Before you pitch your deck, crystallize it. Whether it’s a scrappy startup raising its first ₦50 million (Fifty Million Naira) in seed funding or a scaling company bringing in institutional investors, capital raising is never “just money.” It is governance, control, liability, and future litigation risk wrapped in one transaction. This essentially means that it must be approached with utmost caution and detailed legal guidance to avoid costly mistakes that may cost a founder control over his business.

From structure to exit, here are several key legal factors every startup and growing business must consider before raising capital. 

1.   CORPORATE STRUCTURE

The legal structure of the startup must be right. This includes proper incorporation with the Corporate Affairs Commission (CAC). Shares must be properly allotted and filed. All equity allocation must be properly documented. All incorporation documents, board resolutions, and filings with the CAC must be up to date. A founder must also consider future expansion when contemplating the corporate structure of the business. A structure that would allow investors to participate in funds would often be more favored.

2.   COMPLIANCE WITH REGULATORY REQUIREMENTS

Depending on the type of business and sector, regulatory requirements may vary. One of the important boxes to tick is tax compliance. Non-existent tax documentation or discrepancies in tax records may be a red flag to venture capitalists, especially during Seed or Series A funding circles. Similarly, relevant employment regulations must be adhered to. It is also necessary to ensure compliance with sector-specific regulations and guidelines. For example, to set up a sports betting company in Nigeria, you require a minimum share capital of N30,000,000 (Thirty million naira).

3.   DUE DILIGENCE AND RISK EXPOSURE

To be funding-ready, the company’s risk profile must be assessed. This typically covers intellectual property ownership, employment and contractor agreements, litigation history, tax liabilities, and data protection compliance. 

A common issue in early-stage companies is unclear ownership of intellectual property. All founders, employees, and contractors should assign their IP rights to the company, not to themselves, to avoid valuation disputes.

4.   SHAREHOLDER RIGHTS & GOVERNANCE

Investors frequently negotiate governance protections to safeguard their investment. Major rights that require careful consideration may include:

·    Board seats

·    Information and reporting rights

·    Approval rights over major corporate actions

·    Restrictions on issuing new shares

·    Exit-related protections

While such provisions are commercially reasonable, poorly negotiated governance structures can constrain management decisions and complicate future fundraising.

5.   CHOOSING THE APPROPRIATE FUNDING INSTRUMENT

The legal implications of fundraising vary from equity financing, convertible instruments to debt financing. In an equity round, new shares are issued to investors in exchange for capital. This leads to dilution of existing shareholders and typically introduces enhanced investor rights. Common legal considerations for equity financing include pre-emption rights, anti-dilution protection, liquidation preferences, board representation, reserved matters and veto rights, as well as tag-along and drag-along provisions.

Moreover, Startups often raise early-stage capital through convertible notes, SAFEs (Simple Agreements for Future Equity), or convertible loan agreements. Key legal considerations that may influence this include valuation caps, discount rates, maturity dates, conversion triggers, and treatment upon acquisition or insolvency. 

Where funding is raised as debt, legal considerations include loan terms and repayment obligations, security interests over company assets, personal guarantees by founders, and registration of charges with relevant authorities. 

Choosing the appropriate funding instrument in raising capital for a startup or growing business is both regulation and vision-sensitive. 

6.   TERMS OF THE INVESTMENT

If equity funding feels right, understanding the terms of the investment is crucial before accepting venture capital. It is important to communicate the correct valuation of the business from the outset to avoid unrealistic expectations. While using convertible notes, it is essential to understand how the conversion terms will affect your ownership.[1] When raising capital, the “terms of the investment” define more than the price of shares. They determine control, risk allocation, financial upside, and exit dynamics.

7.   EXIT STRATEGY

Think of the end from the beginning. An exit strategy is not a sign of pessimism. It is a sign of maturity. From the moment capital is raised, investors are already thinking about exit. A well-structured exit strategy aligns these interests and reduces future conflict. Common exit routes include Trade Sale (Acquisition), Initial Public Offering (IPO), Secondary Sale, Management Buyout (MBO), and Redemption or Buyback. 

CONCLUSION

Fundraising isn’t just about convincing investors; it’s a legal process that requires strategy and preparation.[2] Founders who approach fundraising strategically by prioritizing legal readiness, regulatory compliance, and alignment of interests position their companies for sustainable growth. Those who treat it as merely a financial transaction may find that the real cost emerges later in the form of disputes, dilution, or loss of control. It is always important and advisable for founders to ensure they have sound legal advice before, during, and after any fundraising process. This would enable and ensure regulatory compliance, as well as the protection of their present and future interests and stake in their business.

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[1]    mMBA, E. E. (n.d.). Legal Considerations for Raising Venture Capital in Nigeria. https://www.linkedin.com/pulse/legal-considerations-raising-venture-capital-nigeria-excel-eliboh-h39de/

[2]    Admin. (2025, March 25). Legal considerations for raising funds for your Nigerian startup. Jennify Legal Consult. https://jennifylegal.com/legal-considerations-for-raising-funds-for-your-nigerian-startup/

Written by Chinaza Eneh and Inioluwa Olaposi for The Trusted Advisors

Email us: info@cms.trustedadvisorslaw.com

Telephone Number: +234 810 159 9159