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A Shareholders Agreement is no proof that you own shares in a Company

November 25, 2016 · 3 min read
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Startups are the new cool especially in Nigeria. The resilience, idealism and opportunism of the Nigerian youth, the abundance of solvable everyday problems, the increasing opportunities of Information Technology and the reality of disappearing traditional jobs has created a curious mix for pushed the rise in the number of startups run by young Nigerians.

As with every business, finance is essential and very often Nigerian startups are bootstrapped for a long period of time as the new entity struggles with fine-tuning its model, pivoting, hiring talent and navigating its path to sustainable revenues.

One of the most prevalent ways Nigerian startups bootstrap today is by founders offering shares to key talent rather than paying fully for their services. Skilled talent in Information Technology is in high demand all over the world.

Expectedly, the value of such talent where available even on a freelance basis is often miles away from the budget of a typical Nigerian startup. By offering shares to a key employee, startup founders are able to offer salaries within budget plus ensure the employee’s commitment to the growth of the company for a large part of its formative years.

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Committed

However, it is important for all parties to note that shareholding in a Nigerian company is a strict matter of the law and not merely the agreement of parties. Oftentimes, an employee being offered shares in a company is too excited by the offer and fails to attend to the key legal details and assumes that an agreement purportedly made by ‘shareholders’ is enough.

The startup on the other hand is understandably lacking in essential structures like a functional company secretary and a necessary culture of documentation filing at the Corporate Affairs Commission. The result is a situation where parties have made wrong assumptions which could lead to disappointments and avoidable conflict in the long run. The employee’s position is the most precarious as years put into helping a company grow could end up being for nought.

To help all parties, a few ingredients should be put in mind where shares are offered to an employee:

Valuation of the services to be obtained for shares

Where the shares are to be obtained from the company, the law requires that the Company obtains adequate value for its shares. Because the company does not expect money from the employee, an independent valuer is needed to value the worth of the services to be provided by the employee in exchange for the shares he is to obtain.

The Agreement for transfer

This document captures the desire for shares to move. A Share Transfer Agreement is needed where the shares are to be obtained from an existing shareholder. Where the shares are to be gotten directly from the company a Share Subscription Agreement should be signed by parties.

Corporate approvals

The Company’s board of directors should approve the movement of shares. Most times approval of shareholders is essential for the passing of shares in a private company.

Filing and records

Nigerian law clearly states that a person is not yet a member of a company until an entry of his name into the Company’s register of members.  A new shareholder should insist on getting a copy of this entry in the Company’s books. More importantly is the filing of the new shareholding at the Corporate Affairs Commission. This is key for the protection of new shareholder because by filing at the CAC, the transaction is perfected and notice is available to the world especially any future investor. A new shareholder should therefore request for the certified true copy of the change of shareholding filed at the CAC.

It is exciting to obtain shares in a growing startup with exciting prospects. It is however the responsibility of an intending shareholder to ensure that he stands on solid ground to avoid a tale of wasted years.


About the Author

Enyioma Madubuike is a lawyer, writer and entrepreneur. Join him on Twitter where he engages in public interest discussions @philkingenyioma.

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