Convertible Loans as a Funding Option for Turkish Startups and Special Requirements Foreign Investors Should Consider
In particular, early-stage start-ups that are established to invest in technology and innovative ideas and require long-term, trust-based financing, but do not wish to dilute their founders' shares through the equity investment they will receive, and have difficulty raising debt from the banks due to their weak balance sheet structure, use convertible debt investments around the world. Although not common, convertible debt investments can also be an effective source of funding for Turkish start-ups.
Convertible loans allow investors to invest in a start-up with an uncertain valuation by lending money since it is often the case that there is not enough data to make a valuation of the company in its early stages. These loans typically do not generate interest, but are redeemed in the future by converting into shares in the company upon the occurrence of certain triggering events such as a round of qualified equity financing or the achievement of a certain valuation threshold. Natural persons and legal entities domiciled in Turkey may freely structure their investments in convertible loans by taking advantage of the freedom of contract provided by the Turkish Code of Obligations numbered 6098, provided that they comply with the legislation on banking and financial markets. However, funds brought into Turkey by foreign investors for the purpose of financing Turkish start-ups must comply with the special requirements set out in the legislation, the violation of which may lead to the application of foreign currency credit restrictions on amounts already paid.
Paragraphs 3 and 9 of Article 6 of the Capital Movement Circular of 2 May 2018 (“Circular”) provide special time limits for the addition of amounts brought into the country by foreign investors to the capital of Turkish companies. Article 12 of the Circular introduces certain exemptions for investments in Turkish companies by way of convertible loans under convertible loan agreements. In the case of convertible debt agreements concluded in foreign currency between Turkish residents and foreign venture capital funds established abroad, provided that explicit provisions stating that;
a) transferred amount will be added to the capital within a maximum of 12 months from the date of transfer,
b) transferred amounts will be added to the capital, except in the event of the dissolution or liquidation of the company (they will not continue to exist as debt),
c) entire transferred amount will be added to the capital.
are contained in the agreement, requirements under Article 14 of the Circular, which imposes foreign currency credit restrictions on companies, shall not apply with respect to the foreign currency transferred to the account of the Turkish company.
Although not common, convertible debt investments can also be an effective source of funding for Turkish start-ups.
Convertible loans allow investors to invest in a start-up with an uncertain valuation by lending money since it is often the case that there is not enough data to make a valuation of the company in its early stages.
Natural persons and legal entities domiciled in Turkey may freely structure their investments in convertible loans by taking advantage of the freedom of contract provided by the Turkish Code of Obligations numbered 6098, provided that they comply with the legislation on banking and financial markets.
Funds brought into Turkey by foreign investors for the purpose of financing Turkish start-ups must comply with the special requirements set out in the Capital Movement Circular of 2 May 2018 (“Circular”), the violation of which may lead to the application of legislation on foreign currency credit restrictions.
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