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Starting a Business

I am in the process of a entering into a joint venture with two others. I have been allocated 10% of the deal because I don’t have funds to secure a better deal. What is the risk?

Is it a good idea to take this funding route?

Entrepreneur

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There are several types of businesses that can be formed and operated on a small scale. The venture could be a closed corporation with a membership of up to ten members or a private company. There are different legal requirements governing the formation and management of these business entities.

Dot the “I’s” and cross all the “T’s”

No matter what kind of entity the venture is, it’s essential that you sign a shareholders agreement when the business is set up. At the start of any new venture, each person assumes that other person has similar values and ideas, but when things go wrong they quickly realise that they cannot work together.

A legal arrangement, can provide a simple way to protect the interests of partners and shareholders

A partnership can be an effective method of pooling resources and skills to the financial advantage of all concerned. However, it brings with it responsibilities and the possibility of financial burden. “If you seek legal advice and have an agreement drawn up where you can negotiate minority protection in the agreement you will be able to safe-guard your risk,” advises Georg Kahle, Bowman Gilfillan Attorneys.

“The agreement will spell out what your rights are as a small shareholder,” says Kahle.

“Some minority protections are contained in the law of the country. If you enter into an agreement with the fellow shareholders in order to regulate your dealings with one another, you will be protecting your interests as a minority shareholder. One of the pitfalls of being a minority shareholder is the danger of having your shareholding diluted by a further issue of shares by the company”, says Kahle

Value of shares must be properly defined in the agreement

When the company’s shares are sold within the ranks of the shareholders, the issue of share value becomes extremely important. The company may decide to share the profits in the form of dividend payments and as the company grows in value, the value of the shares should grow as well.

Therefore, the shareholders agreement will specify how often dividends will be paid and how their value will be determined (e.g., as a percentage of net profits). The agreement should say when they are not to be paid – such as when working capital is required and the dividends are paid back into the business and not to the shareholders.

Determining the value of a company in the shareholders agreement

There are many different methods of valuing a company. The method of valuation must be decided at the beginning as it can save litigation and disagreements later. A “Valuation of Shares” clause can be included into an agreement to set out the process by which the fair market value of the shares can be agreed to in the event that the shareholders cannot agree.

First Refusal clause should be included in a Shareholder Agreement.

Shareholders of start up company should enter into a Right of First Refusal Agreement requiring shareholders to give the company or the other shareholders the priority right to match any offers to buy shares in the company. This provision means that when an offer is received from a third party, a shareholder must allow the other shareholders right of first refusal to purchase his or her shares before selling them to the third party.

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Starting a Business

What are the do’s and don’ts of securing an online domain name?

We asked Domains.co.za founder, Wayne Diamond, what the do’s and don’ts are when it comes to entrepreneurs registering domain names for their start-ups…

Wayne Diamond

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There’s that L-word again:

“Location, location, location”. It’s the make or break decision. Every estate agent and business owner cannot overemphasise the importance of this Critical Business Decision Number 2 (Number 1, of course, has to do with what you’re going to sell!).

Related: As a start-up, what are the most important areas I should be looking at?

 

Whatever business you’re in, being close to customers and convenient to business partners and suppliers is essential. That bricks-and-mortar wisdom is equally true in the world of online commerce. Having the right domain name and the right support for your online presence has emerged as a real driver of success.

Some figures put the scale of the opportunity into perspective: US e-commerce is predicted to reach $440 billion by 2017, showing a compound annual growth of 13.8%[1]. While the Internet economy is in its infancy in South Africa and Africa, it is growing strongly: research by World Wide Worx showed that consumers, small and medium businesses and government were already purchasing products and services worth R59 billion on the web three years ago.[2]

So how to secure the best and most profitable Internet real estate to make sure your business can ride the e-commerce wave?

