East Africa’s first early stage equity investment instrument.
Our experience has shown that it is early stage investments that are usually difficult to acquire in East Africa because for most of these companies have not made an assessment of a pre-money valuation, secondly it is usually onerous to comply with due diligence requests at this stage and investors usually feel that they must be compensated for the risk they incur to invest in an early stage startups. As an inaugural instrument, we have kept it simple, for instance there is no valuation cap. As we advance and learn investor sentiments and wishes in Africa we shall iterate the instrument.
- The instrument intends to create a stop-gap measure for early stage investments in East Africa. Traditional early stage technology companies will often use a convertible note, future equity-promissory note such as a safe or kiss. As an incentive for investment these early stage financing instruments incentivize the early investor by offering equity at a conversion discount, or valuation cap. Legal regimes in East-Africa make it difficult to implement this and there is generally lack of understanding how these instruments work, since financing tech-companies/startups is a nascent practice.
- The instrument builds on acceptable practice of equity warrants, and call options. In particular creating a future event i.e. eligible financing at which stage the investor receives shares for their purchase price at the rightful company valuation and as compensation for betting on a company early with the associated risk, the instrument provides additional shares (discount shares) at a fixed strike price (in this case the nominal/par value).
- Mindful that the commonest exits for early stage investors are priced rounds of financing. The crux of the instrument is to make the investor’s funds parasitic on the future priced round such that the investor gets the upside of a good price per share at which point they can exit the investment by selling/transferring shares.
- Lastly, flip entities have become common in East-Africa. It therefore makes sense that the investor should get the benefit of a flip transaction. The instrument puts in place protections as applicable.