Ethiopia To Enact A Startup Act

A proclamation named as “ Start-up Businesses Proclamation” by the Ministry of Innovation and Technology together with the Job Creation Commission and other players is on draft.

Startup Act, as it is usually called, has been legislated before by Tunisia and Senegal in Africa aiming to provide customized support for startups and incentivize entrepreneurship. It is also reported Rwanda is in the process of putting place one.

Italy was the first country to introduce a startup act globally. Tunisia, the pioneer to introduce startup act in the continent has seen a growth in its startup ecosystem after.

The Ethiopian draft Startup Act ( Start-up Businesses Proclamation ) , Shega was able to access before it’s officially released, introduces various interventions that are specifically targeted to solve the major issues startups and ecosystem players have been facing.

The draft proclamation, after a likely consultation from the public, is expected to be tabled to the Cabinet and then to House of Peoples’ Representatives.

Some ecosystem players have been reporting being counseled in the process of drafting and a consultative meeting with support organization has also been held back February. However, a request to feedback from a wider ecosystem and public is yet to happen if it is part of the plan.

What is New?

The draft proclamation establishes a National Startup Council that will have 7 -9 members and will be chaired by the Minister of Innovation and Technology. The goal of the council is ” To foster economic growth by creating an eco-system which is conducive to the development of innovation and technology, and the creation of new jobs “

The council will be overlooking and supporting the ecosystem, the technical advisory group the will be set up, and various initiatives the startup act introduces.

A technical advisory board that reports to the council will be filled by members from both public and private stakeholders. This board will have the power to receive applications for ” Start-up Business Label” and “Innovative Business Label”, manage the application process, decide who to give these labels, take away the labels, and also ” recommend to the Council on the utilization of the Fund “.

The details operation for the technical advisory board is going to be defined through directives that will be issued by the Ministry.

A ” Startup and Innovation Unit ” will also be set up under the Ministry of Innovation and Technology which creates an organizational structure inside the ministry that will specifically push the growth of the startup ecosystem in Ethiopia.

The other main thing that the draft proclamation introduces is an Innovation fund that aims to finance startups and Innovative business in Ethiopia.

The Innovation Fund that will be lead by MinT and supervised by the council will be used for Start-up scholarship, replacement of workers on Start-up leave, fees that apply for the registration of intellectual property, costs for administrative support, Incentives for eco-system builder and provision of guarantees.

The proclamation expects the innovation fund to be filled from the government budget, loans, and external donations.

Who are startups and Innovative Businesses ?

If one is to get the benefit and incentives designed by the proclamation, they need to get either a startup label or an Innovative business label.

According to the proclamation, a startup label can be provided if the business product, process, or service is ” incrementally innovative, or shall disrupt existing production, service or market structure “.

It also assesses the growth potential and scalability of the business model while it demands at least 25% of the capital to be owned by the entrepreneur.

Finally the organization ” shall be either a micro, small or medium enterprise; and ” The legal existence of the organization shall not exceed five years ” to be labeled as a startup.

For Innovative Bussiness Label, all requirements about the Innovativeness, growth potential, minimum capital that should be held by the entrepreneur applies her as well.

In addition, the Innovative Business is expected to meet the maximum number of employees and the minimum annual turnover ( according to directives that will follow) and it should be a business that is at least 5 years old.

Startups can also apply for a pre-registration certificate that will allow them to operate legally before getting a commercial registration through the normal business registration process.

A pre-registered startup will be allowed not to collect any government levies such as turnover tax, value-added tax, and income tax. This pre-registration period stays for a maximum of two years only.

Incentives for Startups, Investors, and Ecosystem Builders

The Start-up Businesses Proclamation introduces various incentives for various players in the startup ecosystem.

The first incentive for Startups who received the label accordingly is the ” Startup leave ” which allows an entrepreneur to maintain it’s employment relationship while he is away building its startup for a specific period of time.

The proclamation also introduces a startup scholarship and support on intellectual property rights registration from Innovative fund. Administrative support including legal support during registration, accounting, human resources management, and other supports are included too.

Start-ups and innovative businesses will be given the right to open ForEx account and will be provided a card to finance online services needed for the business.

Startups will also have tax-related Incentives and access to legal sandboxes while the proclamation provides direction for the government to come up with a mechanism to subcontract startups when foreign firms bid public projects in Ethiopia and incentivize those contractors who sub-contract startups.

Eco-system builders like Incubators that support startups will be allowed to access funding opportunities and tax breaks too.

Investors who works with startups that received a startup label will be eligible for “Tax break on capital gain, Carry forward loss for angel-investors, Facilitation of expatriation of capital gain for foreign investors, Allowing debt investment, Allowing selling a share below the price of acquisition.”

In addition, Start-ups with minor foreign shareholders will be recognized as local companies, and also the proclamation suggests that the Ethiopian Investment Commission together with Investment Board may look at the minimum Investment amount allowed for foreign Investors to invest in Ethiopia in relation to startups.

The proclamation points out that ” National Bank of Ethiopia shall by directive govern the development of angel investment, venture capitals and private equity funds” as well.

All in all the proclamation appears to try to address the major areas of concern startups and ecosystem players have been raising.

However, the implementation and impact will depend on the subsequent directives that will be published by the Ministry of Innovation and Technology, Ministry of Revenue, Ministry of Trade, and National Bank which govern the specific details as well as the alignment on understanding and delivery by this government bodies.

Disclaimer: The proclamation is on draft. While the general initiatives might not change, any of the details and specific could be changed when it’s officially released and later approved by the Cabinet and HPR.