How Startup Investment Rounds Work in Turkey: A Legal Guide for Founders and Investors

Raising investment is one of the most important stages in the growth of a startup.

A startup may initially be financed by the founders themselves. As the company begins developing its product, acquiring customers and expanding its team, however, additional capital is often required.

This capital may come from:

• angel investors,
• venture capital funds,
• corporate venture capital investors,
• strategic investors,
• accelerators,
• family offices, or
• other institutional investors.

Startup financing is usually completed through several separate investment rounds rather than through a single transaction.

These rounds are commonly described as:

• pre-seed,
• seed,
• Series A,
• Series B,
• Series C, and
• later-stage financing rounds.

Each round has different commercial objectives and may involve different legal structures.

For startups incorporated in Turkey, investment rounds must be considered not only from a financial perspective but also under Turkish corporate law.

The parties may need to deal with issues such as:

• valuation,
• capital increases,
• issuance of new shares,
• shareholder dilution,
• pre-emption rights,
• investor privileges,
• board representation,
• liquidation preference,
• anti-dilution protection,
• founder vesting,
• employee option pools,
• legal due diligence,
• representations and warranties,
• foreign investors, and
• future exit rights.

An investment round is therefore much more than an investor transferring money to the company in exchange for a percentage.

It is a corporate transaction that may reshape the ownership, governance and future control of the startup.

This article explains how startup investment rounds work in Turkey and the key legal issues that founders and investors should consider during each stage of financing.

What Is a Startup Investment Round?

A startup investment round is a financing transaction in which one or more investors provide capital to a startup.

In return, the investor may receive:

• newly issued shares,
• existing shares,
• rights to acquire shares in the future, or
• another financial instrument linked to the company’s equity.

The purpose of the financing may include:

• product development,
• hiring employees,
• marketing,
• entering new markets,
• technology infrastructure,
• regulatory compliance,
• working capital,
• acquisitions, or
• international expansion.

Each financing round usually reflects a different stage in the development of the company.

An early-stage startup with only a prototype will generally be financed differently from a company with millions of dollars in recurring revenue.

What Is Pre-Seed Investment?

Pre-seed investment generally represents the earliest external financing stage.

At this point, the startup may have:

• only an idea,
• a prototype,
• an early MVP,
• a small founding team, or
• limited initial users.

Pre-seed investors may include:

• founders,
• friends and family,
• angel investors,
• accelerators,
• early-stage venture funds, and
• individual technology investors.

The amounts involved are usually smaller than later financing rounds.

The primary purpose of pre-seed capital is often to help the startup reach a point where it can demonstrate:

• product feasibility,
• market demand,
• early customer interest, or
• initial traction.

From a legal perspective, founders should still take pre-seed financing seriously.

Giving away equity casually at this stage can create significant cap table problems later.

What Is Seed Investment?

Seed investment generally occurs after the startup has moved beyond the idea stage.

The company may already have:

• an MVP,
• early customers,
• initial revenue,
• user growth,
• product-market testing, or
• a developing commercial model.

Seed investors may include:

• professional angel investors,
• seed venture capital funds,
• corporate investors,
• accelerators, and
• family offices.

The capital may be used for:

• hiring,
• product improvement,
• customer acquisition,
• market expansion,
• regulatory preparation, and
• building a professional management structure.

Seed financing is often the first round in which institutional investment documents become relatively sophisticated.

What Is Series A Investment?

Series A financing generally occurs when a startup has demonstrated a functioning business model and meaningful growth potential.

Investors may expect evidence of:

• revenue growth,
• customer retention,
• scalable technology,
• market opportunity,
• commercial traction,
• strong unit economics, or
• a credible path toward significant expansion.

Series A investors are commonly institutional venture capital funds.

The legal documentation is generally more detailed than in earlier rounds.

A Series A investor may negotiate rights relating to:

• board representation,
• investor consent,
• liquidation preference,
• anti-dilution,
• founder vesting,
• future financing,
• information rights,
• share transfers, and
• exit rights.

At this stage, the founders may no longer control the entire legal structure of the company without investor involvement.

What Are Series B and Later Financing Rounds?

Series B and later rounds generally finance more mature growth.

The startup may already have:

• substantial revenue,
• a large employee base,
• international operations,
• significant customer numbers, or
• established market position.

Capital may be used to:

• enter foreign markets,
• acquire competitors,
• develop additional products,
• expand sales teams,
• build infrastructure, or
• prepare for an eventual exit or public offering.

Later-stage investors may include:

• larger venture capital funds,
• private equity investors,
• sovereign funds,
• strategic corporate investors, and
• international institutional investors.

The governance and economic rights negotiated in these rounds may become increasingly complex.

How Is a Startup Investment Structured in Turkey?

