Never underestimate how important “boring-but-important stuff” can be if you’re trying to raise money to get a new business off the ground. You can have the best pitch deck. The coolest business idea. The most committed founders. An MVP that checks all the right boxes. Every sign you might — just might — have “product-market fit” in sight. You may even … like your co-founder.
None of it means anything when it comes to fundraising if an arcane legal requirement means that VC itching to write a check simply … can’t. If you’ve contemplated raising funds for a business in Egypt for more than five minutes, you’ve noticed that startups and venture capital firms alike almost invariably transact through offshore structures — even though they’re headquartered in Egypt. Serving Egyptian clients. Employing Egyptian staff. Banking with Egyptian banks.
They’re not dodging Mohamed Maait’s push to end tax evasion. They’re transacting offshore — for the most part — because Egyptian regulations (and common practice) do not permit contract structures that are entirely normal in markets from the US to France, the UAE to South Africa. (Tax efficiency is part of it, sure. Properly structured, investing via a third country lets each party pay taxes in their own jurisdictions.)
ENTER STAGE RIGHT: Three Egyptian regulators. Just about a month ago, the General Authority for Investment and Freezones (GAFI), the Financial Regulatory Authority (FRA), and the Information Technology Industry Development Agency (ITIDA) inked a pact that outlines how they’ll work together to make it easier for venture capital firms to invest directly in Egypt.
What problem are they solving? GAFI has been tapped to prepare a “standard shareholder agreement” for startups, with minority rights being at the center of that contract.
What are these minority rights of which you speak? They’re provisions demanded by VC and PE investors alike that enshrine things like their rights to invest in future rounds, the right to ride along on any future transaction (a “tag along” option), guaranteed board seats, etc. And company founders will often want rights including, for example, the ability to control a company long after they stop owning 50% plus one share. All of this sets the stage for the potential rollout in Egypt of founder claw-back clauses, preferred shares, reserved matters, and employee stock options, as well as looking at valuation methods (and funding instruments) that are common globally, but not yet covered in Egyptian law.
In parallel, the FRA is working on regulations that would allow the use of convertible notes to invest in startups.
WE ASKED FOUR HIGH-PROFILE STARTUP FOUNDERS WHAT THEY THINK, including co-founder and CEO of Mozare3 Hussein Abo Bakr (LinkedIn), co-founder and CEO of NowPay Mostafa Ashour (LinkedIn), founder and managing director of SolarizEgypt Yaseen Abdel Ghaffar (LinkedIn), co-founder and CEO of Yalla Fel Sekka Yasmine Abdel Karim (LinkedIn).
The short answer? They’re brimming with positivity. The protocol is structured in a way that illustrates the regulators’ awareness of the problems in Egypt’s entrepreneurial scene, the founders suggest. It also underscores the Madbouly government’s growing interest in helping entrepreneurs become engines of economic growth on a national scale, our sources agree.
The general consensus is that the protocol will do the spadework to increase foreign direct investment (FDI) and turbocharge entrepreneurism, they say. The major bottlenecks for Egypt startups are access to capital — and barriers that make it hard for FDI to enter the country, according to SolarizEgypt’s Abdel-Ghaffar and NowPay’s Ashour. The regulators, by signing this protocol, are recognizing the tremendous contribution of startups with regard to the inflow of FDIs into the country, Yalla Fel Sekka’s Abdel Karim explains. “International VCs need laws and regulations to spur their interest to invest in foreign jurisdictions. The protocol, and the laws and mechanisms that will follow, will increase confidence and will ultimately encourage foreign investors to enter the Egyptian market.” YCombinator, the highly visible American startup accelerator, for instance, exclusively invests in just four jurisdictions: The US, Canada, Caymans and Singapore. The task now is to convince other VCs that Egypt’s legal and investment mechanics are solid, Ashour says.
If the regulators are successful, they’ll help attract a different caliber of investors — and prompt local VCs to step it up a notch. “When foreign investors start to readily enter the market, we will be noticing a change in the investment style of local angel investors and local VCs,” Abdel Ghaffar tells us. “I’m excited to see how they will adapt to that. Beyond capital, they’ll have to step up their game in terms of their value-added services and their overall relationship with the startups they invest in, he adds.
Success would see Egyptian founders incorporate here Egypt instead of going abroad, according to Abdel Ghaffar and Abdel Karim. Usually, most Egyptian startup founders incorporate their businesses abroad because of the simplicity of establishing their companies in places like Dubai and Delaware. The government is currently trying to simplify and standardize the process of establishing startups in Egypt, Abdel Karim explains.
The aim is clear: Homegrown companies should have an easier time setting up shop in Egypt. If the protocol ultimately delivers minority rights protection, employee stock options, preferred shares and more, the Egyptian market will become much more scalable and mature, Abo Bakr explains. These foundations will ultimately help simplify the process of establishing startups in the country and entice Egyptian companies not to incorporate their startups abroad, according to Abdel Ghaffar. “Swvl is a huge success story, but it’s unfortunate that they had to incorporate their business in Dubai,” he says. “I think the protocol, the instruments the regulators aim to utilize, and the steps that will come next, will shape the future in a way that ensures the next Swvl won’t leave the country.”
NEXT WEEK- We’ll hear from leading venture capital firms on what they hope to see happen and how they expect the reforms — if we get them right — could change how they do business here.
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