When an international investor asks “How are liquidation preference, anti-dilution and vesting mechanisms structured under Turkish law?”, the real concern is whether the familiar VC protections from common-law jurisdictions can be safely replicated under Turkish corporate law. The short answer is: they usually can – but only if the deal is carefully engineered through a combination of the articles of association and a detailed shareholders’ agreement.
Below is a practical, non-exhaustive overview of how these mechanisms are typically built in Turkish joint stock companies (A.Ş.) and, to a more limited extent, limited liability companies (Ltd. Şti.).
1. Legal toolbox under Turkish law
Turkish law does not have an “off-the-shelf” VC statute like Delaware or English model articles. Instead, venture-style protections are constructed using:
- Share classes and privileges (privileged shares for dividends, liquidation proceeds or voting);
- Shareholders’ agreements (SHA) with detailed economic waterfalls and covenants;
- Call/put options, drag-along/tag-along clauses; and
- Capital increase / share transfer mechanisms compliant with the Turkish Commercial Code.
For serious VC deals, the company is almost always structured as an A.Ş., as this form provides more flexibility for share classes, capital markets exits and investor protections than a Ltd. Şti.
2. Liquidation preference: 1x non-participating vs. participating
Liquidation preference governs who gets paid, and how much, in a liquidity event (exit, sale of the company, sometimes also deemed liquidation on change of control).
- 1x non-participating: the investor chooses either to receive its invested amount (sometimes plus a multiple or interest) ahead of common shareholders, or to convert and share pro rata in the exit proceeds.
- Participating: the investor first gets its preference amount back and then also participates alongside common shareholders with its remaining shareholding – sometimes subject to a cap.
Under Turkish law, these are contractual and corporate arrangements rather than insolvency priorities. Practically:
- The articles of association will often grant the preferred shares a privileged right to dividends or liquidation proceeds.
- The SHA then sets out the detailed waterfall: definition of “Liquidation Event”, calculation of the preference, how sales proceeds are distributed and when preferences fall away (e.g. on IPO).
In an actual bankruptcy, statutory creditor ranking still prevails; liquidation preferences are most relevant in solvent exits and share deals, not in court-led insolvency proceedings.
3. Anti-dilution: full ratchet vs. broad-based weighted average
Anti-dilution protection is triggered when the company issues new shares at a price lower than the investor’s previous round price (a down round). Turkish law does not prohibit anti-dilution, but implementation must respect mandatory capital and share-issuance rules.
Two classic models are used:
- Full ratchet: if a new round happens at a lower price, the investor’s effective price is adjusted down to the new price, typically via the issue of additional shares to the investor for nominal consideration.
- Broad-based weighted average: the adjustment is calculated using a formula that takes into account the size of the new round and the old one, softening the impact compared to full ratchet.
Under Turkish law, the mechanics are usually:
- The SHA includes the formula and trigger events;
- The company undertakes to carry out a capital increase or free share issuance in favour of the protected investor when the trigger occurs;
- Other shareholders pre-agree to waive pre-emptive rights to allow that issuance to happen cleanly.
Because capital increases and share issues must be formally resolved by the general assembly and registered with the trade registry, the anti-dilution clause is only as strong as the parties’ willingness (or obligation) to implement these steps. For enforceability, SHAs often include:
- Irrevocable voting undertakings; and
- Penalty or damages clauses if the founders or other shareholders fail to support the necessary resolutions.
4. Vesting and good leaver–bad leaver mechanisms
In Turkish startups, founders often hold all their shares from day one, but investors want vesting to align long-term commitment and avoid “founder walks away with 30% of the cap table” scenarios.
Because Turkish law is cautious about “forfeiture” of fully paid shares, vesting is usually structured as:
- Reverse vesting: the founder technically holds all shares, but the investor (or company) has call options to buy back unvested shares at nominal value if vesting conditions are not met.
- Alternatively, founders start with a smaller stake, and additional shares are issued over time upon meeting milestones (time-based or performance-based).
Good leaver / bad leaver definitions are then built into the SHA:
- Good leaver: departure due to death, disability, termination without cause, or mutual agreement – usually allows the founder to keep vested shares, and unvested shares are bought back at fair market value or a favourable price.
- Bad leaver: resignation without good reason, dismissal for cause, breach of non-compete or fraud – unvested (and sometimes part of vested) shares can be bought back at nominal value or heavy discount.
From a Turkish law perspective, key points are:
- The call options, price formulas and events must be clearly defined in the SHA and, ideally, referenced in the articles of association.
- Courts may review extreme “penalty-like” outcomes under the general principles of proportionality and equity, especially if the departing founder argues that the arrangement is abusive.
- Non-compete undertakings tied to good/bad leaver status must comply with Turkish labour and obligations law (limited in time, geography and scope of activity).
5. Takeaways for foreign investors
To implement liquidation preference, anti-dilution and vesting under Turkish law in a robust way, foreign investors should:
- Prefer A.Ş. structures and embed economic rights both in the SHA and the articles;
- Combine preferences, anti-dilution and vesting with clear corporate procedures (capital increases, waiver of pre-emptive rights, call options);
- Anticipate that Turkish courts may look sceptically at overly punitive mechanisms, so balance commercial protection with legal proportionality; and
- Always coordinate with local counsel to align term sheets with what is actually enforceable under the Turkish Commercial Code and practice.
Done thoughtfully, Turkish law offers enough flexibility to mirror international VC standards – but it requires more craftsmanship in drafting than simply copying a foreign term sheet.
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