There are several possible structures.

The most common include:

1. capital increase and issuance of new shares,
2. purchase of existing shares,
3. a combination of primary and secondary investment,
4. convertible financing, and
5. other contractually structured investment instruments.

The legal structure should reflect the commercial objective of the parties.

Capital Increase

A capital increase is one of the most common methods of investing in a Turkish startup.

The company creates new shares.

The investor subscribes for those shares.

The investment money enters the startup itself.

For example:

Before investment:

Founder A: 60%
Founder B: 40%

Investor invests in exchange for 20% of the post-investment company.

After the transaction:

Founder A: 48%
Founder B: 32%
Investor: 20%

The founders have been diluted because new shares were created.

The startup receives the investment proceeds.

This is a primary investment.

Share Purchase

An investor may instead purchase existing shares directly from a founder or another shareholder.

For example:

Founder A owns 60%.

Founder B owns 40%.

Investor purchases 10% from Founder A.

After the transfer:

Founder A: 50%
Founder B: 40%
Investor: 10%

No new shares were necessarily created.

The investor’s money goes to Founder A rather than to the company.

This is generally referred to as a secondary transaction.

Primary vs. Secondary Investment

The distinction is important.

Primary Investment

Money enters the startup.

The company issues new shares.

Existing shareholders are generally diluted.

Secondary Investment

Investor purchases existing shares.

Money goes to the selling shareholder.

The company itself may receive no new capital.

Many investment rounds contain both components.

For example:

An investor commits USD 10 million.

USD 8 million enters the company.

USD 2 million is used to purchase shares from founders.

This allows the startup to raise capital while giving founders limited liquidity.

Why Investors Usually Prefer Primary Investment

Venture capital investors generally invest to finance growth.

If all investment money goes directly to the founders rather than the company, the startup does not receive resources for expansion.

Investors may therefore limit secondary transactions, particularly at an early stage.

A small secondary sale may sometimes be acceptable where founders have spent several years building the business with limited salary.

However, a founder selling a large percentage early may raise concerns regarding commitment.

Which Company Type Is Better for Startup Investment?

In Turkey, both:

• Limited Şirket, and
• Anonim Şirket

may receive investment.

However, an Anonim Şirket (A.Ş.) is generally more suitable for startups expecting institutional venture capital.

This is because the A.Ş. structure may provide greater flexibility concerning:

• share transfers,
• different share groups,
• privileges,
• board composition,
• capital increases,
• investment rounds,
• convertible financing,
• employee equity structures, and
• exit transactions.

An Ltd. Şti. may still be appropriate for early-stage companies, but some startups later convert into an A.Ş. before institutional financing.

Where significant investment is expected, founders should consider the long-term corporate structure before beginning fundraising.

The First Step: Preparing the Cap Table

Before approaching investors, founders should understand the company’s capitalization.

The cap table should identify:

• founders,
• existing investors,
• employee equity,
• advisors,
• convertible instruments,
• outstanding share promises, and
• any other person claiming equity rights.

A simple cap table may show:

Founder A: 55%
Founder B: 35%
Angel Investor: 10%

However, the fully diluted cap table may look different if the company also has:

• a 10% employee option pool,
• convertible notes,
• SAFE-style instruments, or
• other rights to obtain shares.

Investors will usually review the cap table carefully.

An unclear capitalization structure can delay investment.

Pre-Money Valuation

The pre-money valuation is the value attributed to the startup before the investment.

For example:

Pre-money valuation: USD 8 million

Investment: USD 2 million

Post-money valuation: USD 10 million

Investor ownership:

USD 2 million / USD 10 million = 20%

In a simplified structure, existing shareholders collectively retain 80%.

Post-Money Valuation

Post-money valuation generally represents:

Pre-Money Valuation + New Investment

Using the same example:

USD 8 million pre-money

USD 2 million investment

=

USD 10 million post-money

The distinction sounds simple, but startup financing becomes more complicated when the transaction also includes:

• option pools,
• convertible securities,
• secondary shares,
• multiple closings, or
• different investor rights.

Founders should therefore ask for a fully diluted post-investment cap table.

How Is Startup Valuation Determined?

There is no single statutory formula for valuing startups.

Valuation may be influenced by:

• revenue,
• recurring revenue,
• growth rate,
• customer numbers,
• technology,
• market size,
• intellectual property,
• management team,
• competition,
• prior investment,
• comparable transactions, and
• investor demand.

Early-stage companies may have significant valuations despite having limited revenue.

This is because investors are often pricing future growth potential rather than current accounting value.

The Term Sheet

Once the investor and founders reach preliminary commercial understanding, the investor may issue or negotiate a term sheet.

The term sheet summarizes the principal investment terms.

