The Next Wave: The mechanics of buying your own company

In the realm of venture capital and corporate governance, a peculiar phenomenon has emerged in the African technology landscape. A Kenyan digital banking platform, Cloud9, led by its founder Tesh Mbaabu, has acquired Chpter, an AI-powered conversational commerce startup also founded by Mbaabu. The transaction, an all-stock deal, occurred within a year of Cloud9's launch following the shutdown of its previous venture-backed e-commerce platform, MarketForce.

This scenario raises questions about the legality, ethics, and structural implications of related-party transactions, where the buyer and seller share key decision-makers. While not inherently illegal, these transactions can be suspicious due to the lack of an arm's-length negotiation. The friction between a buyer seeking the lowest price and a seller aiming to maximize their price disappears when the parties are closely linked.

In the case of Cloud9 and Chpter, both startups had secured venture capital, necessitating agreement on valuation from the investors on both sides. As the transaction unfolded, the venture capitalists overseeing the capitalisation tables of both companies played a crucial role in determining the fairness of the deal. The absence of public shareholders and the controlled ecosystem of the private market shielded the transaction from immediate scrutiny or legal repercussions.

However, the underlying principles of objective procedural protections, such as independent board committees and fairness opinions, remain critical in ensuring the legitimacy of such transactions.