The fintech industry in Africa has been experiencing a rapid growth in recent years but of late, there has been a significant change in investor behaviour. With the increasing adoption of mobile technology and the rise of digital payments, more and more Africans are turning to fintech solutions for their financial needs. The year 2023 has seen a significant downturn in venture capital investment in Africa. While there are several factors contributing to the decline in investment, it is important to understand the implications on your startup. One of the largest implications is structuring your entity to attract the increasingly sought after investment and for that you’ll need the proper structuring, especially when it comes to equity.
Equity structure refers to the way in which ownership is divided among shareholders. It is important for fintech businesses in Africa to have their equity structured properly for 4 important reasons:
Firstly, proper equity structure ensures that investors are adequately compensated for their investment. Investors are the lifeblood of any non-bootstrapped business, and fintech companies are no exception. By having their equity structured properly, fintech businesses can attract the right investors and provide them with the appropriate incentives to invest in their business based on reasonable current and future growth projections.
Secondly, proper equity structure allows for better decision-making. When ownership is divided among shareholders, each shareholder has a say in the decision-making process. This can be both a blessing and a curse, as conflicting interests can lead to ineffective decision-making. However, with proper equity structure, decision-making can be streamlined and more effective.
Thirdly, proper equity structure ensures that the company is well-positioned for future growth. As fintech businesses in Africa continue to grow, they will need to raise more capital to fund their expansion. By having their equity structured properly, these businesses can easily raise additional capital without diluting the ownership of existing shareholders and putting future structures a risk.
Finally, proper equity structure protects the interests of shareholders. In the event of a merger or acquisition, shareholders need to be adequately compensated for their ownership in the company. With proper equity structure, shareholders are better protected and can receive a fair share of the proceeds from any deal.
In conclusion, the importance of proper equity structure cannot be overstated for fintech businesses in Africa. By having their equity structured properly, these businesses can attract the right investors, make better decisions, position themselves for future growth, and protect the interests of shareholders. As the fintech industry in Africa continues to grow, it is more important than ever for FinTech businesses to get their equity structure right.
Let us know if you’d like specific help on how to structure your equity effectively in the current economic context in Africa.