101|STARTUP LAW FOR ENTREPRENEURS AND INVESTORS

It is an indisputable fact that Startups have become much more critical with the changing world dynamics, and Türkiye is one of the countries with a high entrepreneurial potential. When we look at the entrepreneurship ecosystem in Türkiye, 6 billion dollars was invested in Türkiye by breaking a record in terms of entrepreneurship in 2021.[1] Despite the 35% decrease in Startup investments worldwide in 2022, the slight increase in Turkey clearly reveals Turkey's potential in entrepreneurship. [2]

Although Startup Law does not have a separate legislation yet, it includes many areas of law such as Corporate Law, Commercial Law, Law of Obligations, Intellectual Property Law, Tax Law, Labor Law, Personal Data Protection Law, Investment Law, Capital Market Law, and Competition Law. We have summarized the crucial legal stages below that a Startup should pay attention to from its establishment.

Legal Protection of Ideas

Ideas compose the first stage of the startup project. It is important that these new ideas are protected under legal protection in order to cope with problems such as the use or copying of these new ideas by others. At the same time, it is necessary to investigate whether the idea in question violates the intellectual and industrial rights of other people.

First of all, it should be noted that it is not possible to protect only ideas under legal protection, because the protection area of intellectual rights covers intellectual products, not the idea itself. Works are protected by copyright under the Intellectual Artistic Works Law No. 5846 and trademarks, patents, designs, geographical indications, utility models are protected under the Industrial Property Law No. 6769.

Agreements

The first touch of the startups with the contracts starts from the establishment stage and plays a critical role at every phase for the continuity of the commercial life of the Startups. For this reason, it is necessary to carefully prepare and analyze the contracts from the establishment stage of the Startup.

Examples of agreements that you may encounter the most in Startup law are Non-disclosure/Confidentiality Agreements, Term Sheet/Letters of Intent, Articles of Association and Partnership Agreements, Shareholders Agreements, Share Purchase & Sale Agreements, Agreements for Transfer of Intellectual and Industrial Property Rights, Business Agreements, Franchise/Dealership/License Agreements, E-Commerce Agreements, Rental Agreements, KVKK (Data Protection) Agreements and related protocols.

Incorporation Process of Startups

Deciding on the type of company in the incorporation process of the Startup is important in terms of tax obligations, responsibilities and legal obligations of the company and its partners. In accordance with Turkish law, a Startup can be established as a sole proprietorship or a capital company. However, when we look at the practice, it is seen that Startups prefer joint stock companies or limited liability companies during the incorporation process. The main reason for this is that sole proprietorships are riskier in terms of individual liability. Because in capital companies, the responsibilities of the partners are limited to the capital they have committed to put into the company whereas the partners of the company are unlimitedly and severally liable for the debts of the company in sole proprietorship companies.

In accordance with the Turkish Commercial Code No. 6102 ("TCC"), the minimum capital required for a joint stock company is ₺ 50,000 and the 25% of this amount must be paid before registration and the remainder within 24 months. In terms of limited liability companies, the minimum capital amount is ₺ 10.000 and must be paid within 24 months from the date of commitment. There is also a significant difference regarding the number of shareholders of joint stock and limited companies. That is, while a maximum number of shareholders in joint stock companies is not regulated in the TCC when the number of partners of the limited company cannot exceed fifty.

While establishing a Startup, it is substantial to reckon with the other expense items such as trade registry fees, lawyer, accounting costs, as well as deciding on the type of company and the amount of capital within the legal framework.

Startups can carry out the incorporation process in Türkiye and then open subsidiaries in Türkiye and abroad, as well as after completing the company establishment abroad, subsidiaries can be established abroad and in Türkiye. While there are many factors to consider when determining the country where the company will be established, tax rates and the withholding tax to be applied to these rates and the costs of establishing a company are among the most important factors that entrepreneurs should pay attention to when establishing a company abroad. Moving the headquarters of a company headquartered in Türkiye abroad is also a common situation for Startups, especially in investment processes.

Incentives and Supports for Entrepreneurs

There has been a significant increase in the number of incentives and supports for Startups in recent years. By courtesy of such incentives, it is possible to realize projects and facilitates entrepreneurs who hesitates because of high insurance and tax costs.

The main incentives and supports for entrepreneurs are as follows:

1. KOSGEB Supports such as Traditional Entrepreneur Supports, Advanced Entrepreneur Support Program, Business Plan Award

2. TUBITAK Supports such as Grant Support, Income Tax Incentives, Credit Support

3. Supports Given in order for Supporting Research and Development Activities such as Income Tax Withholding Incentive, Techno-enterprise Capital Support and R&D Discount

4. Supports for Technology Development Regions and Supports to be Provided to Priority Investments

5. Export Supports

6. Investment Incentive System Supports such as VAT Exemption, Customs Duty Exemption, VAT Refund

Investment Stages

The ability of Startups to reach the right investment at the right time plays an essential role in the success journey of the Startup. The investments that Startups can take can be listed as follows: pre-seed investment, seed investment, A, B, C, D, E, F and G Series Investments and Public Offering. As its name signifies, pre-seed investment is the first investment that takes place before the seed stage, while seed investment is the first investment in the traditional sense. Series A, B, C, D, E, F and G Series Investments are basically categories classified according to Startup's valuation, while Series C or D are usually considered as Startup's final financing series because E-F-G investments are rare. On the other hand, a public offering is when a company opens its shares to the public, in other words, puts it up for sale, to be traded on the stock exchange, and is the final financing stage for a Startup.

The main investor types that can be applied during the establishment phase of the venture can be summarized as Angel Investor, Family-Friends, Crowd funding, Venture Capitals. Startups finance the venture by themselves or with the capital collected from family and friends (Family-Friends) or angel investors, especially in the pre-seed and seed stage. Angel investors expect to capitalize on their investments as startups grow and develop, and to return profitably through an exit strategy. Crowdfunding, on the other hand, is an alternative financing method to traditional investor types, and in this method, the financing of the project or product is financed by many different people over the internet, usually with small amounts of investments. Finally, venture capitals, unlike angel investors, are institutional investors and constitute the investor group that invests in the highest amount. It is common for Venture Capitals to invest in Series A, B, C, D, E, F and G Series.

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[1] 2021 Türkiye Startup Ekosistemi Yatırım Raporu, Yatırım Raporu, StartupCentrum, Last Access: 07.06.23, https://startupcentrum.com/tr/raporlar [2] 2022 Türkiye Startup Ekosistemi Yatırım Raporu, Yatırım Raporu, StartupCentrum, Last Access: 07.06.23, https://startupcentrum.com/tr/rapor/2022-turkish-startup-ecosystem-investment-report