Your Guide to Protecting Your Vision and Securing Fair Deals

Kenya’s start-up ecosystem is booming, with innovators in fintech, agritech, healthtech, and e-commerce attracting local and international investors. However, navigating investment negotiations can be daunting, especially when founders encounter complex legal terms.

A term sheet is the foundation of these negotiations, outlining key investment terms that shape your start-up’s future. For Kenyan entrepreneurs, understanding these terms—and their implications under Kenyan law—is critical.

This guide breaks down term sheet fundamentals, highlights cases from Kenya’s legal landscape, and offers actionable strategies to secure fair deals.

What Is a Term Sheet?

A term sheet is a non-binding document outlining the terms under which an investor will fund a startup. It covers valuation, equity stakes, governance rights, and exit strategies. While not legally binding (except for confidentiality clauses), it sets the stage for binding agreements like Shareholders’ Agreements.

For Kenyan startups, aligning term sheets with local laws is essential. Let’s explore key terms through real-world examples.

Key Terms in a Term Sheet: Kenyan Context

1. Valuation: Pre-Money vs. Post-Money

• Pre-money valuation: The startup’s value before investment.
• Post-money valuation: Value after investment (pre-money + investment amount).

Why It Matters: Valuation determines how much equity investors receive. Overvaluation can lead to future dilution; undervaluation may short change founders.

Case Study: Twiga Foods (2021) Twiga Foods’ 50M Series C round included a pre−money valuation of 300M. Kenyan law (Companies Act 2015) requires shareholder approval for new shares (Section 456), ensuring transparency in dilution calculations.

2. Liquidation Preference

This clause dictates pay-out order if the start-up is sold or liquidated. A “1x non-participating” preference means investors recover their investment first but don’t share remaining proceeds.

Kenyan Insight: In 2023, Sendy’s acquisition by Nigerian Mobility Group triggered liquidation preferences. Investors with “participating” preferences received their initial investment plus a share of proceeds, while founders earned less.

3. Anti-Dilution Provisions

Protects investors from future equity dilution if the start-up raises funds at a lower valuation.

Case Study: M-KOPA Solar (2022) M-KOPA’s $75M Series D included a “weighted average” anti-dilution clause, softer than a “full ratchet.” Under Kenyan law, such clauses must comply with the Capital Markets Act if the start-up plans a public listing.

4. Governance and Control

• Board Composition: Investors may demand board seats.
• Veto Rights: Control over major decisions (e.g., mergers, new shares).

Legal Checkpoint: The Companies Act 2015 (Section 45) mandates that altering shareholder rights requires a special resolution (75% majority). Start-ups like Lori Systems faced investor disputes over veto rights in 2020.

5. Exit Clauses

• Drag-Along Rights: Forces minority shareholders to join a sale.
• Tag-Along Rights: Allows minority shareholders to join a sale initiated by majority holders.

Example: In 2019, Cellulant’s partial acquisition by TPG Growth required tag-along rights for minority shareholders, enforced under Kenyan corporate law.

Legal Considerations Under Kenyan Law

1. Shareholder Approvals:
   • Issuing new shares or altering rights requires shareholder approval (Companies Act 2015).
   • Example: In 2021, Branch International’s Series C required approval from existing shareholders under Section 457.
2. Foreign Investor Compliance:
   • Foreign investors must comply with the Foreign Investment Protection Act and obtain approvals from the Capital Markets Authority (CMA) for large stakes.
3. Tax Implications:
   • Capital gains tax (15%) applies to investor exits. Structuring deals through tax-efficient vehicles (e.g., SEZs) can mitigate liabilities.

Practical Tips for Negotiating Term Sheets

1. Understand Each Term’s Long-Term Impact:
   • A high valuation today could complicate future fundraising.
2. Engage Legal Counsel Early:
   • Kenyan law firms can identify clauses that conflict with local regulations.
3. Balance Interests:
   • Avoid overly restrictive veto rights; prioritize investor alignment with your vision.
4. Document Everything:
   • Ensure term sheets align with Shareholders’ Agreements to avoid disputes.

CONCLUSION: SECURE YOUR STARTUP’S FUTURE

Term sheets are more than financial agreements—they define your start-up’s trajectory. By understanding Kenyan legal frameworks and learning from local cases, founders can negotiate confidently.

At Mukamba & Company Advocates, we specialize in guiding start-ups through complex term sheets, ensuring compliance with Kenyan law while safeguarding your interests. From valuation debates to exit strategies, our expertise turns pitfalls into opportunities.

Ready to negotiate your next investment round?
Contact us today for a consultation. Let’s build your success story, one clause at a time.

This article is for informational purposes only and does not constitute legal advice.

Author: Eugene
Mukamba Managing Partner

Contact Us Today:
Email: info@mukambalaw.com
Phone: +254706223157
Website: https://mukambalaw.com