TRANSFORMING STARTUPS THROUGH FORMALISATION

Hellen Mukasa - Lead, LegalTech Lab

Entrepreneurship in Africa has gained traction and is gradually being fronted as the solution to Africa’s development challenges. In Uganda, Startups play a vital role in creating employment opportunities, enhancing production and supply chains, value addition, technology transfer, development and innovation and if harnessed well, they have the potential to facilitate the transition of our economy to an innovative, inclusive, transformative growth trajectory. However, startups continue to grapple with a wide range of social, economic, policy and regulatory challenges that impede their growth and effective performance.

Over the years, The Innovation Village has been supporting Startups with business growth strategies, trained founders with tech and business related skills to create solutions to the problems affecting our communities. Through the Legal Tech Lab, Startups have been supported to easily transition from the informal sector to formalization with the goal to make them predictable contributors to the country’s Gross Domestic Product (GDP) just like the Micro Small and Medium Enterprises.

In the URA E-bomba ya business summit held last year under the theme: “Business Formalization and Inclusive Resource Mobilization for Uganda’s Economic Independence.” The commissioner General Mr. John Musinguzi, urged businesses in the informal sector to register and formalize if they want to be supported and grow without encountering unnecessary obstacles.

By formalizing, startup increases its ability to attract top talent which can develop the idea into a viable business model. It increases opportunities of access to formal services, both financial and judicial. The startup gains trust from potential partners and investors who usually conduct due diligence checks before they can relate with a Startup. Furthermore, the Startup can raise much needed capital from issuing shares to new shareholders. Despite all such benefits of formalization, many startups continue to operate informally.

Among many reasons, a lack of awareness of the benefits of formalization ranks among the top. Additionally, unfounded fear of the startup’s idea being stolen once “Out there” before the founders test it is another factor including anxiety over the implied obligations after registration such as, paying taxes and expensive legal services. This can be attributed to the fact that most Startups operate on extremely stringent budgets. Therefore, prioritizing expenditure on business related costs such as developing their Minimum Viable Product (MVP), and testing market channels takes precedence.

As a result, legal advice, even when subsidized, is not essential to startups mostly sought as a curative and not preventive measure. I have seen this happen in different instances such as when a start-up finds a very interested investor who asks for its registration status, shareholding, and its bank details, or an unpleasant encounter with the authorities when the Startups’ uncertified products are found on the market without the now mandatory digital stamp.

The most unfortunate case that we at the LegalTech Lab recently encountered was when a startup founder gave away 80 of the 100 shares her startup for seed funding given by an organization. She was then introduced to other potential investors by the same organization, and in the process, issued away an additional 18 shares, leaving her as a mere employee of her Startup with only 2 shares. The startup founder eventually got frustrated and quit because she had lost control of the direction of the startup. There were a couple of factors at play in this case. The obvious naivety of the startup founder, general ignorance of basic legal information about company shares but also, her failure to seek advice from legal counsel, the lack of protection for Startups through an enabling law.

To raise awareness of the importance of formalization of startups, we work closely with Uganda Registration Services Bureau (URSB), Uganda Revenue Authority (URA), and Uganda National Bureau of Standards (UNBS) which hold regular info-sessions in our community. They offer both virtual and physical sessions and provide experts on demand to small, organized groups of our community; for instance, the URSB recently availed its experts to train Agripreneurs in our Mbarara community on formalization.

We are cognizant that it’s an audacious goal to make Startups a predictable contributor to Uganda’s GDP, but we believe that it’s achievable if all duty bearers play their role in creating an enabling environment for startups to thrive. Irrefutably, this leads us right into the debate of whether Uganda needs a Startup Act. In collaboration with Private Sector Foundation Uganda (PSFU), Startup Uganda, with support from a development partner, we represent startups on a Technical Working Committee of the Ministry of Trade Industry and Co-operatives (MTIC) which is leading the startup Policy deliberations. We await the Regulatory Impact Assessment which will inform all next steps on creating an enabling environment for the startup ecosystem.

Hellen Mukasa

Legal Tech Lab Lead

The Innovation Village

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