Venture Capital

Venture capital is financing provided to companies that do not yet have stable cash flow but have rapid growth potential, in exchange for shares in the company. The investor targets the increase in the company’s value over a few years and the sale of the shares through an exit, such as a trade sale or IPO, rather than dividends. Venture capital therefore operates on high risk and high expected return.

Venture Capital Structures in Turkey

• Venture capital investment fund (GSYF): Funds established by portfolio management companies and sold to qualified investors; see Venture Capital Investment Fund.
• Venture capital investment trust (GSYO): Investment trusts in the form of joint stock companies subject to Capital Markets Board (SPK) regulations.
• Corporate venture capital (CVC): Investments made by large companies directly or through their own funds.
• Foreign funds: Funds established abroad generally invest in Turkish companies by acquiring shares directly; see Foreign Direct Investment.

At the earliest stages, angel investors usually step in.

Rights Investors Expect

Although a venture capital investor takes a minority stake, it seeks to limit its risk contractually. Typically negotiated rights include:

• Preferred shares and board representation,
• Liquidation preference and anti-dilution protection,
• Veto rights over key decisions,
• Tag-along, drag-along and right of first refusal,
• Regular reporting and information rights.

Some of these rights are written into the articles of association and others into a shareholders’ agreement.

Legal Points to Watch

Under the Turkish Commercial Code (TCC), the articles of association of a joint stock company may deviate from the Code only where the Code expressly permits it (TCC Art. 340). Documents taken from foreign practice must therefore be adapted to Turkish law. In addition, an investor’s veto rights may result in a change of control and the transaction may require Competition Board approval if the thresholds are met.