Türkiye has become a market that attracts attention and draws a lot of interest with its rapidly developing technological ecosystem in recent years. Especially in 2021 and 2022 and in the following years, start-up investments in Türkiye have shown a significant increase. In 2024, Türkiye received over $1.40 billion in investments, with 577 rounds in total, mainly in the artificial intelligence, marketing and sales, transport and logistics sectors. Compared to the total number of rounds, the proportion of rounds in which foreign investors participated was 8% and 21%, excluding TÜBİTAK BIGG rounds. However, it should be noted that although foreign investors’ interest in start-up investments in Türkiye continues, there are still risks and various uncertainties that these investors may face in terms of corporate governance, legal or financial aspects. In this context, various risks that foreign investors may face in Turkish start-up ecosystem will be discussed.
Corporate Governance and Operational Risks
- Slow Establishment and Further Processes and Failure to Execute the Process in a Digital Way: Although the company establishment processes have been simplified with the Turkish Commercial Code No. 6102 (“TCC”) and some recent regulations, there is a lack of special regulations on start-up establishment and operation processes today, and this situation undermines the interest of investors. As a matter of fact, since Turkish legislation does not regulate a special company type for start-ups, such start-ups are subject to the establishment of joint stock or limited liability companies. Besides, the fact that the establishment processes cannot be carried out in a digital way is also observed to slow down the related process and create additional costs due to some documents that foreign entrepreneurs need to obtain for the company to be established in Türkiye.
- Slowness in Internal Decision Making Processes: As it is known, the motivation of start-ups is based on the principle of high efficiency at low cost. For this reason, it is important that the decisions to be taken or contracts to be signed in a start-up are quickly established and put into effect. Although this is the case, the obligation to conclude contracts with original signatures and the applications to be made to the relevant institutions or organisations in accordance with the legislation and regulations in Türkiye create additional costs and administrative burden that slow down the internal decision-making process.
- Lack of Rapid Investment Mechanisms in the Legislation: Another important issue in the start-up ecosystem is the investment decision to be taken dynamically and quickly. Although framework models such as SAFE (Simple Agreement for Future Equity) and SAFT (Simple Agreement for Future Tokens) exist at the international level – and even used by investors in Türkiye – the fact that these contract types have no corresponding provisions under the TCC causes problems in practice.
Contractual Risk under the TCC
- Failure to Transfer Certain Provisions of Shareholders’ Agreements to the Articles of Association: Although shareholders’ agreements between investors and entrepreneurs in practice contain mechanisms such as prohibition of sale of shares for a certain period of time and/or making offers to other shareholders first in share sales, when these provisions do not have a counterpart in the TCC, such determinations between the parties pose a risk for investors and especially for foreign investors who are not familiar with Turkish legislation. As a matter of fact, since the principle of mandatory provisions of the TCC prohibits the inclusion of provisions that are not permitted under the law in the shareholders’ agreements to be concluded by the parties, the implementation or enforcement of these provisions will pose a problem and may create distrust, especially among foreign investors who are not familiar with the TCC.
Some Common Risks in Contracts
- Dispute in case of Dilution of Shares: Naturally, since the share ratio of the existing shareholders will decrease as new shareholders come to the company there may be a dispute as to which shareholder will bear this situation more, the absence of protection provisions against dilution in the shareholding agreements will constitute a risk especially for the investor who invested at an early stage.
- Decrease in Share Value with Dilution of Shares: In the event that a start-up receives an investment with a low valuation, a decrease in the value of these shares will come to the fore in addition to the dilution of the shares. As a matter of fact, this is a serious risk for an investor who invests in the start-up in question. Especially in the clauses regarding capital increases in the contract, the investor’s lack of veto right will put the investor in an extremely unfavourable situation financially.
- Situation of the Entrepreneur/Founder Exiting Earlier than the Investor: In the start-up ecosystem, investors generally make their investments for at least a few years. In this context, it is important for many investors that the entrepreneurs remain in the start-up for a certain period of time. As a matter of fact, for the investor who attaches importance to this issue, unless it is agreed in the shareholding agreement that the entrepreneurs will remain in management for a certain period of time after the current investment, the entrepreneur’s exit by transferring his shares will pose a risk for the investor in question.
