JUMIA - AFRICA’S STARTUP SUCCESS STORY: An analysis of Legal structures that build startup unicorns in Africa.
By Raymond Asiimwe
When Jumia went public there was heightened frenzy in the ecosystem. The debate quickly shifted to whether the company was an African startup. The company is incorporated in Germany, has operations in 14 countries including Rwanda, Kenya and Uganda with headquarters in Dubai, a tech team in Portugal and it is listed in New York. In truth there is no perfect answer as to what makes it an African startup but there is more to learn in what it takes to become a unicorn in Africa. Using the lens of a legal practitioner, this is my analysis of what it takes.
Incorporate right and Incorporate in the right jurisdiction:
A short sighted approach adopted in the design of the company’s capital structure is the undoing of many startups. It practically sounds the death knell to the possibility of accessing finance for most African startups. Primarily because many companies usually issue few shares out of their authorized capital, and also because there is no clear plan for allocation of shares to founders, employees, and independent contractors.
Assuming the company can work around this and shall not need to issue equity to these categories of people, then this issue will arise every time you are preparing for a round of investment. You might have to issue new shares which may require approvals from shareholders. This is quite costly and difficult to do especially if you have to face angry shareholders to inform them that they have to be diluted to make way for a new investor.
Needless to say, that it helps to incorporate in certain jurisdictions for the legal benefits they offer; Delaware State in the US is favoured for its consistency in corporate law and a common preference for venture capitalists/investors mainly because of capital gains tax benefits upon disposal of shares. Mauritius, for no capital gains tax.
A startup-centric securities market.
In 2012, President Obama signed into law the Jumpstart Our Business Startups Act. The law among other things requires startups to only have 2 years of audited financial statements, less than 1bn gross revenue a year, and generally less disclosures are required for instance there is no requirement to disclose the CEO’s pay ratio. Further, it is generally accepted practice that the lockup period for most companies on the NYSE is 180 days, this can be critical especially for tech investors who want to cash out after a long wait of uncertainty. In Uganda for instance the lock-up period is 2 years! on the Uganda Stock Exchange, this is certainly not an incentive for investors to go public.
There is a meteoric rise of dual class IPOs amongst tech companies because they allow founders to retain control of their company despite the dilutive incidences the company might undergo. Compared to the London Stock Exchange, the NYSE allows dual class IPOs that provide different share classes with different rights to restrict and retain control. The LSE does not allow dual class structures. This explains the sudden exodus of foreign technology companies to the NYSE. Founders get the upside of a liquid market and start-up friendly securities market.
Cap-tables and Financing Strategy:
To understand this let us use Jumia as our cadaver.
Early Stage financing rounds:
Series A: lead Investor: Blakeney management, Millicom Systems, Rocket internet raised Euro 40m
Series B: lead Investor: Millicom systems, with Rocket internet, and MTN
Series C: Summit Partners, Rocket internet, Orange, Millicom systems, MTN, Goldman Sachs, CDC Group, AXA group. Raised: 150m euro and 360m euro
On December 18, 2018, the shareholders entered an investment agreement with, Pernod Ricard Deutschland GmbH, to invest €75 million to be issued ordinary shares for an agreed pre-money valuation of €1.4 billion corresponding to 5.08% of the shares in the Company as of January 3, 2019. The investor also was granted the right to subscribe for additional ordinary shares at nominal value if an IPO occurred 18 months from the date of the investment agreement and the IPO price was lower than the price he had purchased the shares.
In another shareholder agreement executed amongst existing shareholders; the company granted the right to anti-dilution shares to compensate for dilution if any securities or instruments were issued at a weighted average price €13.04 per share.
Mastercard Europe SA also agreed to purchase €50.0 million of the companies’ ordinary shares in a concurrent private placement at a price per share equal to the euro equivalent of the initial public offering price per ordinary share (the “Concurrent Private Placement”).
The main observations that can be made are that:
- Technology companies are capital intensive and need a financing strategy. A typical technology company could have several early stage financing rounds A through Z. In this case Jumia did A - C
- Investors invest in a pack; your first investors are usually repeat investors.
- Founders must be willing to give up as much equity as possible if they wish to raise financing. This has dilutive effects on their stake in the company.
- The company should have or be willing to make legal instruments, shareholder or investment agreements providing for dilutive situations.
- The company could offer a block of equity in a concurrent private placement prior to offering equity to the general public.