<p><strong><u><strong>INTRODUCTION</strong></u></strong></p>



<p>Earlier this ;month, a Ghanaian Financial Technology (Fintech) ;start-up ;“<strong>F</strong><strong>loat</strong>” ;was ;reported to have raised $7million equity and $10million debt during a seed round.This follows a similar seed round of $35million raised by ;a ;Ghanaian health tech ;start-up ;“<strong>m</strong><strong>Pharma</strong>” earlier this year.  ;These successful seed rounds ;are indicative of a growing start-up ecosystem with ;scalable and ;viable ;business ideas ;worth investing in.</p>



<p>While ;many young people continue to leverage ;the disruptive influence of technology to ;design products and services, they will ;require funding to support ;the ;development, growth, and expansion ;of their start-ups. ;However, ;there are ;regulations ;in place ;that ;determine ;which funding options are permissible and can be used to raise funds. ;</p>



<p>In Ghana, private companies ;are ;prohibited by the Companies Act, 2019 (Act 992) ;from making an invitation to the public to acquire shares ;(equity) ;or debentures ;(debt) ;and to deposit money for fixed periods or payable at a call whether bearing or not bearing interest. ;These prohibitions limit ;a ;private company’s ;ability to raise initial ;capital ;and/or ;engage in additional fundraising ;initiatives ;to support its operations. ;</p>



<p>Nonetheless, ;some ;permissive fundraising options ;such asprivate placements, right issues, capitalization issues, conversion, and going public through initial public offers (IPOs) ;exist and ;can be leveraged by ;start-ups ;to make available critical funds required to grow and ;expand geographically.</p>



<p>This ;article ;seeks to ;discuss ;some of the permissible means of fundraising ;options start-ups can use to raise funds ;from local and global sources. ;</p>



<p><strong><u><strong>FUNDRAISING THROUGH PRIVATE PLACEMENTS</strong></u></strong></p>



<p>Private placements involve direct offers ;(involving the circulation of pitch decks) ;to investors (individuals or entities) to acquire ;equity ;in ;or extend debt financing ;to ;a private ;company. ;These invitations could be ;extended to ;a group of ;investors ;by ;a ;private ;company or on its behalf by a private equity firm. ;An essential requirement is that such invitations should not ;be publicized or advertised as ;that ;will be in contravention of the prohibition of making an invitation to the public to acquire shares or debenture. ;Also, the number of investors that can invest in return for shares ;through these private placements ;cannot be more than fifty ;in total ;at a particular time. ;Detailed information necessary to help investors make informed decisions are required to be disclosed. However, entrepreneurs ;must take steps to protect confidential and proprietary information through the execution of non-disclosure agreements prior such disclosuresand be prepared to be subjected to rigorous due diligence in most cases. ;</p>



<p>An entrepreneur/start-up ;seeking to raise funds ;through private placement can ;leverage ;any of the following seed fundraising rounds:</p>



<p>a. ;<strong>Pre Seed Funding</strong></p>



<p>In the startup’s early stages, funding is usually gathered informally. ;Pre-seed funding is at the very beginning of the startup’s launch. Founders start by investing their own money (bootstrapping) ;or ;seek ;assistance ;from ;friends and family ;for formative capital ;which are expected to be repaid within a reasonable time. ;</p>



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow"><p>Getting a business idea off the ground is the hardest part, as it takes the most work with the littlest investments. During the pre-seed stage, a start-up is mostly still in the market research stage and without any tangible product or service. The business model is still being developed; thus, investments are still at high risk. While there is still little proof of profitability, it is very rare to receive funding from venture capitalists or angel investors unless one has a strong network and a scalable or viable business idea. </p></blockquote>



<p>b. ;<strong>Seed Funding</strong><strong> ;</strong></p>



<p>An early effort by a start-up to raise funds to grow is through “seed” funding. Funds from this round are usually used to finance a start-up&#8217;s initial market research, product development, create value, and to employ personnel to drive its growth. New opportunities for funding at this stage include start-up incubators and accelerator programs, early-stage venture capitalists, and crowdfunding. Mostly, funding is exchanged for equity stakes in start-ups. <br></p>



