It starts with an idea; one that won’t leave you alone. You turn it over in your head, maybe scribble it down at midnight, question whether it’s actually good or just familiar. Eventually, conviction wins, and you register a company to make it real. You dip into savings from your 9-to-5 to fund test projects, quietly validating the idea while still showing up to your day job. You build, break things, rebuild.
The MVP starts to show promise, so you assemble a small team and together, you refine the product, tighten the pitch, and eventually launch. Real users arrive, and with them, your first real signal: this might actually work. Then reality sets in. You need a bigger operational team, more intellectual property built out, proper frameworks and processes to replace what used to run on instinct and spreadsheets. At this point, your savings are depleted or totally exhausted.
So the question every founder eventually faces arrives: how do I raise capital? And just as importantly, what do I need to do to make my company one that investors are willing to bet on?
Startups raise capital from a range of sources, including angel investors, accelerators, crowdfunding platforms, venture capital/ private equity firms, and corporate or institutional investors. Each type of investor may focus on different stages of a company’s development, with varying risk appetites and expectations around governance, control, and board representation. In return for their investment, investors typically receive equity together with agreed investor rights in the company, and other protections.
However, raising capital goes beyond securing an investor willing to provide funding. As a startup moves from bootstrapping and angel investment to institutional funding, investors increasingly scrutinise its ownership structure, governance arrangements, intellectual property, commercial contracts, regulatory compliance, and corporate records. A well-prepared legal and corporate foundation is critical to completing a financing efficiently, while gaps or unresolved issues can delay or complicate a transaction during due diligence.
1. Raising Institutional Capital? The Legal Issues That Become Deal-Breakers at Due Diligence
Institutional capital generally refers to substantial pools of capital held by or managed on behalf of institutions such as pension funds, insurance companies, endowments, asset managers, mutual funds, venture capital funds, private equity funds and other investment organisations. These investors may invest directly in companies or through investment funds, depending on their mandate, sector focus, risk appetite and investment objectives.
Institutional investors often bring more than capital to a transaction. Their investment process typically involves a detailed assessment of the company, its founders, ownership structure, operations and legal position. This is particularly the case for growth, late-stage and pre-IPO investments, where the size of the investment and the number of stakeholders involved can make the transaction more complex.
Where an institutional investor invests through a venture capital or private equity fund, the General Partner (GP) or investment manager will typically identify investment opportunities, conduct due diligence on the investee company and make investment decisions in accordance with the fund’s mandate. The Limited Partners (LPs) provide capital to the fund and generally conduct their own due diligence at the fund level, including assessing the GP, the fund structure, investment strategy and governance arrangements.
For a startup seeking direct institutional investment, the process will typically begin with discussions between the company and the prospective investor, followed by a term sheet setting out the principal terms of the proposed investment. Depending on the transaction, these may include the investment instrument, investment amount, valuation, resulting shareholding, investor rights, governance arrangements, liquidation preferences and conversion mechanics.
However, agreeing the commercial terms is only one part of the process. Before the investment documents are finalised, the investor will typically conduct legal due diligence to verify the company’s position and identify any issues that could affect the investment. This is where seemingly minor gaps in a startup’s records can become significant transaction issues.
The scope of the due diligence exercise will vary depending on the size, structure and nature of the investment, but institutional investors will commonly examine:
- Incorporation and statutory records;
- The company’s cap table and ownership structure;
- Shareholder agreements and other governance arrangements;
- Intellectual property ownership and assignments;
- Material commercial contracts;
- Employment and contractor arrangements;
- Regulatory and licensing requirements;
- Litigation and disputes;
- Data protection and other compliance matters; and
- Previous fundraising and investment documentation.
Issues such as undocumented equity issuances, incomplete or inconsistent cap tables, unregistered or improperly documented intellectual property, incomplete IP assignments, regulatory gaps, inconsistent corporate records, or undocumented employment and contractual arrangements can delay closing, require remedial work, increase transaction costs, or affect the terms of the proposed investment.
