Three key legal challenges for startups in Nigeria and how to navigate them

NIGERIA’s population is about half of the population of the entire African continent, hosting about 200 million citizens. This huge population is seen by many as an opportunity for economic growth in the country. One of such persons is the WTO Director, Dr. Ngozi Okonjo-Iweala, who, when speaking at Business Day’s Africa Trade and Investment Summit, stated that, “In an aging world, Africa’s growing young population anchors the workforce and markets of tomorrow.” In view of this, it would make sense for startups to thrive in the country, because the increase in the population of a country, if managed right, can help the country’s economy by increasing the demands of products and services, thereby encouraging innovative ideas. However, these startups require effective legislations to succeed, legislations that will encourage individuals to start businesses, encourage investors to invest in startups and such that will provide ease of business. Olisa Agbakoba, the senior partner and head of the arbitration and ADR Practice Group, said in the Africa Trade and Investment Summit that “the reason for multidimensional poor people in Nigeria despite its resources is because of the regulatory environment, which is in a mess.” He added that, “we can’t get resources or revenues because the legal framework is so weak.”

This leads to the purpose of this article, which is to highlight three legal challenges startups face in Nigeria and how they can navigate these challenges to guarantee success in their businesses. This article will also provide comparisons between Nigeria and other countries that have startup-friendly laws and how they have enabled startups in those countries to thrive.

 

Legal Challenges

1. Complex Regulatory Environment: There are different sectors and industries where a startup can be established. For example, we have the oil and gas sector, power sector, financial sector and manufacturing sector, among others. The businesses in these sectors have laws that are guiding the way they are run. Thus, businesses must obey the laws and regulations of both the general laws and sector-specific laws. For instance, startups must adhere to complex regulatory frameworks including, labor laws, tax laws, data privacy requirements and sector-specific laws. This is where the problem for startups comes in, they have issues with complying with all these laws, sometimes because of ignorance, negligence or cost of compliance. Compliance to laws can be expensive, for example, in the energy sector, the Environmental Impact Assessment Act 2004 requires any project that is likely to have a significant impact on the environment to ensure that an environmental impact assessment is done in respect of the project prior to its commencement. This process requires some expenses to be incurred which startups may find difficult to bear. The energy sector is one that has witnessed the birth of a good number of startups in Nigeria, some of which include, Rensource, Arnegy and Scrapays Inc. among others. These startups are expected to comply with and obey all the laws applicable, such as, obtaining licenses, permits, tax payments, and labor laws, to mention a few.

For instance, startups in the energy sector are required to comply with the rules and guidelines given by the Nigerian Electricity Regulatory Commission (NERC) and the Federal Ministry of Environment, Environmental Impact Assessment Act and some other safety regulations. Complying with all these laws plus the requirement to acquire permits and licenses for different projects could be very costly, especially for renewable energy startups, and disobedience could lead to the downfall of the startups. That is why it is reported by the National Bureau of Statistics (NBS), that regulatory issues are among the top five challenges faced by Nigerian startups, affecting nearly 30 percent of new businesses. But we can take a leaf out of the playbook of the United Kingdom where what is known as regulatory sandboxes have been established. This is where businesses are given a safe space to test innovative products and services without the normal regulatory consequences. If this is introduced in Nigeria, it will provide a controlled environment that allows new renewable energy technologies and business models to be tested without immediately having to comply with all regulatory requirements, and will instead allow companies to try out their ideas under supervision. For example, in the United Kingdom, the Financial Conduct Authority (FCA) – which is the financial regulatory body in the United Kingdom saddled with the responsibility of protecting consumers, promoting competition and maintaining market integrity – has established a regulatory sandbox for Fintech companies to test financial products and services and since its inception in 2016, it has accepted 89 firms into the regulatory sandbox. Ensuring a safe business environment for these startups will encourage startups to build on their renewable energy ideas without pressure which can in turn promote energy capacity in Nigeria. So rather than depending on non-renewable energy like fossil fuel for electricity, we will begin to focus on renewable energy like solar, wind and water for power.

Another way to do this is by encouraging capacity building and knowledge sharing by introducing training programmes, workshops, peer-to-peer learning sessions and collaborations between institutions,which can help stakeholders better understand regulatory requirements and develop strategies to overcome barriers. In Denmark for example, the government has established a collaborative approach to energy planning, involving stakeholders from across the energy sector. This approach has helped ensure that regulatory frameworks support the growth of renewable energy while addressing the concerns of all stakeholders. This can be used in Nigeria, not just with the energy sector but with other sectors as well.

2. Intellectual Property Protection: Intellectual Property rights are important because they protect the inventors’ idea and encourage innovation in the country, which then drives economic growth. For instance if you invent or create something, you have the right to protect the product or service from being copied or stolen once it has been registered. Unfortunately, obtaining this right can be expensive and time-consuming, especially for startups due to the high cost of registration, but failing to register one’s intellectual property can make it vulnerable to theft or imitation.

The Nigerian Trademarks Act requires companies to actively register and monitor for infringement and a Nigerian startup facing IP theft might need to sue for damages, which requires evidence and financial resources. This and many other reasons is why it was reported in PwC that Nigeria has one of the weakest intellectual property laws in the world, which has increased the amount of counterfeit and pirated products in the country.

One of those reasons could be why Rita Anwiri, an expert in Intellectual Property stated that, “the non-availability of an IP policy, a specialized court like they have in China for resolving IP disputes with trained IP judges presiding over IP cases contributes to the weak state of IP rights in Nigeria.”