<p><strong>Simple Agreement for Future Equity (SAFE)</strong> is one of the instruments used in securing investors’ equity interest at this stage. A SAFE provides investors with a right to future equity and converts on agreed milestones usually before the next funding round of the start-up. Funds raised at this stage could be significantly high and may be the only funding required to make the start-up successful. </p>



<p>Valuations are conducted at this stage (the reason it is sometimes called the &#8220;priced&#8221; round) ;and ;take into account the ;start-up&#8217;s market operation – products and customer base, market share, revenue, and profitability. From the valuation, ;the ;total ;start-up ;value, total money to be raised, and post-money values are determined. ;</p>



<p>The following funding rounds could be undertaken during seed funding: ;</p>



<p>i. ;<strong>Series A</strong></p>



<p>With significant evidence of an established product/service and customer base, growing revenues, growing market share, among others, a ;start-up ;may opt for Series A funding. At this stage, investors are interested in how the ;start-up ;will navigate and expand its market, strategies to grow and increase revenue. Therefore, funds raised are mostly used to improve product offerings, support channel development activities, and gain market shares. Investor participants at this stage ;could ;include venture capitalists, angel investors, and ;investments from ;crowdfunding platforms. In recent times, ;start-upsparticipating ;in ;Series A rounds have been able to raise between $2million to $10million. ;</p>



<p>ii. ;<strong>Series B</strong></p>



<p>Before a ;start-up ;can opt for a Series B funding round, it must have demonstrated that it has an established and validated product or service offering. During this round, a ;start-up ;seeks funding to increase its reach and customer base following substantial market development based on earlier Series A funding round. Further, investments into sales and marketing, technology, business development, human resources, and capacity building initiatives, are the key goals of raising substantially huge funds associated with this round with minimum valuations at $30million. Later-stage investing firms drive investments ;for this round. ;</p>



<p>iii. ;<strong>Series C</strong></p>



<p>Series C funding round is only available to start-ups that have proven successful, well established, and with ;a sustainable ;business model. At this stage, the reasons for raising funds will be to help the start-up expand into new geographical markets, develop a new line of product/service or acquire or merge with other ;start-ups ;for competitive market advantages. Also, funds may be used to scale up and attain a global presence. The capital outlay is huge demanding valuations based on the historical performance of the ;start-up ;in terms of revenue, profitability, customer base, market share among others than on future assumptions of good performance. This round attracts hedge funds, investment banks, and other large secondary market investment groups with huge funds, networks, and excellent professional expertise. It is not uncommon for start-ups to raise ;up ;to $100million plus in this seed round. ;</p>



<p><strong><u><strong>CONVERSION</strong></u></strong><strong><u><strong> ;</strong></u></strong><strong><u><strong>&#8211;</strong></u></strong><strong><u><strong> ;</strong></u></strong><strong><u><strong>DEBT OR PROMISED EQUITY</strong></u></strong></p>



<p>Through ;private placements, a ;start-up ;may be able to secure ;a ;debt financing arrangement ;with a conversion option(debenture) or ;commit to future equity ;(through the use of SAFE) ;in exchange for ;immediate ;funding. ;Underlining these ;funding ;arrangements ;is the ;promise of conversion into equity. ;Generally, conversion ;into share ownership (equity) will occur on ;an ;agreed contingent event. ;Once conversion occurs, ;lenders ;will become ;a ;shareholder ;of the ;start-up. ;</p>



<p>These ;sources of funding are not repayable ;reducing ;any ;debtfinancing ;commitments ;and allowing re-investment of cashflows into ;start-ups. ;Start-ups can use the funds ;raised ;to support their growth and expansion ;and reward ;lenders/investors with participation in ownership ;at a later date. ;</p>



<p><strong><u><strong>RIGHT AND CAPITALISATION ISSUE</strong></u></strong><strong><u><strong>S</strong></u></strong></p>