Investment readiness therefore begins well before a startup enters formal investment conversations with potential investors. It is important to identify and address material legal, corporate, intellectual property, contractual, and regulatory issues in advance, maintain accurate records, and ensure that the company’s documentation supports the ownership and commercial position represented to prospective investors. This allows the due diligence process to focus on validating a well-organised business rather than uncovering avoidable gaps.
2. Your Startup Has Investors But Is Your Ownership Structure Ready for the Next Round?
In startup fundraising, a “financing round” means a particular fundraising event where a company raises capital from investors on agreed terms. Startup fundraising rounds are categorized based on the stage of the company’s growth. Common stages include Pre-seed round, Seed round, Series A, Series B, C and later rounds.
A startup may have raised capital from angel investors, friends and family, or other early-stage investors, however, completing an earlier funding round does not necessarily mean that the company’s ownership structure is ready for institutional investment. It is important for founders to have a clear understanding of who owns what in the company, including shares already issued, employee equity awards, SAFEs, convertible notes, warrants and any other rights to acquire shares.
This is particularly important where the company has used SAFEs or convertible notes to raise capital. These instruments do not usually result in immediate dilution when they are issued because the investor does not receive shares at that stage. Dilution occurs when the instrument converts into equity. At conversion, new shares are issued to the investors, increasing the total number of shares in the company and consequently reducing the percentage ownership of existing shareholders, unless they also receive additional shares or otherwise have protections against the dilution.
An accurate and up-to-date cap table is therefore essential before starting a new fundraising round. It allows founders and prospective investors to understand the company’s current ownership structure and assess how the proposed investment, together with any outstanding SAFEs, convertible notes or other equity rights, will affect ownership following the round.
Before approaching new investors, founders should check the cap table against the underlying investment and equity documents. Founders should also make sure that the dilution resulting from existing instruments is understood and that the employee option pool is appropriate for the next round.
Early-stage companies can also have informal or unclear arrangements, such as gentleman or handshake agreements, excessive advisor equity without vesting, or poorly structured convertible instruments. As the company grows, institutional investors will look closely at these arrangements and want to see a clear and reliable ownership structure. It is therefore important that founders put proper vesting arrangements in place for founder and key employee equity. A common approach is four-year vesting with a one-year cliff, although the appropriate structure will depend on the company and the individuals involved.
3. What Changes Legally When a Founder Takes on an Institutional Investor?
Institutional investors invest substantial pools of capital, and as a result, they carry out detailed legal and financial due diligence before committing to an investment. They may also negotiate specific rights and protections designed to protect their investment and give them appropriate oversight of the company.
These rights can include equity ownership, protection against certain forms of dilution, priority over other shareholders in certain circumstances, information and reporting rights, board seat, and consent rights over important company decisions. The particular rights will depend on the investment structure and the terms negotiated between the investor and the founders.
For founders, this can be a significant change from the way the company was operated at the early stages. A founder who previously had broad discretion over business decisions may now need investor approval for certain matters. The company may also have ongoing reporting obligations and a more formal governance structure.
The investment will often involve several legal documents rather than a single investment agreement. These may include a Share Subscription Agreement, Shareholders’ Agreement, voting agreements, investor rights agreements, board or governance documents, and amendments to the company’s constitutional documents. These documents should be considered together because the rights created by one document may affect the operation of another.
Institutional investors may also negotiate terms that affect future fundraising and the eventual sale of the company. These can include anti-dilution protections, Most Favoured Nation (MFN) rights, pre-emption rights, liquidation preferences, and other rights that determine how investors are treated when new shares are issued or the company is sold.
This does not necessarily mean that founders lose control of their businesses when they take institutional investment. The extent of investor influence depends on the investor’s shareholding and the rights agreed as part of the transaction. However, institutional funding usually brings a more formal relationship between the company, its founders, and its investors.
The investment amount is therefore only one part of the deal. Before signing, founders should understand what rights the investor receives in return for its investment, which decisions require investor approval, what information must be provided, and how the investment may affect future fundraising, ownership, and control.
4. From Angel Investors to Institutional Capital: How Legal Risk Changes as a Startup Scales
When a startup is in its early phase of growth, funding often comes from the founders themselves, family and friends, or angel investors. At this stage, investment arrangements can be relatively simple and relationship-driven. Founders may use instruments such as SAFEs or simple promissory notes, with limited due diligence and little focus on formal governance or investor control rights.
