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What is a Start-up?
Adem AKKIR, one of MGC Legal’s Partner Attorneys, writes about “Entrepreneurship and its Legal Aspects in Turkey” and the specifics of a start-up. So, What is a start-up?
“Start-up” refers to a new and growing company. It emerged at the end of the 20th century and has become increasingly popular recently, particularly with the rise of technology and globalization.
Start-up is an innovative, new, risky enterprise aiming for rapid growth, such as a new business, product, or service. Usually, start-ups have limited funding, resources, and a small team but with high-growth potential. The goal of a start-up is usually to grow quickly and create a successful, long-lasting company or business.
In its simplest form, a start-up refers to a business that has recently been established and is in its early stages of operations. However, in a technical sense, being newly established is not the only criterion for a business to be considered a start-up.
It must also focus on technology and innovation and differentiate itself from traditional forms of entrepreneurship by emphasizing growth and change. Start-ups are young companies open to investment, brought together by one or more entrepreneurs to create innovative products and services. They are characterized by a focus on new, cutting-edge technology and a desire to disrupt traditional markets and create new opportunities.
The characteristics of start-ups, stemming from their corporate structures, have often led to these ventures being promoted and supported. In fact, today, incentives and supports are almost synonymous with the start-up concept.
What is The Partnership Structure of a Start-up?
The partnership structure of a start-up typically involves a group of co-founders or partners who come together to establish the business and share in its ownership and management. The most common structure for a start-up is the Limited Liability Company (LLC) or Incorporated Company (Inc), which have become the dominant forms of the commercial organization worldwide since the early 1900s. These traditional company types are characterized by having a legal entity, freely transferable shares, and limited liability.
These company types are also widely used types for start-ups. When determining the type of a company, the characteristics of anonymous and limited companies should be examined, and the appropriate type of company should be determined based on the needs of the start-up. Once the type of company has been determined, it is critical that the amount of capital the company will need, the partnership structure, management, acquisition, exit processes, shareholders agreements, and company bylaws are determined by rules set by the company’s Articles of Incorporation.
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Additionally, as previously mentioned, the start-up concept is particularly distinct from traditional businesses in terms of technology and innovation. It is often associated with concepts such as incentives and support. This can lead to rapid changes in the partnership structure of start-up companies.
In this context, different factors such as “angel investor” partnerships, corporate venture capital, incubators, strategic alliances, joint ventures, or sponsorships given to entrepreneurs can affect the formation of a start-up’s partnership structure. For example, a start-up that receives investment through the equity-based crowdfunding method may have many partners who own small shares.
Historical Development of Start-up Law
The concept of start-up emerged related to the rise of Silicon Valley. This technology center, concentrated around Stanford University, has had a major impact on the world’s technological development since the 1970s.
At this point, the belief in technology’s role in human development and the idea that the internet could change the world led to start-ups being considered not just a business venture but also a social phenomenon. This period also marks the beginning of the professionalization process regarding start-up law. Success stories of companies like “Amazon” and “Netscape” led to the illusion that anyone registering a domain name could start a successful start-up in the early 2000s.
This led to a loss of control and the bursting of the dot-com bubble, resulting in one of the global economic downturns of the period. After the dot-com bubble, the start-up community learned from this experience and continued its journey more rationally, increasing its speed. As a result of this process, start-up entrepreneurship has been approached not as garage adventures but as professional and planned process management.
The liberalization of the economy, an open global market, and the ease of doing business through the internet have resulted in the start-up sector being considered a driving force, especially in developing economies. The reshaping of global trade in the online environment and the technology-centered approach has led to being considered not as an alternative but as a necessity for businesses.
Accordingly, Research and Development (R&D) units have become an integral part of companies. The change observed in the commercial sphere has also reshaped the legal dimension of the subject, and the process has begun to be referred to as “Start-up Lawyering 2.0“, which refers to innovation.
The Coronavirus disease (COVID-19) pandemic has also led to significant changes in start-up entrepreneurship. Start-ups have faced many challenges in switching to remote work, sourcing and distributing products and developing new ideas that cater to current conditions. In this context, the growth of e-learning and video meeting can be an example of how start-up ventures can come to the forefront in difficult times.
What is The Scope of Start-up Law and its Relationship With Other Law Branches?
Start-up law is a discipline that examines the application of various laws that a start-up company will encounter from the moment of the idea to the establishment, growth, and exit stages. It is an efficient and systematic integration of these laws into the company efficiently and methodically. There is no direct law for it.