These may include:

• investment amount,
• valuation,
• investor percentage,
• share type,
• board rights,
• liquidation preference,
• anti-dilution,
• founder vesting,
• option pool,
• pre-emption rights,
• information rights,
• exclusivity,
• due diligence,
• confidentiality, and
• exit rights.

The term sheet is one of the most important documents in the investment process.

Founders should not sign it without understanding the economic effect of each provision.

Is a Term Sheet Binding?

Many startup term sheets specify that most provisions are non-binding.

However, certain provisions may be binding.

These commonly include:

• confidentiality,
• exclusivity,
• transaction costs,
• governing law, and
• dispute resolution.

The wording of the document is decisive.

A founder should therefore not assume that the words “term sheet” automatically mean that nothing in the document creates legal obligations.

Exclusivity

Investors often request an exclusivity period.

During this period, the startup may agree not to:

• negotiate with competing investors,
• solicit alternative investment offers, or
• enter into another financing transaction.

The purpose is to allow the investor to conduct due diligence and negotiate documentation without fear that the founders will immediately complete another transaction.

Founders should negotiate the duration carefully.

An excessively long exclusivity period can prevent the startup from raising capital elsewhere if the investor later abandons the transaction.

Legal Due Diligence

After the term sheet, the investor commonly conducts legal due diligence.

The purpose is to determine whether the startup legally owns what it claims to own and whether there are material risks.

Due diligence may include review of:

• corporate documents,
• shareholding,
• capital payments,
• intellectual property,
• employment,
• customer contracts,
• supplier contracts,
• tax matters,
• litigation,
• regulatory compliance,
• personal data protection,
• licenses,
• loans,
• related-party transactions, and
• previous investment agreements.

The investor may also investigate founder disputes or informal equity promises.

Corporate Due Diligence

Corporate review may include:

• articles of association,
• trade registry records,
• share ledger,
• board resolutions,
• general assembly resolutions,
• share certificates,
• capital increases,
• past share transfers,
• representation powers, and
• shareholder agreements.

The investor wants to verify that the cap table is legally correct.

If the startup says Founder A owns 50%, the corporate records must support that position.

Intellectual Property Due Diligence

For a technology startup, IP review is extremely important.

The investor may ask:

• Who owns the source code?
• Did founders assign pre-incorporation IP?
• Did employees sign appropriate agreements?
• Did freelancers transfer relevant rights?
• Who owns trademarks?
• Who controls domain names?
• What open-source software is used?
• Are there infringement claims?

A startup that does not control its core technology may be extremely difficult to finance.

Employment Due Diligence

Investors may review:

• employment contracts,
• executive agreements,
• remote work arrangements,
• compensation,
• employee claims,
• confidentiality,
• intellectual property provisions, and
• social security compliance.

Misclassification of employees as freelancers may also create risk.

Startups often grow quickly and may neglect employment documentation during the early stages.

These problems tend to appear during investment due diligence.

Data Protection Due Diligence

Data protection has become particularly important for:

• SaaS companies,
• mobile applications,
• AI startups,
• fintech businesses,
• healthtech startups, and
• e-commerce companies.

The investor may investigate:

• privacy notices,
• legal grounds for processing,
• data transfers,
• security measures,
• customer data,
• employee data,
• data breaches, and
• processor contracts.

If the startup’s business depends heavily on personal data, compliance risk may materially affect valuation.

Regulatory Due Diligence

A startup operating in a regulated industry may require specific licenses or authorizations.

Examples may include:

• payment services,
• electronic money,
• financial services,
• crypto assets,
• insurance,
• healthcare,
• energy,
• telecommunications, and
• transportation.

The investor may require confirmation that the business is legally permitted to operate.

A startup that has built its business model around an activity requiring authorization it does not possess may face substantial investment risk.

Due Diligence Red Flags

Common red flags include:

• missing corporate resolutions,
• undocumented share transfers,
• founder disputes,
• source code owned by freelancers,
• trademarks registered personally by founders,
• unpaid taxes,
• employment claims,
• regulatory uncertainty,
• customer concentration,
• unclear option promises, and
• pending litigation.

Not every red flag prevents investment.

The investor may instead require the startup to correct the issue before closing.

These requirements are often called conditions precedent.

Conditions Precedent

Conditions precedent are matters that must be completed before investment closing.

Examples include:

• converting the company into an A.Ş.,
• transferring IP to the company,
• registering a trademark,
• obtaining a regulatory approval,
• terminating an inappropriate related-party agreement,
• amending the articles of association,
• resolving founder equity problems,
• creating an employee option pool, or
• obtaining corporate approvals.

The investor may refuse to transfer funds until all required conditions are satisfied.

Investment Agreement

The Investment Agreement regulates the actual financing transaction.