This flexibility can be useful in the early days, but it can also create problems later if the arrangements are not properly documented. As the company grows and begins to attract institutional capital, investors are likely to look more closely at how earlier investments were structured, whether the company’s ownership records are accurate, and whether the rights attached to previous investments are clearly documented.
The legal risks also become more significant as the business grows. Investors may examine whether founders and employees have properly assigned intellectual property to the company, whether the necessary corporate approvals were obtained, and whether the company is meeting its contractual and regulatory obligations.
This is why founders should not wait until an institutional investor begins due diligence before addressing these issues. Bringing in appropriate legal advisers early can help ensure that early-stage agreements, equity arrangements and other commitments are properly documented and do not create unexpected valuation, ownership or control issues in a later funding round.
5. When an Investor Wants Board Rights: What Founders Should Understand
One of the most important changes that can come with institutional investment is the introduction of investor board rights. A board seat gives an investor more than visibility into the business. An investor director participates in board decision-making, has access to confidential company information, and owes applicable legal and fiduciary duties in their capacity as a director.
Founders should therefore understand exactly what board rights are being offered before agreeing to them. This includes looking at the proposed board composition, appointment and removal rights, voting arrangements, quorum requirements and any reserved matters requiring investor approval.
It is also important to understand which decisions will remain within management’s control and which will require board or investor approval. Where an investor director has a casting vote or veto rights over certain matters, these provisions can have a significant practical effect on how the company operates. Conflicts of interest should also be considered, particularly where an investor sits on the boards of competing companies.
Board rights should therefore be negotiated as part of the wider governance structure rather than treated as standard boilerplate. Founders should ensure that the board composition, voting thresholds, quorum requirements and information rights work alongside the company’s existing arrangements and remain workable as the company raises further capital.
6. Investor Rights Beyond the Term Sheet: The Governance Consequences Founders Often Miss
A term sheet sets out the main commercial terms of a proposed investment. It is usually the starting point for the more detailed and legally binding documents that follow. Founders commonly focus on the proposed investment amount and valuation when a new investor comes on board, and pay little attention to other terms of the transaction which equally have important consequences on the company.
The definitive investment documents may contain provisions covering pre-emption rights, most-favored nation rights, anti-dilution protection, drag-along and tag-along rights, reserved matters, veto rights and information rights. These provisions can continue to affect the company’s decision-making long after the funding round has closed.
For example, an investor may require highly detailed financial reporting on a monthly or even more frequent basis, seek a commitment that a founder devote all of their working time exclusively to the company, or request approval rights over a broad range of routine business decisions, such as hiring senior employees, entering ordinary commercial contracts or approving expenditure above relatively low thresholds. While these requirements may be intended to provide the investor with greater oversight and protection, overly broad or demanding rights can place significant administrative and operational burdens on the company, slow down day-to-day decision-making and unnecessarily restrict the founders’ ability to manage their time and responsibilities.
Founders should therefore look beyond what they are giving an investor economically and consider the rights the investor will have after the investment is completed. The question is not simply “How much are we raising?”, but also “What rights are we giving in return?”
7. What International Investors Need to See Before Investing in an African Company
International investors considering an African company will often look beyond the commercial opportunity. They will want confidence that the company’s legal and corporate foundations are sound, its records are reliable, and the investment can be made and managed in compliance with the relevant laws.
For an African startup, this may involve additional questions around corporate records, foreign ownership, foreign exchange requirements, tax, regulatory licences, beneficial ownership, corporate governance and the ownership of intellectual property.
Investors may also examine how the company is structured across jurisdictions and whether the structure allows intellectual property and other key assets to be properly protected.
Common areas of focus include a clean and auditable cap table, properly documented intellectual property ownership, compliance with local corporate, tax and foreign exchange requirements, and, where appropriate, a holding company structure in a jurisdiction familiar to international investors.
The investment documents may also need to follow structures that are familiar to international investors, such as SAFEs or priced-round documentation, rather than relying on bespoke instruments that may be unfamiliar to the investor or its counsel.