It’s all in the name:

The first decision is what domain to use. One of the exciting developments is the launch of new Internet domain names, so it’s definitely no longer a choice of .com or .co.za. The proposed dotAfrica (.africa) geoTLD (geographic Top Level Domain) is one option that’s set to come online around the first quarter of next year, but what about the ZAdotCities domains of .joburg, .capetown or .durban? Domain names within these additional geoTLDs will be able to be snapped up by the public around November this year.

While .com remains a good choice for truly international businesses, choosing a domain name with some local flavour is probably going to work well for many companies.

The greater range of domain names also makes it more possible that you will be able to choose the right name for your business. When it comes to the more established domains, like .com or .co.za, chances are higher that the name you want has already been taken.

When it comes to that all-important name, received wisdom used to be that short was best, but the trend nowadays seems to have reversed—even phrases are now used. The key is to choose a name that is easily recognisable, that will stick in peoples’ minds and that describes the business well.

Perhaps a good example is the domain used by the writer of this article: www.domains.co.za is both a brand name and a name that perfectly describes the nature of the business. At just seven characters in length, “domains” is also an easy to spell, easy to remember word – keeping names under ten characters is guaranteed to help audience recall.

Something people will remember easily is absolutely vital.

Some companies use specific names for individual campaigns, but always make sure the business as a whole has its own web address.

Experience has shown that it’s probably worthwhile to register similar domain names to the one you choose, just to keep competitors from taking them in an effort to sow confusion.

My final advice: it’s always a good idea to use an ISPA (Internet Service Providers’ Association of SA) member to help you register the chosen address of your start-up. That way you’ll be sure that all the formalities are correct, and that the company you’re dealing with abides by ISPA’s code of conduct.

Finally, as there are already almost 950 000 .co.za domains registered, it’s a good idea to surf to www.domains.co.za and perform searches to see if the domain you would like is indeed available.

Related: Does the South African government award grants to franchisees?


[1] Chuck Jones, “Ecommerce is growing nicely while mcommerce is on a tear”, Forbes, 2 October 2013, available at http://mashable.com/2013/02/05/ecommerce-sales-top-1-trillion-worldwide/.

[2] “Internet 2% of SA economy”, 29 May 2012, available at http://www.worldwideworx.com/internet-2-of-sa-economy/.

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Starting a Business

How to protect your business idea when sending them to financial instituitons?

Signing an NDA, is it necessary?

Anton Ressel

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How can I protect my business idea before I submit my business plan to financial institutions and other agencies for help?

You have a few options:

Firstly, you can include a disclaimer as an introductory clause, saying that any and all information contained in the business plan and related documents remain the Intellectual Property of xxx (your name) and may not be reproduced, copied or used in any manner without express written consent. This is not legally binding, but usually enough.

Secondly, you could ask them to sign a non-disclosure agreement, which is more binding from a legal perspective. The downside of this is that it can come across as arrogant, especially from someone who is approaching us for help. Personally I refuse to sign any NDA from clients who approach me for help, it just smacks of mistrust and arrogance.

On a final note, good ideas always get copied. If you are that worried that your idea will be stolen, you may need to re-look at it and find ways to make it difficult to replicate, or better yet, make sure you are first to market.

Related: As a start-up, what are the most important areas I should be looking at?

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Starting a Business

Does the South African government award grants to franchisees?

In my experience, unless you as the entrepreneur have some ‘skin in the game’ and a reason to get up and make the business work every morning, it seldom will.

Anton Ressel

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I am considering purchasing a children’s education franchise and wanted to know if the government offers grants. The cost of the franchise is R 86 000. If so what are the criteria to qualify and how does one go about it?

Accessing grant funding for a franchise may prove challenging, unless that franchise is registered and accredited, in which case there is a fund that may consider it – see CNBC for more info.

Otherwise, you could look at www.investmentincentives.co.za and see if any of those sources of financing are of interest. It naturally depends on your own PDI (previously disadvantaged individual) status as many of these funds are focused on youth, women and PDI’s.

Finally, on an emotional level I would caution against going all out for grant funding and not loan finance. In my experience, unless you as the entrepreneur have some ‘skin in the game’ and a reason to get up and make the business work every morning, it seldom will.

 

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