How to Structure an Investment Deal in Nigeria: Term Sheets, Valuation & Legal Essentials

Getting a term sheet is exciting. Signing the wrong one is expensive. This guide explains how investment deals are structured in Nigeria, from the first term sheet to the final shareholder agreement. Whether you are a founder raising your first round or an investor deploying capital into an SME, understanding these mechanics will protect your interests and prevent costly disputes.

1. The term sheet: not binding, but consequential

A term sheet is a non-binding document (except for exclusivity and confidentiality clauses) that sets out the key commercial terms of an investment. In Nigeria, most term sheets follow international standards with local adaptations for tax, currency, and regulatory requirements. The critical sections to negotiate are valuation, instrument type, governance rights, and exit provisions.

2. Valuation: pre-money vs post-money

Pre-money valuation is what your company is worth before the investment. Post-money valuation is pre-money plus the investment amount. This distinction matters because it determines the investor's ownership percentage. A common mistake Nigerian founders make is agreeing to a valuation without clarifying whether it is pre-money or post-money. Always confirm in writing.

Example: If your pre-money valuation is ₦100m and the investor puts in ₦20m, the post-money valuation is ₦120m. The investor owns 16.7% (₦20m / ₦120m), not 20%.

3. Investment instruments

Ordinary shares

The simplest structure. Investors receive ordinary shares with the same rights as founders. Common in angel rounds and family investments. Downside: no liquidation preference, so if the company fails, ordinary shareholders lose everything pari passu.

Preference shares

Common in VC deals. Preference shareholders get their money back first in a liquidation event, often at a 1x multiple. In Nigeria, preference shares must be authorised in your MEMART and comply with CAMA 2020. Ensure your corporate lawyer has experience with preference share issuances.

Convertible notes

A loan that converts into equity at a future funding round, usually with a discount (e.g., 20%) and a valuation cap. Popular for pre-seed and bridge rounds because they defer valuation negotiation. In Nigeria, convertible notes must comply with SEC regulations if they are marketed to more than a small group of sophisticated investors.

4. Governance and board control

Investors typically demand a board seat at seed and above. For Nigerian founders, the key negotiation is not whether the investor gets a seat, but what decisions require board approval versus founder discretion. Common protected matters include: annual budgets, new debt, asset sales, executive hiring, and related-party transactions. Do not agree to founder-level veto on day-to-day operations.

5. Liquidation preference and anti-dilution

A 1x non-participating liquidation preference is standard in Nigeria: investors get their money back first, then convert to ordinary shares for any remaining upside. Participating preferences (where investors get their money back AND share in remaining proceeds) are founder-unfriendly and should be resisted.

Anti-dilution provisions protect investors if the next round is at a lower valuation. Weighted average anti-dilution is standard; full ratchet (where earlier investors get full price protection) is punitive to founders and should be avoided.

6. Drag-along, tag-along, and pre-emption rights

• Drag-along: If majority shareholders sell, minority shareholders must join the sale on the same terms. Protects against holdouts blocking a clean exit.
• Tag-along: If majority shareholders sell, minority shareholders can elect to sell their shares on the same terms. Protects minority investors from being left behind.
• Pre-emption / right of first refusal: Existing shareholders get first dibs on new share issuances or transfers. Standard in most Nigerian deals.

7. The legal documents you will sign

Beyond the term sheet, expect to negotiate a subscription agreement, shareholders agreement, updated MEMART, and board resolutions. In Nigeria, stamp duty and CAC filing fees apply to share issuances. Budget 1–2% of the raise for legal and regulatory costs. Use a lawyer who has done Nigerian investment deals before — generalist corporate lawyers often miss nuances that cost founders later.

8. Tax considerations

Capital gains tax (10%) applies to gains from the disposal of shares. Dividends are subject to withholding tax (10% for resident companies, lower for some treaty countries). If you are raising in USD from a foreign investor, understand the FX repatriation rules and any tax treaty benefits. Structure your holding company thoughtfully if you plan to raise from multiple jurisdictions.

Conclusion

Investment deal structuring is where founders either build long-term value or give it away. Take the time to understand each clause, negotiate with clarity, and never sign a term sheet without independent legal review. Read Fundwey's legal opinion on investment structuring in Nigeria.