For businesses in Africa and around the world, the COVID-19 outbreak has been a disruption of epic proportions. However, the kinds of disruption businesses have experienced for the most part, have been sector-specific. While some companies are facing difficulties due to a drastic reduction in patronage, others; especially companies that enable a work-from-home lifestyle, have seen an uptick in usage and revenues.
Regardless of whether the outbreak was positive in the short term or not though, to survive the disruption, stay in business and maintain profitability in the long term, there are certain legal issues that every startup will need to be aware of.
We have highlighted five of the main ones below:
Employment law
Employment issues are likely to be the first thing many businesses will need to sort out in the wake of the pandemic. The first aspect relates to startups in sectors that were impacted negatively by the pandemic. Many such businesses have had to lower their personnel costs by terminating or furloughing some employees in a bid to stay afloat. Ending or suspending an employment relationship is not always as straightforward as writing an email to that effect though – there are several legal conditions that may expose a startup to a lawsuit by the employee if such conditions were not complied with. To be safe, you should get your contracts reviewed and if necessary, modified; to accommodate work-from-home policies and any other adjustments you might be making.
Financing and fundraising
Fundraising, whether equity fundraising from venture capital firms or debt-based fundraising from banks or other financial institutions, has always been a complicated process. The current global financial situation has had the impact of making it even more so. Recent studies such as this one by Crunchbase have shown that fewer investments are being made, and often at lower valuations than usual, although many deals are still being struck. What we have found working on financing deals during this period is that companies are having to be better positioned to inspire confidence in potential investors. To get the best deal possible out of the negotiations, be sure to work with a strategy, and to focus on the terms that are most important to you.
Dispute resolution
Apart from the direct impact of the pandemic on their business functions, startups will have to deal with the impact on their customers, suppliers, service providers, and other companies and individuals whom they are in business with. For instance, some suppliers may not deliver as agreed due to disruptions to their supply chain, and some customers may not be able to make payments as agreed. The goals for startups in such instances would be to enforce their contractual rights while still retaining those business relationships to the best extent possible. If you’re currently in a dispute or are likely to be in one soon, having highly experienced legal counsel will be essential, to represent you in negotiations and in court if necessary.
It’s generally beneficial to explore alternative dispute resolution mechanisms like negotiation and mediation since they are generally cheaper and faster. Your counsel will be able to guide you to the best choice in your particular circumstances.
Corporate restructuring
The pandemic may have a permanent impact on some startups. Companies may need to merge, make acquisitions, or be acquired to be able to continue operating. Others may need to pivot their business models substantially, to attain profitability, if their previous business models were particularly hard-hit. In the worst case, some companies may need to bring their operations to a close through winding up or insolvency proceedings. In all these situations, there would be an immense risk to the company as a corporate entity and the founders themselves, if the processes are not completed with a high degree of professional expertise. A poorly negotiated acquisition might leave the founders short-changed, and a poorly implemented winding-up process could expose the company and its officers to severe legal liability from creditors or even regulatory agencies.
Regulatory compliance and government initiatives
In their efforts to keep the pandemic in check, governments at the federal, state, and local levels across the continent have instituted several regulations restricting movement and requiring businesses to restrict their operations in other ways. You can read our full report on how governments and the private sector across Africa are reacting to the pandemic here.
The degree of the impact government regulations will have on a company will mostly be dependent on the extent of their physical operations, but for those companies affected, compliance is crucial to avoiding sanctions. Preparing a comprehensive policy that clearly outlines what actions the company (and individual staff) should take in different circumstances will help you make the right decisions consistently and efficiently.
As the world grapples with the pandemic and its aftermath, it presents great challenges for startups but also presents opportunities for quick pivots in many cases. -. Overall, to succeed beyond this period, startups will need to manage a lot of change and effectively doing that consists of having an efficient and business-savvy legal team behind them.
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