It may establish:

• investment amount,
• subscription mechanics,
• valuation,
• number of shares,
• closing conditions,
• representations and warranties,
• investor obligations,
• founder obligations,
• indemnification,
• closing procedures, and
• termination rights.

In some transactions, these matters may be combined with the Shareholders’ Agreement.

In others, separate documents are used.

Share Subscription Agreement

Where the investor subscribes for newly issued shares, the transaction may include a Share Subscription Agreement.

This document may regulate:

• number and type of shares,
• subscription price,
• payment,
• capital increase,
• closing date,
• conditions precedent, and
• representations.

The contractual obligation must then be implemented through the appropriate Turkish corporate procedures.

Share Purchase Agreement

Where the investor purchases existing founder shares, the transaction may include a Share Purchase Agreement.

This may regulate:

• seller,
• buyer,
• number of shares,
• purchase price,
• warranties,
• closing,
• transfer procedure, and
• liability.

A financing round combining primary and secondary components may therefore involve both subscription and purchase mechanics.

Shareholders’ Agreement

After the investor becomes a shareholder, the relationship between founders and investors may be regulated through a Shareholders’ Agreement.

This agreement may address:

• management,
• board structure,
• voting,
• investor consent,
• reserved matters,
• information rights,
• founder vesting,
• transfer restrictions,
• pre-emption,
• tag-along,
• drag-along,
• anti-dilution,
• liquidation preference,
• future financing, and
• exit.

The SHA can shape the operation of the company for many years.

Board Representation

A venture capital investor may request a board seat.

For example:

Before investment:

Board Member 1: Founder A
Board Member 2: Founder B

After investment:

Board Member 1: Founder A
Board Member 2: Founder B
Board Member 3: Investor nominee

This allows the investor to participate in strategic governance.

The investor may also request a board observer rather than a voting director.

Reserved Matters

Investors commonly request consent rights over major decisions.

These may include:

• new share issuance,
• borrowing above a threshold,
• acquisitions,
• major asset sales,
• IP transfers,
• business changes,
• senior executive appointments,
• related-party transactions,
• founder compensation,
• liquidation, and
• company sale.

The objective is to protect the investor against fundamental decisions that could materially affect the value of the investment.

However, founders should avoid giving investors veto rights over ordinary daily operations.

Founder Vesting During Investment

Even if founders were not previously subject to vesting, institutional investors may require it.

For example, the investor may require:

• four-year reverse vesting,
• a one-year cliff,
• credit for time already served, and
• Good Leaver/Bad Leaver provisions.

The investor wants to ensure that founders remain motivated after receiving investment.

Founder vesting can therefore become an important part of Series A and even seed negotiations.

Founder Lock-Up

Investors may also restrict founder share transfers.

A lock-up clause may provide that founders cannot sell shares for a certain period except in approved circumstances.

This helps ensure that founders remain economically committed.

The agreement may contain exceptions for:

• permitted family transfers,
• approved secondary transactions,
• company exits, or
• other agreed transfers.

Employee Option Pool

Professional investors frequently require an employee equity pool.

The purpose is to attract key employees through equity-based incentives.

For example:

Founder A: 55%
Founder B: 45%

Before investment, the investor may require a 10% ESOP pool.

The founders may therefore be diluted even before the investor receives its own shares.

The treatment of the option pool can materially affect the effective investment valuation.

Why the Option Pool Matters

Suppose an investor proposes:

USD 9 million pre-money valuation

USD 1 million investment

The investor receives 10% post-money.

However, the investor also requires a 10% employee option pool to be created pre-money.

The economic burden of creating that option pool may fall primarily on the founders.

The actual transaction may therefore be less founder-friendly than the headline valuation suggests.

Founders should model the fully diluted cap table before signing the term sheet.

Liquidation Preference

Liquidation preference determines how investors receive proceeds in certain exit scenarios.

Suppose an investor invests USD 5 million for 25% of the startup.

The investor receives a 1x non-participating liquidation preference.

If the company sells for USD 10 million, the investor may compare:

• USD 5 million preference, and
• 25% of USD 10 million = USD 2.5 million.

The investor may choose the USD 5 million preference, depending on the terms.

If the company sells for USD 100 million, the investor may instead participate as a 25% shareholder and receive USD 25 million.

Liquidation preference can therefore materially affect founder returns.

Participating Liquidation Preference

A participating preference can be more investor-friendly.

The investor may first recover its preference amount and then participate in the remaining proceeds.

For example:

Investor invests USD 5 million.

Startup sells for USD 20 million.

Investor first receives USD 5 million.

The investor may then also participate in the remaining USD 15 million according to its ownership percentage.

This can significantly reduce the proceeds available to founders.

Founders should understand the exit waterfall before accepting the term.