For example, a start-up company operating in e-commerce must comply with requirements such as the protection of personal data, primary and secondary legislation on consumer protection, primary and secondary legislation specific to e-commerce, and regulations and supervision by the regulatory and supervisory authorities regarding the products and services it offers. This is where start-up law and the lawyers/attorneys studying it must examine these laws.
This field is considered a young, dynamic, interdisciplinary field of law that attracts attention. Although start-up law is primarily based on private law, it is also closely tied to public law. The government largely implements the incentives and support provided to start-ups in the start-up ecosystem.
Additionally, start-ups often operate in sectors such as technology and information, which are subject to heavy government oversight and require various permits or licenses. In this respect, start-up law can be seen as having a close relationship with administrative and tax law.
As start-ups grow over time, they tend to increase the number of employees and diversify their business relationships. As a result, start-up law often intersects with contract law in terms of relations with business partners and labor and social security law regarding relations with employees.
What Are The Legal Stages of a Start-up?
The life cycle of start-ups refers to the stages a business goes through, from discovering an innovative idea to its implementation and eventual consumption. The different stages of the life cycle of a start-up are manifested in the legal sphere as legal stages of the start-up. These stages can be listed as follows:
Before the establishment of the start-up, it consists of the person or people who come up with the idea and are moving to put it into practice. The pre-establishment stage is important for the idea to move forward with solid steps. If the venture is a partnership, the legal relationship between the partners must be established on a solid foundation. Suppose the start-up is going to be established by raising investment from third-party investors. In that case, the legal relationship between the investor partners and the start-up must be established on a solid foundation.
When entrepreneurs decide to put their innovative ideas into practice, the first concrete step is usually to establish a company. Establishment, which comes from the Latin word “corpus” (body), refers to the creation of a legal personality separate from the legal personalities of the founders and the conduct of all business and transactions by that legal personality.
The main advantage of establishment is the limited liability of the company shareholders and the fact that they are not held personally responsible for the company’s debts. Establishment facilitates the transfer of shares in the company. Tax advantages are created in the transfer of shares after a certain period of time. Also, it is possible to benefit from tax advantages and government incentives with the establishment.
The establishment stage and the incorporation process represent the transition of a start-up from an abstract idea to a concrete venture. Businesses that successfully pass this process will go to the “seed stage” to collect their future fruits. In this stage, the start-up raises the capital required for advanced development through investors and financing.
There are many ways to raise initial capital through investors. For example, financing through high-net-worth individual investors, investments through crowdfunding (a collection of individual investors), and venture capital funding (typically corporate investors acting on behalf of a fund) can be provided.
As the venture moves from the seed stage to a more experienced organization that has raised investment and is selling products, new commercial concerns such as global partnerships or increasing production capacity may arise. Financial growth and an increase in the number of employees may lead the company to face institutional and legal challenges that it was not previously familiar with. Additionally, developments and changes in the maturity stage may necessitate a start-up to seek support from third parties in areas such as consultancy, licensing, or distribution.
In this context, the maturity stage is one of the stages where a start-up may need the most legal support in everyday and occasional situations.
Realization / Liquidation stage
The legal existence of start-ups ends in the realization/liquidation stage. However, it should be noted that there is not always an “exit” scenario in which the activity is abandoned in every venture. For example, a company achieving high profitability and earning value through dividend payments is also possible.
The end of the legal existence of a successful start-up typically occurs when investors who have contributed to the start-up in the past demand a return on their investments. This return generally occurs through the sale of shares or assets of the venture, a merger with another company, or an initial public offering.
In other cases, the legal life cycle of a start-up is no longer commercially viable, and the liquidation process begins. This process, which starts with the winding up of the commercial activities of the start-up, ends with the distribution of the assets of the start-up among the shareholders.
What Are The Industrial and Intellectual Property Rights in Start-ups?
Entrepreneurs often focus on the product, service, or technology that will be produced when creating a start-up. However, how the product or service is produced and protecting the idea behind it is also important because the product or service will only have meaning if it is protected against unauthorized interventions by third parties.
In this context, industrial and intellectual property rights are important in terms of preventing others from using the new technology and similar creations established by entrepreneurs without permission.
Related Article: Brand Protection in Turkey.
Secondly, industrial and intellectual property rights enable entrepreneurs to convert their intellectual outputs during the production phase into marketable commercial assets. Also, properly protecting intellectual property rights provides a sense of security for potential investors.
