Turkish Law Blog

New Law Field Rising on Top of Unicorns: Startup Law

Erdem Mümtaz Hacıpaşaoğlu Erdem Mümtaz Hacıpaşaoğlu/ Startup Law Consultancy | Vircon Data Protection
06 May, 2019
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Modern era changed how we grasp and mean business drastically.  In our elders’ period, the best possible chance to become successful in business life was to get a foot in the door of a well-established corporate company. Things have changed after entrepreneurs found ways to incubate and accelerate an idea to a billion-dollar valuation company. (As entrepreneurs we call it to become a unicorn*) If you grow that fast, you can't survive with ordinary business skills and management techniques. You will need different instruments and concepts to hold your startup together in the fast-growing and changing environment. This change also requires a new approach to customary legal tradition. Ladies and gentlemen, I would like to introduce to you: Startup Law.

1. Scope of the Field

During the establishment period of this field, we were thinking that we are narrowing a law field as startup law. When you dive deep down, you will first surprise with the width. To become a startup, all you need is a new idea. So, it can be in every field. Building a social media platform, creating hardware to improve internet security, extracting the essence from fruits to increase the durability of foods are all considered as startups. As a startup lawyer, you can easily find yourself in different legal disciplines. Sometimes it is getting worse, and you can’t find a rule to apply on such issue and have to give your legal opinion based on your overall experience. You will also need to follow the startup ecosystem, know the stakeholders and know how a business grows. It is hard to define the borderlines, but you will need a global explorer approach which will expand the horizons of being a lawyer.

2. Global Approach and New Instruments

When you explore different startup ecosystems, you will first see the United States with the effect of Silicon Valley. Israel also became a “Startup Nation” with a government-backed model. Even we couldn’t achieve to create a unicorn in Turkey; we have some promising startups as well.  When you try to become a unicorn, you see that you will need more legal rules and instruments to make your life easier. Imagine you need a software engineer, but you can’t afford to pay his/her salary. You will need to persuade him with a dream of ownership of the company. You leave some shares of your company as the “option pool”. Imagine you are an investor or an accelerator program investing hundreds of startups per batch. You can’t negotiate 100 pages of Share Holders Agreement (SHA) with every startup. To keep in mind, 90% of startups fail in their first two years. You will need a better solution. This is how “convertible note” was born.

3. Position of Turkish Law

i. Deductions and Perks

To start with we don’t have an isolated startup law entered into force like Latvia. Nevertheless, we have lots of legislation and perks for making entrepreneurs’ lives easier. If you are under 29 years old and establishing your first startup, according to Social Security and General Health Law’s recent change, you will not pay an insurance premium for a year. Also, you will be exempted from personal income tax up to 75.000 Turkish Liras per year for three years. If you can prove your technology, you can register your company to a technopark, and you will benefit from discounts in employee premiums, value-added tax, and corporate income tax.

ii. Company Law

It is easy and relatively cheap to establish a company, but it is harder to close. Turkish Commercial Law doesn’t have any space for the new instruments like vesting, convertible notes, drag along and stock options due to the protective approach which we call “steel corset.”. Luckily, we have freedom of contract amendment in Turkish Law of Obligations. We can determine additional terms and conditions freely and build mechanisms to be compatible with startup law approach. I believe it is a matter of 3-5 exits in our ecosystem to see an isolated startup law legislation.

iii. Investment Law

Turkey has a vast investment potential to support growing startups. We have angel investor networks, venture capitals, corporate venture capitals, and crowdfunding platforms for creating investments to entrepreneurs. Angel investors can deduct up to 100% of their investments from their income tax if they are licensed angel investors under Regulation on Individual Participation Capital. We adopted investment funds and crowdfunding under Law on the Capital Markets.

4. Conclusion

Expansion of entrepreneurship throughout the world required a new approach in law. Startup law created both a legal discipline and a new way of being a lawyer. It requires new skills and fast adaption to new legal concepts. Even though Turkey doesn’t codify a startup law; there is plenty of legislation which supports entrepreneurship. As our ecosystem grows day by day, we are going to need more startup lawyers to contribute startup law applications. We will rise on top of unicorns.

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