Anti-Dilution Protection

Investors may also negotiate protection against future down rounds.

Suppose an investor invests at a USD 20 million valuation.

The startup later raises financing at USD 10 million.

The earlier investor may receive an adjustment under an anti-dilution clause.

Common international mechanisms include:

• full ratchet, and
• weighted average.

Full ratchet is generally more aggressive.

Weighted average may distribute the effect more proportionately.

Why Down-Round Protection Matters

Without anti-dilution, all existing shareholders are diluted when new shares are issued.

With anti-dilution protection, founders may experience additional dilution because earlier investors receive an adjustment.

Founders should therefore model a hypothetical down round before agreeing to investor protections.

Pre-Emption Rights

Existing shareholders may have rights to participate in new capital increases.

The purpose is to allow them to maintain their ownership percentage.

For example:

Investor owns 20%.

A new round would dilute the investor to 15%.

The investor may exercise its pre-emption or contractual participation right and invest additional capital to remain at 20%.

The operation of statutory and contractual rights must be coordinated with Turkish corporate law.

Pro Rata Rights

Venture investors commonly request pro rata rights.

A pro rata right allows the investor to invest in later rounds proportionally.

This protects the investor against unwanted dilution.

Some investors may request super pro rata rights, allowing them to increase their ownership in later rounds.

Founders should consider whether such rights could restrict future fundraising flexibility.

Drag-Along Rights

Drag-along provisions facilitate a future company sale.

Suppose shareholders holding 85% agree to sell the startup.

A buyer requires 100% ownership.

A minority shareholder refuses.

A properly structured drag-along clause may require the minority shareholder to sell on equivalent terms.

This can prevent a small shareholder from blocking an exit.

Tag-Along Rights

Tag-along rights protect minority shareholders.

If founders sell a controlling stake to another buyer, investors may have the right to participate in the sale on similar terms.

This prevents founders from receiving a private exit while leaving minority investors behind under a new controlling shareholder.

Representations and Warranties

Investors often require the company and founders to provide representations concerning matters such as:

• corporate existence,
• valid share ownership,
• financial information,
• contracts,
• IP ownership,
• employment,
• taxation,
• litigation,
• regulatory compliance, and
• data protection.

If these statements are inaccurate, the investor may have contractual remedies.

Founders should therefore carefully verify warranties before signing.

Founder Warranties

Investors sometimes request personal warranties from founders.

Founders should pay close attention to:

• scope,
• liability cap,
• limitation period,
• knowledge qualifiers,
• materiality thresholds, and
• fraud exceptions.

A founder should avoid unlimited personal exposure for matters outside the founder’s control.

Disclosure Letter

Where the investment agreement contains broad warranties, the company may provide a disclosure letter.

For example, the company may warrant:

“There is no litigation.”

If a lawsuit exists, the company can disclose it specifically.

Proper disclosure may prevent the known matter from later being treated as a warranty breach.

Disclosure is therefore an important part of sophisticated investment transactions.

Indemnification

Investment agreements may also include indemnity provisions.

These can provide compensation for specific identified risks.

For example:

• pending tax dispute,
• IP ownership issue,
• regulatory investigation, or
• historical employee claim.

Indemnities should be negotiated carefully because they may create direct financial liability.

Closing

The investment becomes legally and commercially effective at closing.

Closing may involve simultaneous actions such as:

• investor payment,
• capital increase,
• share issuance,
• articles of association amendment,
• board appointment,
• execution of shareholder documents,
• share ledger updates, and
• delivery of closing documents.

In Turkey, the contractual closing must be coordinated with required corporate and trade registry procedures.

An investment agreement alone may not be sufficient to create the intended corporate ownership structure.

Capital Increase Procedures

Where an investor receives newly issued shares, the startup must comply with the applicable capital increase rules.

Depending on the company structure, this may involve:

• shareholder resolutions,
• board actions,
• amendments to the articles of association,
• capital commitments,
• payment procedures,
• pre-emption rights,
• registry filings, and
• corporate record updates.

The precise process depends on whether the startup is an A.Ş. or Ltd. Şti.

Foreign Investors

Foreign individuals and foreign companies may generally invest in Turkish companies, subject to sector-specific restrictions and regulatory requirements.

A foreign investor may need to provide:

• corporate documents,
• authority documents,
• apostilles or legalization,
• Turkish translations,
• tax identification information, and
• beneficial ownership information.

Foreign investment may also trigger additional reporting or regulatory considerations depending on the sector and transaction structure.

Does a Foreign Investor Need a Turkish Partner?

Generally, no.

Foreign investors may generally acquire shares in Turkish companies without requiring a Turkish shareholder, subject to specific restrictions applicable to particular sectors.