When it comes to industrial and intellectual property rights, “brand and patent” are usually the first things that come to mind. In the context of industrial property rights, the venture’s name, logo, or slogan (or products and services produced by the entrepreneur) is protected. A patent protects technical inventions and technological innovations at the center of the start-up.
In addition to brand and patent rights, copyright and trade secrets are intellectual property rights to be protected. Under the scope of intellectual rights, various creative works such as website and application source codes, UI-UX designs and graphics, videos, and sound recordings can be considered as marketing materials.
Trade secrets, in particular, refer to important information in production and creation processes. Unlike other intellectual property rights, trade secrets cannot be protected by registration or records by nature. Therefore, the responsibility of protecting trade secrets mainly belongs to the start-up. In this regard, confidentiality clauses and non-disclosure agreements must be included in contracts with business partners such as employees or sellers.
The intellectual property rights of a start-up operating in Turkey are protected under a broad legislative framework, both at the national level, such as the Law on Intellectual and Artistic Works No. 5846, the Industrial Property Law No. 6769, and the Law on Protection of Integrated Circuit Topographies No. 5147, as well as at the international level, such as the Paris Convention, the European Patent Convention, the Berne Convention, the Rome Convention, and the WIPO Copyright Treaty.
What Are The Important Considerations in Start-up Law?
Entrepreneurs can face several legal issues or obstacles when bringing a start-up to life. At this point, particularly in the context of the start-up’s establishment and growth process, the following situations should be taken into consideration when dealing with employees, third-party organizations, and investors:
- When a start-up has multiple founding partners, it can be beneficial to make detailed agreements about the business relationship details beforehand. In this context, when examples such as the Zuckerberg/Winklevoss Facebook lawsuit, which is the subject of movies, are considered, it can be stated that it is very important for the relationships between the founding partners in the start-up to be regulated by corporate and professional agreements such as shareholders agreements that bind to a set of rules.
- Another point that should be paid attention to in the context of start-up law is related to the legal status of the venture. If legal support and comprehensive consulting services are not received in the establishment phase, mistakes can be made in the choice of company type or partnership structure. This can cause the start-up to be disadvantaged in terms of benefiting from future investments and incentives.
- It is necessary to pay attention to industrial and intellectual property rights in a wide process, from determining the company name to taking the domain name, trademark, patent, software, etc.
- If the start-up operates in share markets and securities exchanges during its development process, it is also essential to carefully manage these activities, which require technical legal knowledge.
- Start-ups must also pay attention to the tax obligations related to their business. If the legal requirements in the context of tax obligations are not paid attention to, the start-up and even the entrepreneur themselves may be faced with tax burdens, criminal sanctions, and administrative sanctions.
- Start-ups must pay attention to labor and social security laws, particularly in employee relationships. In this context, key topics that should be given attention include information related to workers and employers, job definitions, contract and trial periods, wage information, overtime conditions, dismissal, and compensation terms.
- Nowadays, permission must be obtained from relevant authorities in order to operate in many sectors. These permissions, linked to certain conditions in the legislation, are taken for public order and security. For example, when considering a “Fintech Start-up” operating in Turkey, it must comply with regulations and obtain certain permissions from many institutions, such as the Capital Markets Board, the Personal Data Protection Authority, the Ministry of Treasury and Finance, and the Central Bank. At this point, it would be useful for start-ups to consider the technical regulations from a legal point of view to ensure that business processes are carried out healthily.
- In modern commercial life, a start-up conducts its relationships with parties such as consumers and suppliers through contracts. In this regard, it is often seen that start-ups in the early stages mostly use standard contracts. Of course, it is natural for a start-up to use standard contracts and not draft new ones every time. However, a start-up needs to have access to legal knowledge to the extent that it can make changes to contract drafts when necessary and correctly negotiate contract offers from stakeholders.
Why Do Start-ups Need Professional Support?
Start-ups generally need professional support because they are new ventures with little institutional memory and require expertise in legal matters, business operations, and networking. As mentioned before, a start-up is not just a commercial organization but also a venture focused on technology, change, and innovation.
Statistically, 9 out of 10 start-ups fail and end their activities early in their life cycle. In this context, the choices made by entrepreneurs, taking into account the requirements of today and the future, will be decisive in the life cycle of a start-up. In practice, new ventures often try to manage their business processes without legal support or receive support from people who are not experienced in start-up law.
