The 5 Contract Clauses That Cost Nigerian Startups Millions

Introduction

Every month, I review investor agreements for Nigerian startups. And every month, I see the same five clauses that founders signed without understanding—clauses that later cost them control, equity, or both.

These aren't obscure legal technicalities. They're standard provisions that appear in most venture capital and angel investment agreements. But “standard” doesn't mean “favorable to you.”

Here's what to watch for, what these clauses actually mean, and what to negotiate before you sign.

1. Liquidation Preferences

A liquidation preference determines who gets paid first when the company is sold, merged, or wound down. Most investor agreements include a 1x non-participating preferred liquidation preference—meaning the investor gets their money back before anyone else sees a naira.

The problem? Many founders don't understand that a “participating preferred” liquidation preference means the investor gets their money back AND shares in the remaining proceeds. This can dramatically reduce what founders and employees receive in an exit.

2. Anti-Dilution Protection

Anti-dilution clauses protect investors if the company raises money at a lower valuation in the future (a “down round”). There are two main types: weighted average and full ratchet.

Full ratchet anti-dilution is extremely investor-friendly—it adjusts the investor's price per share to match the new, lower price. This can significantly increase the investor's ownership percentage at the expense of founders and earlier investors.

3. Board Composition and Veto Rights

Investors often negotiate board seats and veto rights over key decisions: raising additional funding, selling the company, changing the business model, hiring or firing executives, and approving annual budgets.

While some investor oversight is reasonable, overly broad veto rights can effectively give a minority investor control over your company's direction.

4. Drag-Along Rights

Drag-along clauses allow majority shareholders to force minority shareholders to participate in a sale of the company. While these protect against hold-out minority shareholders blocking a deal, the threshold matters enormously.

A drag-along triggered by a simple majority (50%+1) is very different from one requiring 75% or 90% approval. Founders should negotiate for higher thresholds and minimum price protections.

5. Non-Compete and Exclusivity Clauses

Some investment agreements include clauses that restrict founders from working in the same industry if they leave the company, or that require the company to operate exclusively in a defined market.

These clauses can be problematic if they're too broad in scope or duration. A non-compete that prevents you from working in “technology” for three years across Africa is very different from one limited to “fintech in Nigeria” for twelve months.

Conclusion

These five clauses appear in almost every investment agreement. Whether you negotiate them depends on your leverage, your goals, and your appetite for risk.

But you should at least understand what you're signing. Most founders don't—and that's why these clauses cost millions.

If you're reviewing an investment agreement and want a second opinion, we offer fixed-fee contract reviews. Schedule a consultation.