China was once considered challenging for IP protection, now it has made significant strides by establishing a modern and efficient IP system, allowing it to lead globally in patent, trademark and design applications, as was stated by Ms. Wang, Deputy Director General of WIPO. It was also stated by Action Plan that China improved its IP examination system by promoting electronic filing, perfecting fast passage for patent examination, setting up green passage for trademark examination and fast registration passage for software copyright. China’s focus on enforcement, such as specialized IP courts and quicker dispute resolutions, helps reduce costs associated with infringement.

Thus, as a nation, it is important to be aware that while it is good to make laws concerning the protection of our IP rights, it is also as important to put focus on enforcement and implementation, which is something Nigeria still struggles with.

EnyiomaMadubuike, who is an information technology legal consultant, underscored this when he said that “though Nigeria’s IP laws are quite backward, some desirable effects can still be achieved with the existing ones if deliberate moves are made by the government to enforce them.”

Enforcement is a big problem when it comes to IP laws. As reported by the Nigerian Copyright Commission, the Nigerian software market has an alarming rate of pirated products contributing to a loss of more than $82M per annum despite the existence of IP laws. The Government must thus find ways to provide better enforcement of the IP laws in the country because it is one of the structures that promote startup success.

This is evident in the new joint study done by the European Union Intellectual Property Office (EUIPO) and the European Patent Office (EPO) where it found that Intellectual Property rights are a significant factor in the success of European startups. The report shows that on average, startups that apply for trademarks and patents rights prior to their initial seed or early growth stages are up to 10.2 times more likely to successfully secure funding.

In 2023, Switzerland was ranked the world’s most innovative economy for the 13th year in a row according to the Global Innovation Index (GII). This is as a result of the growth in patent and trademark applications in the country over the years, which has also resulted in a growth in capital investment in local startups. What this means is that when you protect your innovations, it encourages investors to invest. Nigeria should try to have its IP laws in line with international best practices.

3. Contract and Employment issues: Drafting a contract is probably the most important aspect of any business, especially for startups. These contracts could be between the start up and investors, employees or even the government, and adhering to the contract is a must. A well drafted contract is thus very imminent for any startup to succeed. In Nigeria, contracts are governed by the Nigerian Contract Law, Sale of Goods Act and the Companies and Allied Matters Act (CAMA). Startups must understand these laws because it will help them know whether or not they have made a binding and enforceable contract. A business contract that is well drafted will include, a non-compete agreement, confidentiality agreement, and intellectual property rights. These clauses must be well drafted to prevent any conflicts that may arise in the future and to make sure there are no unfair agreements between the parties.

Furthermore, as a startup founder, you need to be aware of the legal framework that governs employer-employee contracts to avoid potential problems. A contract of employment is the foundation of any relationship between an employer and employee. An employment contract in Nigeria should include key details such as the job title, wages, benefits, pensions, retirement plan, working hours, leaves and termination conditions. Many startups overlook the importance of clarity in these contracts, leading to disputes that could have been avoided.

Payday, a Fintech company, ran into problems barely six months after raising $3million in investment. It was alleged that the company’s founder and CEO was paying himself a monthly salary of $15,000 at the expense of the company’s survival while employees were made to take pay cuts. This and many other reasons led to the downfall of the startup which later had to be acquired by Blockchain payments platform, Bitmama Inc.

When drafting an employment contract, a startup is not meant to go contrary to it by proposing wage cuts. The key labor laws Nigerian startups must comply with are the Nigerian Labour Act, the National Minimum Wage Act and the National Pension Commission Guidelines. The National Minimum Wage Act for instance just amended the minimum wage from 30,000 naira to 70,000 effective from July 2024. The Act does not take cognizance of those businesses that are just starting. So while this may be of benefit to already established businesses, startups may find it difficult to pay their workers due to operational costs.

Another Act to look at is the Startup Act, which though provides for incentives like tax reliefs and access to funding, startups may find it difficult to meet the eligibility criteria for these benefits such as “startup labelling” which can be time-consuming and costly. Here is what Singapore did to help startups pay their employees. The Singapore government provides various grants and funding to support businesses throughout each stage, from early stages to the expansion stage. The Singapore government provides wage subsidies through programs like the Career Trial Program, which offers 30% subsidy of monthly salary for up to 6 months. There was also the Jobs Growth Incentive, a $1 billion Government initiative to incentivize the hiring of local workers from September 2020 to September 2021. The JGI supported employers to expand local hiring and it provided employers with 15% to 50% salary support for new employees. Following this, the Nigerian government can introduce wage subsidies or grants for startups employing young talent and can provide tax incentives tied to employment creation to offset increased payroll costs.

How startups can navigate these challenges.

• Get a qualified lawyer: Seeking legal advice is one of the best decisions a startup can make. Qualified lawyers will help with compliance, drafting contract agreements, registration of business and intellectual property, litigation and dispute resolution processes. Seeking legal help makes the process easier especially because starting a business can have a lot of legal complications which a lawyer can help deal with.
• Register your intellectual property: This will encourage investors to invest and it will help prevent disputes over who owns an innovation or brand. IP ownership strengthens a startup’s position in partnerships, negotiations and licensing.
• Mergers and Acquisitions: This is when companies combine their assets, shares or ownership control to achieve strategic objectives such as growth or increased market share.M&A can allow startups to benefit from access to resources and expertise that the more established company already has. For instance, the larger company can provide legal expertise, increased funds and could also attract and retain talents.
• Focus on industry-specific regulations: As stated earlier, each industry or sector has its rules and regulations, focusing on the regulations that relate to the particular sector where the startup is involved with will make compliance easier. For instance Fintech startups need to secure CBN licenses, while energy startups are required to have their proposed businesses assessed according to the EIA.

.•Oladele is a 2024 Law graduate of AfeBabalola University, Ado Ekiti.

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