A startup can therefore receive investment from:

• US venture capital funds,
• European investors,
• Middle Eastern investors,
• Asian strategic investors, or
• other foreign investment vehicles.

Cross-border investment documentation should nevertheless be coordinated with Turkish corporate implementation requirements.

Foreign Currency Investment

Startup investments are frequently negotiated in:

• USD,
• EUR, or
• another foreign currency.

However, Turkish companies operate within Turkish corporate, banking, foreign exchange and accounting rules.

The transaction documents should carefully define:

• investment currency,
• conversion methodology,
• share subscription price,
• payment mechanics, and
• accounting treatment.

Founders should coordinate legal documentation with financial advisers.

Convertible Loans

A startup may raise financing through a convertible loan.

The investor initially provides debt.

Upon a future event, the debt may convert into equity.

Possible conversion events include:

• next qualified financing,
• maturity,
• company sale, or
• another agreed trigger.

Terms may include:

• valuation cap,
• discount,
• interest,
• maturity date,
• conversion mechanics, and
• investor protections.

Convertible financing must be structured carefully under Turkish law.

Why Startups Use Convertible Financing

Early-stage startups may find it difficult to agree on valuation.

For example, a company may be too early to determine whether it is worth:

• USD 2 million,
• USD 5 million, or
• USD 10 million.

A convertible structure may postpone the valuation discussion until a later professional investment round.

The early investor receives an economic advantage, such as:

• a discount, or
• valuation cap,

in exchange for investing earlier.

SAFE Agreements

SAFE agreements are commonly used in the United States.

SAFE stands for:

Simple Agreement for Future Equity.

Under the original model, the investor provides capital today in exchange for a contractual right to receive equity upon certain future events.

However, a standard US SAFE is designed around US corporate law.

A Turkish startup should not simply download a SAFE template and assume it will work identically.

Legal issues may arise regarding:

• capital increase,
• future share issuance,
• pre-emption rights,
• corporate approval,
• conversion mechanics,
• accounting,
• tax treatment, and
• enforceability.

SAFE-style investments may need significant adaptation.

Multiple Convertible Investors

Founders should also understand the cumulative dilution effect.

Suppose a startup raises:

• USD 200,000 from Investor A,
• USD 300,000 from Investor B,
• USD 500,000 from Investor C,

all through convertible instruments.

No shares may initially be issued.

The founders may still appear to own 100%.

However, when all instruments convert during the next investment round, substantial equity may be issued.

The founders may discover that they have already economically allocated a large percentage of the company.

Convertible investments should therefore be included in a fully diluted cap table.

Investment Tranches

Some investors do not transfer the entire investment amount at once.

Investment may be paid in tranches.

For example:

USD 1 million at closing.

USD 1 million after product launch.

USD 2 million after reaching a revenue target.

The agreement should clarify:

• milestone definitions,
• payment dates,
• what happens if the milestone is disputed,
• whether shares are issued immediately or per tranche, and
• investor obligations.

A startup should avoid being committed to significant dilution while the investor retains broad discretion not to fund later tranches.

Milestone-Based Financing

Milestones may include:

• revenue,
• customer count,
• regulatory approval,
• product launch,
• geographic expansion, or
• profitability.

Milestones should be objectively measurable.

A provision stating:

“Further investment will be made if the company performs satisfactorily.”

may give the investor excessive discretion.

Clear metrics reduce future disputes.

Tranched Investment Risk

Founders should consider what happens if:

• the investor does not fund,
• the company has already issued shares,
• the startup fails to reach a milestone,
• market conditions change, or
• the investor becomes unable to invest.

The agreement should allocate this risk clearly.

Bridge Rounds

A startup may need temporary financing between major rounds.

This may be called:

• bridge financing,
• extension round,
• interim financing, or
• seed extension.

Bridge rounds may use:

• equity,
• convertible loans,
• SAFE-style instruments, or
• shareholder loans.

The objective is generally to give the company enough capital to reach the next significant financing event.

Down Rounds

A down round occurs when the startup raises investment at a lower valuation than the previous round.

This may happen because of:

• slower growth,
• market downturn,
• increased competition,
• poor financial performance,
• loss of customers, or
• broader economic conditions.

Down rounds can create difficult negotiations involving:

• anti-dilution,
• founder dilution,
• employee option repricing,
• investor consent, and
• valuation.

They can also affect employee and founder morale.

Flat Rounds

A flat round occurs where the startup raises capital at approximately the same valuation as the previous financing.

Although less problematic than a down round, it may indicate that the company has not increased in value significantly since the previous investment.

Investors may still negotiate revised rights.

Up Rounds

An up round occurs where the new valuation exceeds the previous round.

This is generally positive for founders and existing investors.

Existing shares are effectively valued at a higher price.