Ultimately, international investors want to be able to understand what they are investing in, who owns it, what rights attach to the investment and whether the company can lawfully receive and deploy the capital.
8. Cross-Border Investment into Nigeria: The Corporate and Regulatory Questions Investors Ask
Investment into Nigeria may generally take the form of foreign direct investment (FDI) or foreign portfolio investment (FPI). FDI involves a foreign investor making a substantial or strategic investment in a Nigerian business, typically with an intention to establish a lasting interest and, in some cases, participate in the management or decision-making of the business. FPI, by contrast, involves a foreign investor acquiring financial assets in Nigeria, such as shares or other securities, primarily as an investment rather than with the intention of exercising significant control or management over the underlying business.
Accordingly, where foreign capital, whether direct or portfolio, is invested in a Nigerian company, the transaction may raise considerations beyond the commercial terms agreed between the investor and the company. Investors commonly raise questions around corporate approvals, foreign ownership requirements, foreign exchange rules, tax considerations and the documentation needed to evidence the investment and any subsequent repatriation of returns.
Depending on the structure and sector of the business, investors may also examine matters such as Central Bank of Nigeria (CBN) foreign exchange requirements, evidence of capital importation, Nigerian Investment Promotion Commission (NIPC) registration, Business Permit requirements administered by the Ministry of Interior for companies with foreign participation, sector-specific licences, tax residency, transfer pricing and the procedures for repatriating investment proceeds. They may also review compliance with the Companies and Allied Matters Act (CAMA), applicable Securities and Exchange Commission requirements and other sector-specific regulations.
For founders, the practical lesson is straightforward: cross-border fundraising should not be treated as a purely commercial transaction. The Nigerian corporate and regulatory requirements should be considered when the investment is being structured, rather than after the transaction has already been agreed.
9. When Should an African Startup Reorganise Its Corporate Structure Before Raising International Capital?
Corporate reorganisation involves changing a company’s structure, which may include creating a holding company, establishing operating subsidiaries or creating a wider group structure.
Reorganisation is not automatically required before every international fundraising. However, it may become relevant where the existing structure creates challenges around investment, intellectual property ownership, taxation, regulatory compliance, future fundraising or an eventual exit.
Investors may also prefer a structure that separates the company’s key assets from the operational entity. For example, where the operating company carries out activities that create significant risks and liabilities, a holding company structure may be considered to provide greater separation and protection between the operating business and certain assets.
Some African startups therefore adopt a structure involving an offshore holding company and an African operating subsidiary. Common jurisdictions used for these structures include Delaware-US, and Mauritius, depending on the company’s circumstances and investor requirements.
However, restructuring is not simply a matter of incorporating a new holding company. Founders need to consider the effect on existing shareholders, employees, contracts, intellectual property, tax obligations and regulatory requirements. Where existing shareholders or noteholders are to be transferred or rolled over into the new holding structure, the necessary consents should be obtained in advance and the relevant transfer or restructuring documents put in place.
Timing also matters. Where a restructuring is necessary, completing it before a funding round is generally more straightforward than attempting to reorganise the company while the fundraising is already underway. A mid-transaction restructuring can introduce additional cost, delay and tax or regulatory complexity.
The right structure will depend on the company’s circumstances and future plans. The important question is not simply whether a restructuring can be done, but whether it creates a structure that supports the company’s intended growth, future investment and eventual exit strategy.
10. The Legal Preparation an African Startup Needs Before Pursuing a Strategic Acquisition
In recent years, Africa’s startup ecosystem has seen a growing number of strategic acquisitions, as companies increasingly look beyond organic growth to enter new markets, acquire technology and intellectual property, and strengthen their competitive position. Notably, recent data shows that approximately 84 technology and startup mergers and acquisitions (M&A) deals, with an estimated combined value of $11.4 billion, have taken place across Africa in recent times.
The reasons for pursuing an acquisition vary. In some cases, an acquirer may seek to leverage the target company’s existing licences, relationships or market presence to enter a new market without having to build an operation from the ground up. In others, the attraction may lie in the target’s intellectual property, technology, talent or technical expertise. An acquisition can therefore provide a faster route to capabilities that might otherwise take significant time and resources to develop independently.