<p>Although right and capitalization issues are other permissible options for raising funds, ;the nature of start-ups makes them ;impracticable ;for use. ;Mostly, start-ups are founded by entrepreneurs with little or no money and ;who ;will not be in a position to invest additional capital through ;a ;right issue.Further, because start-ups are generally not profitable at their early stages, ;they are unable to ;retain earnings (reserves) to facilitate a capitalization issue ;as well. ;</p>



<p><strong><u><strong>INITIAL PUBLIC OFFERS (IPOs)</strong></u></strong></p>



<p>Raising funds through an ;IPO ;implies the ;legal ;conversion of a private company into a public one. ;By this, the shares ;of ;start-ups will be ;offered ;to the public for purchase and ownership. ;</p>



<p>An IPO process is ;expensive, ;complex and requires the service of professionals such as underwriters, lawyers, accountants, and others to prepare the required prospectus among others. ;Further, these professionals help start-ups to determine the ;value of ;the company, the type of shares to be issued, the number and price per share, etc. ;</p>



<p>Start-ups must also comply with ;strict legal requirements onthe conversion of a private company ;into a ;public ;one. ;Nonetheless, entrepreneurs ;may ;use IPOs ;as means of either raising huge ;capital ;or ;as an exit strategy to dilute their ownership and control. ;</p>



<p><strong><u><strong>MERGERS AND ACQUISITIONS</strong></u></strong><strong><u><strong> ;</strong></u></strong><strong><u><strong>(M&;A)</strong></u></strong></p>



<p>Mergers and acquisitions are ;more ;business ;survival, growth, and expansion ;strategies than fundraising options. However, ;through ;an M&;A, ;start-ups will be able to consolidate their product or service offerings, ;revenue streams, ;increase customer base and ;market and attain a near-monopoly ;status depending on ;the type of integration, an M&;A process seeks to achieve. ;With this, ;new investments are injected into the operations of the ;new company ;with sustainable ;improvements in liquidity, products or services, and technology. ;</p>



<p><strong><u><strong>CONCLUSION</strong></u></strong></p>



<p>Lack of business ideas is not one of the challenges ;facing Ghana’s start-up ;ecosystems. ;How to raise requisite funds ;to ;develop ;ideas into ;viable businesses with ;relevant product/service offerings ;continue to ;slow the ;growth rate of many start-ups. ;Therefore, ;understanding ;fundraising options available for start-ups is critical ;information ;every entrepreneur must have before their decision-making on raising funds. ;Whilst some of these fundraising initiatives demand incorporation of start-ups in ;preferred jurisdictions like Delaware, ;the opportunity to use a Ghanaian incorporated start-up to raise money using any of the above-discussed tools ;also exist, and therefore an understanding of what is permissible in Ghana is relevant. ;More importantly, the appropriate instruments/documents must be executed ;when any ;of the discussed fundraising ;means ;are used ;to offer protection to the entrepreneur, the company and investors. ;</p>



<p><strong><u><strong>About the Authors</strong></u></strong></p>



<p><strong>RICHARD NUNEKPEKU</strong> ;is the Managing Partner of ;<strong>SUSTINERI ATTORNEYS PRUC</strong>, ;a client-centric boutique law firm specialized in transactions, corporate legal services, dispute resolutions, and tax. ;Richard is also a research and teaching assistant for the Commercial Law Course at the Faculty of Law, Ghana Institute of Management and Public Administration (GIMPA). He ;is reachable at ;<a href="mailto:richard@sustineriattorneys.com"><u>richard@sustineriattorneys.com</u></a></p>



<p><strong>CECILIA ANTWI KYEM</strong> ;is ;a ;Part II ;student of the Ghana School of Law and interns at ;<strong>SUSTINERI ATTORNEYS PRUC</strong><strong>.</strong><strong> ;</strong>Cecilia has an interest in Commercial Transactions,Financial Technology (Fintech), ;Start-ups ;and SMEs, Company Law and Contracts as well as Alternative Dispute Resolution.</p>

THE FUNDRAISING OPTIONS FOR START-UPS – WHAT ENTREPRENEURS NEED TO KNOW
- Categories: Business, Entrepreneurship
- Tags: fundingGhanaStartup
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