee contained in the 5th edition of Halsbury 2008 to define a deed of guarantee as follows:

A guarantee is an accessory contract by which the promissor (you) undertakes to be answerable to the promisee (the bank) for the debt, in the event of default or miscarriage of another person (your friend) whose primary liability to the promisee must exist or be contemplated.

In simple terms you are signing a contract promising that if one person does not pay his legal debts, you will pay on his behalf.

What a deed of guarantee is not?

The easiest way understand what something is, is to understand what it is not. The case of Vossoloh AG V Alpha Trains (UK) Ltd (2010) EWHC 2443 gives a great example of what a deed of guarantee is not it states that:

A contract under which the liability or debt of the principal debtor (your friend) is extinguished or replaced by the liability of some other person (you) is not a contract of guarantee.

This means that if the contract that your friend is trying to get you to sign TRANSFERS his legal debts to you, making him free of debt and you owe his debt, you are not signing a contract of guarantee but a novation.

Must my friend be a party to the deed of guarantee?

The answer to this question is no. Andrew and Millet in their book on the Law of Guarantees identified that whilst the simplest form of guarantee is one in which the creditor, principal and guarantor are all parties to the contract, it is not unusual for the contract of guarantee to be between the lender and the guarantor. Therefore, you must not think you are not bound by a deed of guarantee just because the party you are guaranteeing did not sign the agreement.

Can I be the only one who signs a deed of guarantee?

Yes. A deed of guarantee is different from a contract of guarantee. Now, a deed of guarantee is a contract that is valid because of its form. Because you sign a deed it is binding on you because it is a deed. It doesn’t depend on sufficiency of consideration to be valid etc. Even if you are the only one who signs the deed of guarantee it is still binding on you.

What does this all mean?

This simply means that whenever you want to sign a deed of guarantee you should understand what you are doing. It is advisable that you get a qualified legal practitioner to review the agreement for you and ensure that you are making a good decision. It also means that in business there are legal documents which may appear insignificant but have grave implications. You should not sign documents without reading them properly and making adequate legal consultation regardless of how much you need a loan or money for your business. It is important that you fully understand what you are getting yourself into.

Also Read TeamApt Secures Switching License From CBN To Power Payment Infrastructure Solution, AptPay

 

About Morenike

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, Reni Legal which focuses on uniquely solving the legal problems facing SMES and Start-ups.

Contact: [email protected]

 

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