Whether a startup is the acquirer or the target, legal readiness should form part of its transaction strategy before negotiations begin. This includes maintaining a clean corporate and intellectual property record, with ownership of key assets transferred, assigned or directly registered to the company. Founder and related-party arrangements should be properly documented, with any outstanding vesting or equity issues resolved. Statutory filings and tax obligations should also be up to date, while relevant licences and regulatory registrations should remain valid.
The same preparation should extend to material contracts and disputes. Customer, supplier and employment agreements should be organised and readily accessible, while any existing or threatened litigation should be identified, together with the steps being taken to resolve or manage it. Previous financing transactions should also be clearly documented, including agreements relating to shares, SAFEs, convertible instruments and other investor rights.
Where a startup is an acquirer, preparation should go a step further. The company should establish a due diligence checklist from the outset and identify any regulatory approvals that may be required, including competition or sector-specific approvals. Addressing these requirements early can help minimize delays and provide greater certainty throughout the transaction.
Strategic acquisitions require thorough legal, financial and tax due diligence. An acquirer will need to verify title to the target’s material assets and intellectual property, identify potential liabilities, review employment arrangements and assess the target company’s regulatory and tax compliance.
Competition law is also a relevant consideration. In Nigeria, for example, certain acquisitions may require notification to, and approval from, the Federal Competition and Consumer Protection Commission (FCCPC), depending on the nature and size of the transaction and the applicable merger-control thresholds.
Ultimately, legal readiness can have a meaningful impact on how efficiently an acquisition progresses. Startups that maintain accurate records, resolve outstanding legal issues and understand their regulatory obligations are better positioned to respond to due diligence requests, minimize avoidable delays and negotiate from a position of greater certainty.
11. Selling Part of Your Company: What Founders Should Know About Secondary Transactions
When a company is incorporated and begins to grow, its ownership is represented by shares, which may be held by founders and other shareholders, offered to employees through equity or equity-linked incentive arrangements such as Employee Stock Option Plans (ESOPs), stock options, Restricted Stock Units (RSUs), restricted shares, growth shares, phantom shares and stock appreciation rights, or allocated to investors as part of a fundraising. As the company raises capital or its shareholder base evolves, shares may change hands in different ways. One such route is a secondary transaction.
A secondary transaction involves an existing shareholder selling some or all of their shares to another party, rather than the company issuing new shares. This differs from a primary fundraising, where a company issues new shares to an investor and the company receives the investment proceeds. In a secondary sale, the purchase price is paid to the selling shareholder, providing them with liquidity while allowing an incoming or existing investor to acquire an interest in the company.
Secondary transactions can be particularly useful where founders, early employees or angel investors want to realise part of their investment without requiring the company to raise additional capital. They may also allow institutional investors to acquire shares from existing shareholders as part of a broader investment. In some cases, the transaction can instead be structured as a company buyback, where the company purchases shares from an existing shareholder and subsequently transfers or sells them to an investor. Depending on the circumstances, this structure may be considered for tax or other transaction-planning purposes.
Because the transaction involves existing shares, the first step should be to review the company’s constitutional documents and Shareholders’ Agreement. These documents may contain transfer restrictions, pre-emption rights, rights of first refusal, co-sale rights and requirements for board or investor consent. Founders should identify and comply with any such requirements before the transfer takes place.
The tax implications of the transaction should also be considered, particularly where the selling shareholder is disposing of shares at a gain. The parties should agree on an appropriate valuation and consider how the transaction will affect the company’s ownership structure and the interests of existing shareholders.
It is also important to distinguish a secondary sale from a primary investment when communicating the transaction to shareholders and other stakeholders. This helps ensure that there is a clear understanding of where the investment proceeds are going and whether new shares are being issued.
Founders should also consider how a secondary sale may be perceived by existing and future investors. The sale of existing shares does not, in itself, suggest that a founder or shareholder has lost confidence in the company, is no longer interested in its growth, or that the company is underperforming in the market. Shareholders may simply choose to sell part of their holdings to realise some value from their investment, diversify their personal finances, or create liquidity after committing significant time and capital to the business.
