By Jerameel Kevins Owuor Odhiambo
In Kenya, approximately 80% of startups fail within their first three years, and many of these failures involve legal complications when investor money is involved. Understanding the legal framework before you take a single shilling can mean the difference between a clean exit and years of litigation. The funding journey isn’t just about pitching and closing deals, it’s about creating legally sound structures that protect both you and your investors while giving your startup the best chance to succeed.
First, ensure your business is properly incorporated with the Business Registration Service (BRS) in Kenya, preferably as a private limited company rather than a sole proprietorship. You need a properly drafted shareholders’ agreement that clearly outlines ownership percentages, voting rights, and what happens if things go wrong. Get your intellectual property sorted early; register any trademarks with the Kenya Industrial Property Institute (KIPI) and ensure all founders have signed IP assignment agreements transferring their work to the company. Have clean cap table documentation showing exactly who owns what, and make sure all founders have vesting schedules (typically four years with a one-year cliff) so no one can walk away with equity after minimal contribution. Finally, ensure you have proper corporate governance documents including board resolutions, company bylaws, and minutes of all significant decisions.
Kenyan and international investors will conduct due diligence on your legal structure before writing a check. They want to see that your company is compliant with the Companies Act 2015, that you have no pending litigation, and that all tax obligations with KRA are current. Your contracts must be airtight employment agreements should comply with the Employment Act, and any customer or supplier contracts should be properly documented. Investors need to see that you understand data protection under the Data Protection Act 2019, especially if you handle personal information. They’ll scrutinize your fundraising documents: term sheets, subscription agreements, and shareholders’ agreements must clearly define anti-dilution protections, liquidation preferences, and exit rights. For example, if you’re raising 10 million shillings for 20% equity, your valuation and dilution calculations must be transparent and defensible.
The funding process typically starts with a non-binding term sheet that outlines the basic deal term; valuation, amount to be raised, board composition, and investor rights. Once you agree on terms, you enter due diligence where lawyers examine everything from your incorporation documents to your employee contracts. This phase can take weeks to months, and any red flags can kill the deal. After due diligence, you’ll negotiate and sign definitive agreements including a Share Subscription Agreement (SSA) and an amended Shareholders’ Agreement. The SSA governs the actual investment transaction, while the Shareholders’ Agreement governs ongoing relationships between shareholders. You’ll also need board resolutions approving the issuance of new shares and must file the relevant forms with the BRS within 30 days of issuing shares.
If your funded startup fails, you cannot simply walk away and abandon the company. Under Kenyan law, directors have fiduciary duties to act in the best interest of the company and its creditors, especially when the company becomes insolvent. You must either initiate voluntary liquidation under the Insolvency Act 2015 or allow creditors to petition for winding up. Investors will look at whether you acted in good faith ; did you burn through cash recklessly, engage in self-dealing, or fail to inform shareholders of material problems? If you misrepresented facts to investors or committed fraud, you can face personal liability even though your company is a separate legal entity. For instance, if you told investors you had 500 paying customers but actually had 50, that’s grounds for legal action. However, if you operated honestly, kept proper records, communicated transparently with investors, and the business simply didn’t work, your liability is generally limited to your shares becoming worthless.
The best protection against legal disaster is maintaining what lawyers call “corporate formality.” This means holding regular board meetings with documented minutes, keeping investor communications in writing, maintaining separate bank accounts for the company (never mix personal and business funds), and making decisions through proper resolutions rather than informal arrangements. Create a shutdown protocol before you need it: know what happens to remaining assets, how debt will be handled, and what obligations exist to employees. If your startup raised 20 million shillings and has 5 million left when you realize it won’t work, you have a duty to manage that wind-down responsibly. Pay outstanding employee salaries first, settle any secured debts, communicate honestly with investors about the situation, and document everything. Investors respect founders who handle failure with integrity because they know most startups fail, what matters is how you conduct yourself.
Once you have funding, establish clear governance structures with regular board meetings (at least quarterly) where you present financial statements, key metrics, and strategic decisions. Implement proper financial controls including approved budgets, dual signatory requirements for large expenses, and monthly reconciliation of accounts. Maintain cap table software like Carta or local alternatives to track ownership accurately as you issue employee stock options or raise additional rounds. Create transparency with investors through monthly or quarterly updates even when things aren’t going well; investors hate surprises more than they hate bad news. For example, if you projected 100 new customers per month but are only getting 30, tell your investors immediately and explain what you’re doing to address it. Establish legal and financial advisory relationships early so you have experts to call when challenges arise, whether that’s employment disputes, regulatory questions, or fundraising strategy.
The startups that succeed after fundraising are those that treat legal and financial infrastructure as seriously as product development. Use your investor funds wisely by tracking burn rate weekly and knowing exactly how many months of runway you have at all times. Protect your startup by having all employees, contractors, and advisors sign NDAs and IP assignment agreements from day one. Create an emergency fund within your budget (typically 10-15% of raised capital) for unexpected legal or regulatory issues. Build relationships with your investors beyond board meetings; they have networks, expertise, and pattern recognition from other investments that can help you avoid common pitfalls. Remember that your goal isn’t just to survive until the next funding round, but to build a sustainable business that creates value for customers, returns for investors, and opportunities for your team. When your legal foundation is solid, you can focus on what actually matters: building a product people want to pay for and growing a business that lasts.
The writer is a legal researcher and lawyer