Nevertheless, even an up round creates dilution when new shares are issued.

Higher valuation simply means the startup may raise more capital while giving away a smaller percentage.

How Much Equity Should a Startup Give Investors?

There is no universal percentage.

The appropriate level depends on:

• investment amount,
• valuation,
• stage,
• growth,
• market conditions,
• competition between investors, and
• capital requirements.

A startup may issue:

• 10%,
• 15%,
• 20%,
• 25%, or
• another negotiated percentage

in a particular round.

Founders should focus on cumulative dilution rather than examining each round in isolation.

Cumulative Dilution

Suppose founders own 100%.

Seed round: investors receive 20%.

Founders remain at 80%.

Series A: new investors receive 25%.

Founders become:

80% × 75% = 60%.

Series B: new investors receive 20%.

Founders become:

60% × 80% = 48%.

Without considering an employee pool or other instruments, the founders have moved from 100% to 48%.

This demonstrates why founders should model several rounds in advance.

Investor Rights May Be More Important Than Percentage

A founder may focus heavily on whether the investor receives:

• 15%, or
• 20%.

However, governance rights may be equally important.

A 15% investor with extensive veto rights may exercise more practical control than a 25% investor with limited governance rights.

Founders should therefore analyze:

• board seats,
• reserved matters,
• liquidation preference,
• anti-dilution,
• exit rights,
• pre-emption,
• information rights, and
• founder vesting

alongside percentage ownership.

Investment Round Checklist for Founders

Before signing an investment transaction, founders should understand:

• investment amount,
• pre-money valuation,
• post-money valuation,
• investor percentage,
• primary vs. secondary investment,
• option pool,
• fully diluted cap table,
• convertible instruments,
• dilution,
• share class,
• investor privileges,
• board rights,
• observer rights,
• reserved matters,
• founder vesting,
• Good Leaver rules,
• Bad Leaver rules,
• founder lock-up,
• liquidation preference,
• anti-dilution,
• pre-emption,
• pro rata rights,
• drag-along,
• tag-along,
• representations,
• warranties,
• indemnities,
• exclusivity,
• due diligence,
• conditions precedent,
• closing procedures, and
• future financing rights.

A founder should know exactly what the company will look like after closing.

Common Startup Investment Mistakes in Turkey

Focusing Only on Valuation

A high valuation can come with aggressive investor rights.

Ignoring the Option Pool

A pre-money ESOP pool may significantly increase founder dilution.

Using Foreign Templates Without Adaptation

US or UK investment documents may not operate correctly under Turkish corporate law.

Unclear Cap Table

Informal equity promises can create serious due diligence problems.

No IP Assignment

The investor may discover that core technology belongs to founders or freelancers.

Excessive Founder Warranties

Founders may accept unnecessary personal liability.

No Future Round Modeling

The founders focus only on the current investment.

Ignoring Liquidation Preference

A high ownership percentage may not translate into equivalent exit proceeds.

Ignoring Anti-Dilution

A future down round may create unexpected founder dilution.

Giving Investors Operational Veto Rights

Too many reserved matters may prevent effective management.

No Legal Review of Convertible Instruments

SAFE and convertible structures require local adaptation.

Poor Corporate Housekeeping

Missing resolutions and share records can delay closing.

Preparing a Startup for Investment

A startup should ideally prepare before approaching investors.

This may include:

• cleaning the cap table,
• updating corporate records,
• transferring IP,
• registering trademarks,
• reviewing employment contracts,
• reviewing privacy compliance,
• organizing material contracts,
• identifying regulatory issues,
• resolving founder disputes, and
• creating a virtual data room.

A company that is prepared for due diligence can move through fundraising significantly faster.

Virtual Data Room

Professional investors commonly request a data room.

The data room may include:

• corporate documents,
• financial records,
• IP documents,
• employment agreements,
• commercial contracts,
• regulatory documents,
• litigation information, and
• previous investment agreements.

Well-organized documentation can improve investor confidence.

A startup should not begin searching for critical contracts only after due diligence starts.

Legal Counsel in Startup Investment Rounds

Investment rounds can involve several different areas of law simultaneously.

These may include:

• corporate law,
• contract law,
• intellectual property,
• employment,
• tax,
• data protection,
• regulatory law, and
• cross-border investment.

Legal counsel should therefore evaluate both:

• the commercial terms, and
• the legal mechanisms required to implement them.

The role of legal counsel is not only to draft documents.

It is also to identify how investment terms affect:

• founder control,
• dilution,
• liability,
• future financing, and
• exit.

Practical Example: Seed Investment

Two founders own:

Founder A: 60%
Founder B: 40%

The startup is valued at USD 4 million pre-money.

Investor contributes USD 1 million.

Post-money valuation:

USD 5 million.