The context of the transaction is therefore important. The size, timing and reason for the sale may shape how it is understood by other stakeholders. Where the rationale is communicated clearly and the transaction is properly structured, a secondary sale can be presented as a shareholder liquidity event rather than a reflection of the company’s performance or future prospects.
12. After the Funding Round: The Governance Changes Founders Need to Put in Place
Once the investment has been completed, the company must translate the agreed terms into its corporate records, governance processes and day-to-day operations. This is often where founders begin to encounter the practical implications of the rights negotiated with new investors.
Following completion, the company will need to update its statutory registers and filings, issue and allot shares where applicable, update its cap table, reflect any changes to the board and put the investor rights agreed in the transaction documents into effect. This may include establishing board meeting arrangements, implementing reserved-matter approval processes and putting agreed information and reporting obligations in place.
Founders should also establish a clear process for ongoing compliance with the company’s obligations to its investors. Financial and management reports should be prepared and circulated within the agreed timeframes, board meetings should take place as required, and any matters requiring investor or board consent should be identified before decisions are made. Where investors have information or inspection rights, the company should have a process for responding to those requests efficiently.
These may seem like administrative matters, but they can have a significant impact on the relationship between the company and its investors. A company that closes a round without putting the agreed governance framework into practice can quickly find itself missing reporting deadlines, overlooking consent requirements or creating unnecessary conflicts with investors.
Post Funding-Round Checklist
- Update the company’s statutory registers and required filings to reflect the new investment and any changes in shareholding or directorship.
- Issue and allot shares, where applicable, and ensure the cap table accurately reflects the post-investment ownership structure.
- Review the shareholders’ agreement and investment documents and identify all ongoing investor rights and obligations.
- Put board meeting schedules and reporting procedures in place.
- Establish a clear process for matters requiring board or investor consent, particularly reserved matters.
- Set up a timetable for financial, management and other reports that must be provided to investors.
- Keep a record of all approvals, consents and board decisions to ensure the company’s governance remains properly documented.
Planning your next fundraise? Whether you are preparing for a round or already engaging with investors, the Vazi team can support you through the process. Feel free to reach out to discuss how we can help.
References
- UK Private Capital, ‘Institutional Investors’ <https://www.ukprivatecapital.co.uk/our-industry/institutional-investors.html> accessed 28 September 2026.
- James Chen, ‘How Institutional Investors Operate and Impact Markets’, Investopedia <https://www.investopedia.com/terms/i/institutionalinvestor.asp> accessed 28 September 2026.
- Carta, ‘Startup Fundraising: Investors’ <https://carta.com/uk/en/learn/startups/fundraising/investors/#institutional-investors> accessed 28 September 2026.
- Carta, ‘Startup funding: A guide to raising startup capital’ <https://carta.com/uk/en/learn/startups/fundraising/> accessed 3 October 2026.
- Lawrence Fubara Anga, Edidiong Antai and Al-Ameen Sulyman, ‘Mergers and Acquisitions’, Aelex <https://aelex.com/wp-content/uploads/2024/02/Mergers-Acquisitions_-Nigeria-Lexology-indepth.pdf> accessed 28 September 2026.
- TechCabal Insights, ‘84 M&A Deals Worth $11.4 Billion in Disclosed Value Recorded So Far in 2026’ <https://insights.techcabal.com/84-ma-deals-worth-11-4-billion-in-disclosed-value-recorded-so-far-in-2026/> accessed 28 September 2026.
- The Trusted Advisors, ‘Understanding Foreign Direct Investment Regulations in Nigeria’, Legal 500 <https://www.legal500.com/developments/thought-leadership/understanding-foreign-direct-investment-regulations-in-nigeria/> accessed 28 September 2026.
- Charles Frank, ‘Founder Catalyst’ ‘What to do after your fundraising round (UK Startup Formalities check-list)’ <https://www.foundercatalyst.com/blog/closed-your-round-here-s-your-formalities-must-do-list> accessed 3 October 2026.