How Protected Is a VC Really in a Turkish Startup Bankruptcy or Concordato?
When foreign investors look at the Turkish ecosystem, the question “how protected is a VC really in a Turkish startup bankruptcy or concordato?” is usually left to the last slide of the deck – until something goes wrong. Turkish law has its own insolvency mechanics, creditor ranking and rules on intellectual property (IP) that can significantly affect recovery for equity and debt investors.
This text gives a high-level overview for foreign VCs and founders: what happens if a Turkish startup collapses, how creditor hierarchy works, where secured creditors stand, and what becomes of the IP that often represents most of the company’s value.
1. Bankruptcy vs. concordato: two different paths
In Turkey, a distressed startup typically faces either:
- Bankruptcy (iflas) – a full liquidation process in which a court-appointed bankruptcy administration realises assets and distributes proceeds to creditors according to statutory ranking.
- Concordato (konkordato) – a court-supervised restructuring in which the debtor proposes a plan (haircut, instalments, possibly partial asset sales) and seeks creditor approval, under the court’s protection from enforcement.
For a VC, both scenarios mean loss of control: once bankruptcy is opened or concordato is approved, corporate decisions are effectively taken out of the boardroom and moved into the courtroom. Shareholders, including preferred or “venture” shareholders, become residual claimants behind creditors.
2. Where does a VC sit in the creditor ranking?
Under Turkish law, the ranking of claims in insolvency is largely mandatory. Broadly simplified, the estate is used:
- First, to pay procedural expenses (court costs, administration fees) and certain employee claims.
- Second, to satisfy secured creditors from the proceeds of their collateral.
- Then, to pay unsecured creditors (suppliers, unsecured loans, tax and social security claims within their special rules).
- Only if something is left, can shareholders receive any distribution.
In most venture deals in Turkey, the VC’s main exposure is equity, even if labelled “preferred” in the shareholders’ agreement. Those contractual preferences (liquidation preference, seniority over common, etc.) are powerful in a solvent exit, but do not override statutory insolvency ranking. In a real bankruptcy scenario, preference clauses between shareholders are largely irrelevant if the company’s assets are insufficient to cover creditors.
If the VC also holds convertible notes or shareholder loans, their position depends on:
- Whether those instruments have actually converted into equity before insolvency; and
- Whether any security has been granted for those debts.
An unsecured VC loan will typically rank like any other unsecured claim; if subordinated by contract, it may effectively sit behind other unsecured creditors.
3. Why secured creditors dominate the recovery
The real “winners” in a Turkish insolvency are usually secured creditors. Common forms of security include:
- Pledge over movable assets (equipment, inventory, receivables, bank accounts);
- Commercial enterprise pledge over the business as a whole;
- Mortgage over real estate; and
- Pledge over IP rights (trademarks, patents, designs) and, in some cases, shares.
Secured creditors are paid primarily from the proceeds of their collateral, subject to certain costs and priority items. A bank with a pledge over all receivables or key IP can capture most of the value before unsecured creditors – and certainly before shareholders – see anything.
For a VC, this often means: even if the startup has valuable assets on paper, most of the liquidation value may already be earmarked for secured lenders, leaving equity “underwater”.
4. The fate of IP: crown jewel or lost asset?
In many Turkish startups, the only real asset is IP – software, algorithms, trademarks, domain names, brand, designs. Under Turkish law, IP is part of the debtor’s estate and can be:
- Sold to a third party as a standalone asset;
- Transferred as part of a sale of business; or
- Used in a concordato plan, for example by licensing or assigning it to a newco controlled by creditors.
If IP has been pledged in favour of a creditor, that creditor has priority over the proceeds of its sale up to the amount of its claim. Any VC security over IP must be duly perfected and registered to have effect against other creditors and insolvency administration.
Existing licence agreements may continue or terminate depending on their terms and on insolvency law restrictions. For a VC who invested heavily on the assumption that the startup’s IP is defensible and monetisable, this means that control over that IP in distress situations depends on:
- How it is owned (operating company vs. separate IP holding company);
- Whether there are senior security interests; and
- Whether the VC has any direct rights (pledge, step-in, purchase option).
5. Concordato: restructuring does not mean investor immunity
Concordato is often seen by founders as a “second chance” mechanism. For VCs, however, it is primarily a creditor-driven restructuring:
- A standstill prevents individual enforcement actions for a period.
- A plan is proposed with reductions and/or rescheduling of debts.
- Classes of creditors vote; if sufficient majorities are met and the court approves, the plan becomes binding.
Equity holders are not the protagonists of this process. In practice, VCs as shareholders may be diluted, wiped out or left with a symbolic stake, while new money providers, secured creditors or strategic buyers receive the upside in the restructured entity. Unless the VC is also a significant creditor (for example, via a secured convertible loan), their ability to influence the concordato outcome is limited.
6. Practical lessons for foreign VCs
So, in a Turkish startup bankruptcy or concordato, how protected is a VC really? The honest answer: far less than in the glossy term sheet suggests, unless serious work has been done on downside protection.
Foreign VCs investing in Turkey should consider, together with local counsel:
- Whether part of the investment should be structured as secured debt or convertible instruments rather than pure equity;
- Using pledges over shares and IP, and understanding where those pledges sit relative to bank security;
- Separating critical IP into a different entity, or ensuring contractual rights to acquire or licence it in distress; and
- Reviewing financing documents of existing lenders to see what room is left for junior investors.
Even then, Turkish insolvency law is ultimately designed to protect the collective interests of creditors, not to enforce venture-style preference waterfalls. For anyone deploying capital into Turkish startups, understanding this reality at the entry stage is essential risk management, not pessimism.
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