Investor receives:

20%.

Post-investment ownership:

Founder A: 48%
Founder B: 32%
Investor: 20%

If the investor also requires a pre-money employee option pool, the founders may be diluted further.

Practical Example: Series A

Assume before Series A:

Founders: 70%

Seed Investor: 20%

ESOP: 10%

The company raises USD 5 million from a Series A investor for 25% post-money.

After the round:

Founders: 52.5%

Seed Investor: 15%

ESOP: 7.5%

Series A Investor: 25%

The founders still collectively own a majority, but their ownership has decreased substantially since incorporation.

Practical Example: Secondary Sale

Assume:

Founder: 70%

Seed Investor: 20%

ESOP: 10%

A Series A investor wants 25%.

The transaction includes:

• 20% newly issued shares, and
• 5% purchased from the founder.

Part of the investor’s money enters the company.

Part goes directly to the founder.

The legal documents must distinguish between:

• share subscription, and
• share purchase.

Practical Example: Convertible Investment

A startup raises USD 500,000 through a convertible loan before Series A.

The loan includes:

• 20% discount,
• USD 5 million valuation cap.

Series A later occurs at a USD 10 million valuation.

Depending on the agreed mechanics, the convertible investor may convert using the more favorable valuation cap or discount.

This can give the investor significantly more equity than a simple USD 500,000 investment at the Series A valuation would produce.

The dilution should therefore be calculated before the convertible instrument is signed.

What Happens After Closing?

Closing is not the end of the investor relationship.

After investment, the company may have ongoing obligations such as:

• financial reporting,
• board meetings,
• investor information,
• annual budgets,
• regulatory compliance,
• investor consent for reserved matters, and
• future financing notifications.

Founders should understand these obligations before accepting the investment.

An institutional investor may significantly increase the governance discipline required within the company.

Preparing for the Next Investment Round

Every investment round should ideally leave the company capable of raising the next one.

Founders should avoid structures that make future fundraising unnecessarily difficult.

Potential problems include:

• excessive liquidation preferences,
• full ratchet anti-dilution,
• oversized investor veto rights,
• complicated share classes,
• excessive advisor equity,
• large inactive founder holdings, or
• unusual rights granted to early investors.

A new investor may require these terms to be restructured.

The best financing terms therefore protect the current investor without making the company unattractive to future investors.

Investment Rounds and Exit Strategy

Venture capital investors generally invest with the expectation of eventual liquidity.

Potential exits include:

• strategic sale,
• merger,
• secondary sale,
• private equity acquisition,
• or public offering.

Investment documents often contain provisions designed to facilitate an eventual exit.

These may include:

• drag-along rights,
• tag-along rights,
• liquidation preference,
• IPO provisions,
• transfer restrictions, and
• founder cooperation obligations.

Founders should understand the investor’s likely exit horizon before accepting capital.

Conclusion

Startup investment rounds in Turkey involve much more than agreeing on a valuation and transferring money.

Each investment round can reshape:

• ownership,
• founder dilution,
• voting power,
• board composition,
• investor rights,
• founder obligations, and
• future exit economics.

A typical investment process may involve:

• initial investor discussions,
• valuation negotiations,
• term sheet,
• exclusivity,
• legal due diligence,
• investment agreement,
• shareholders’ agreement,
• corporate approvals,
• capital increase,
• share issuance, and
• closing.

Founders should pay particular attention to issues such as:

• pre-money and post-money valuation,
• fully diluted capitalization,
• employee option pools,
• convertible instruments,
• liquidation preference,
• anti-dilution,
• founder vesting,
• reserved matters,
• board representation,
• pro rata rights,
• drag-along, and
• tag-along.

The highest valuation is not necessarily the best investment offer.

A slightly lower valuation with balanced investor rights may sometimes be significantly more attractive than a higher valuation accompanied by aggressive liquidation preferences, veto rights or anti-dilution protections.

The investment should therefore be evaluated as a complete legal and economic package.

For Turkish startups expecting multiple financing rounds, the legal structure established during the first investment may influence every later transaction.

A clean cap table, clear intellectual property ownership, properly maintained corporate records and balanced shareholder documentation can make future fundraising easier.

Poorly structured investment terms can make later financing or an eventual exit much more difficult.

For this reason, founders should approach every investment round with two questions:

How much capital are we receiving today?

and

What will our ownership, control and legal position look like tomorrow?

Both questions are equally important.

Legal Disclaimer: This article is provided for general informational purposes only and does not constitute legal, tax, financial or investment advice. Startup investment transactions may differ depending on the company’s legal form, sector, shareholder structure, investor profile and financing terms. Founders and investors should obtain professional legal and financial advice before entering into investment, share subscription, share purchase or convertible financing transactions in Turkey.