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3 Steps to exit and sell your African startup 💰

Startup teams and investors work really hard, they sacrifice everything. At some point, everyone needs to be rewarded for that hard work and luckily, an exit and sale of a company creates that opportunity.

Cap Tables & Equity

April 17, 2021

Yo, African founding teams, employees and their investors work hard

Everyday, every hour, we’re hustling to create a dream that could fail at any time. But we get up everyday to build that mission and feed our families, teams and customers. We all deserve to be compensated for our sacrifices towards achieving a stronger Africa.

For that, a startup needs to be sold or achieve an exit for teams, investors and employees to cash out.

That’s what this article starts to explore: how to build & sell your startup in Africa. Before we get into the steps to prepare to sell & exit your company. Most African exits like Beyonic, Paystack, and Sendwave were sold to larger companies. Only a few companies reach stock exchanges like Jumia (arguably). 

In this article, we focus on the steps to selling a startup operating in Africa 🇳🇬 🇰🇪 🇿🇦

We talk a lot about ‘exits’ in Africa, it’s the biggest buzz word. But no-one is speaking to founding teams in Africa directly about how we can create exits and be rewarded for our sacrifices and hard work. There are a lot of legal, financial and cultural issues to consider.

What’s an exit - and why should I care? 💵

An exit is when a startup has gotten to the point where it’s reached product market fit, profitability and can be sold or listed on a stock exchange.  In other words, it’s the day that the founding team, investors and employees get cash for all of their sacrifices every day, week and month to build out a startup.

The reason we should care is a bit simpler. Startup teams and investors work really hard, they sacrifice everything. At some point, everyone needs to be rewarded for that hard work and luckily, an exit and sale of a company creates that opportunity. Companies are born (incorporated), and one day they will have to create some kind of exit event. So, it’s only natural to think about potential exit strategy avenues in the beginning of a company’s lifecycle. 

But an exit and sale of a startup is not just a contingency plan for when things go well. What’s your plan for when things do not go well? The strategy for your exit can determine both your personal and professional future. 

The easiest way to understand an exit strategy is kind of like Stripe’s acquisition of Paystack. Stripe bought Paystack’s shares, which means that they now own Paystack’s intellectual property: from the product, to its services and team’s contributions.

As well, what that means is that everyone that held stock in Paystack got cash payments for their shares. For instance, Chike may have 100,000 owned shares that had a price of 10 cents each when Paystack first started. But, as Paystack grew, the price of those shares may have gotten to $35 dollars. Adedayo’s shares went from being worth $10,000 dollars at 10 cents per share, to being worth $3,500,000 dollars.

When Stripe bought Paystack, that means Chike is selling shares to Stripe for $35 dollars each. Stripe would then buy them from Chike for $3.5m.

The 3 steps to selling your African startup 📊

There’s tons of ways to exit a company. Here, we’re focused on selling your company. For that, there’s a lot you can do now to prepare for that journey in the future. The earlier you’re thinking about an exit, the better. 

Step 1: Prepare your cap table, term sheet & letters of intent

If you know Raise, you know all we talk about is keeping your legals clean. That’s hard to do for any startup in Africa. This is important here because how your equity ownership is set up in the earliest stages will determine how your company can be sold in the future. We’ve literally seen startups with cap tables across Nigeria and Kenya who would never be able to sell their startup. Their revenues are strong, company is growing, but their cap table & ownership were not accurate and causing too many issues between investors and founding teams.

A company’s cap table should always be as clean as possible. We’ve already written about the importance of maintaining a clean cap table from the very beginning of your startup’s growth. Here are some important things you can do now to get a sense of how to prepare your cap table for the future:

  • Be sure both your entity in Nigeria, Kenya, South Africa and Delaware all match up with similar and accurate data at all times
  • Reflect all ownership on the cap table, including your existing share & convertible holders;
  • Accounting for employee stock option grants as quickly as possible while the value of equity is low;
  • Assigning the right share class to every single investor so as to not undervalue their investments;
  • Complying with tax and securities regulation to avoid unnecessarily high tax penalties.

Step 2: Align with your potential acquirer early

Start building that relationship early! Shola, CEO of Paystack, talks a lot about how they built relationships with Stripe at their seed and Series A round. They built out a relationship, aligned their values and learned that they could grow Paystack and Stripe together. 

If there’s a founder, startup or company that you think has the capital to acquire you and that your startup can add value to them - call them. Get on the phone, grab a coffee and let them know you’re interested. They probably won’t take you seriously at first - and that’s okay. They will be waiting to see you execute on your promises and build your company.

Which you will.

Step 3: Close the deal and be sure it’s compliant

Once you’re reached the point of drafting a term sheet, letter of intent - you are ready to get your legals in order. Be careful, this part will be messy, because the sale of the shares will be affected by regulations all over the world - especially tax and credit related regulations in Africa. Be mindful of how those local laws affect the sale.

For example, if you are a Delaware company with a Nigerian subsidiary, your sale is affected by both Delaware and Nigerian laws. There will be rules you will need to follow to be sure securities, tax and corporate laws are accounted for. 

Be sure to hire the right lawyers, tax accountants, and valuation firms to work on you with your deal. 

What’s next?

Keep building. Your company is growing in value everyday, and that’s where all of your focus should be. The African tech ecosystem is growing, so that means that your opportunity for a sale or exit is coming, it is literally only a matter of time. Until then, create the value and achieve your mission with your team, employees and investors. 

One day at a time. Until next time! 

If you enjoyed this article on building your exit strategy for an African Startup, please revisit this series where we will delve further into the topic of exits to discuss what an M&A and IPO exit scenario looks like in practice and how less mainstream types of exit strategies can also be successful.