In this process, legal advice will be beneficial. Given the complex and multidisciplinary structure of start-up law, which deals with many interrelated laws, it is easy to say that this field is not limited to legal knowledge and interpretation in a specific area and that it is necessary to adopt various institutional skills in multiple disciplines and to evaluate a wide range of needs in order to specialize in this area.
Examples of legal support that a start-up may need include issues arising from the company’s operation, tax benefits, investment incentives, licensing or permit requirements in the field of activity, liabilities arising from environmental regulations, sustainability, information security, and protection of personal data. Additionally, the new technologies and approaches at the center of start-up ventures require legal support from lawyers who are also familiar with these technologies and approaches.
What is an Angel Investor?
It is impossible to pass the “Angel Investors” when discussing start-ups without opening a parenthesis. Angel investors are wealthy private investors focused on financing small start-up ventures in exchange for a certain share of the venture.
Angel investors differ from venture capital firms in using their own capital. Angel investors are more patient with entrepreneurs and are open to contributing with small capital spread over a long period; these are other aspects that differentiate it from venture capital.
Angel investors generally finance start-ups still in the thought or establishment phase. Although these initiatives have the potential to generate profits through partnership, they still need capital to develop or grow products.
It should also be noted that the high risks faced by start-ups also motivate angel investors to contribute to the venture through mentoring or by offering direct management assistance.
Legal Overview of Angel Investors and Start-ups
Angel investors are called individual participation investors in the Turkish legal literature. The legal relationship between the investor and the start-up is regulated in the Regulation on Individual Participation Capital published in the Official Gazette dated 15.02.2013 and numbered 28560. In the context of the Regulation above, angel investors, that is, individual participation investors, refer to real persons who transfer their assets and/or experience and knowledge to companies at the start-up or growth stage. On the other hand, the Regulation defines the start-up entrepreneur as a real or legal person who wants to establish their own business based on an idea.
While determining the definition of investor in the Regulation, it is noteworthy that the angel investor’s role in non-financial issues such as mentoring is also indicated by the special mention of personal experience and knowledge apart from capital.
Another point that should be mentioned in the legal context is the legal status of start-ups in Turkey. In accordance with the Regulation on Individual Participation Capital, a venture, namely a start-up, refers to a joint stock company in which the individual participation investor is a partner by investing to invest. From this point of view, it is useful to pay attention to the fact that start-ups that want to develop cooperation with angel investors are organized as joint stock companies.
In order to operate as an angel investor, that is, as an individual participation investor, a license must be obtained from the Ministry of Treasury and Finance. An investor who wishes to obtain a license must meet any of the conditions defined in the Regulation as an investor with high income or wealth or an experienced investor. The license period foreseen for the individual participation investor is five years, which can be extended into five-year periods.
In the regulations on the subject, it is pointed out that individual participation investors must comply with the investment limit and fields of activity and the minimum and maximum amounts stipulated in the legislation.
Finally, the business plan and the articles of association, which form the basis of the legal relationship between the individual participation investor and the venture, are subject to the supervision of the Ministry of Treasury and Finance.
What Does it Mean to Be a Unicorn and a Decacorn?
- “Unicorn” is a colorful term that stands out in start-up law. It refers to start-ups valued at one billion dollars or more by a venture capital firm. The term was first used by Aileen Lee, the founder of Cowboy Ventures, in 2013.
- The term “Decacorn” refers to start-ups with a current value of over 10 billion dollars. Here, it can be said that decacorn companies are the more advanced versions of Unicorn companies. Decacorns are different from Unicorns and their derivatives not only in terms of size but also in terms of revenue and business model.
What is Exit? What Are The Legal Issues to be Considered While Exiting?
“Exit” refers to the transfer or sale of shares in a start-up that has reached a certain value. Having a good exit strategy is crucial for the smooth operation of a start-up’s life cycle. Although each venture has its own unique challenges, important topics to consider when creating an exit strategy for a start-up can be summarized as follows:
Creating an exit strategy ensures that the venture’s plans are made correctly. In this regard, a good exit strategy requires determining a timeline, incorporating that timeline into a well-defined process, and structuring the company in a way that can take advantage of any opportunity along the way.
When creating an exit strategy, difficulties such as maintaining competitiveness in changing market conditions may arise. In this case, a well-managed exit strategy can also allow the venture to benefit from new opportunities by moving beyond its current business horizon. A well-functioning exit strategy for a venture that is supported by strategic goals, short and long-term milestones, and a long-term plan that is well-structured and organized will lead the company to an exit the right way.
What Are The Incentives and Supports For Entrepreneurs in Turkey?
In Turkey, various incentive and support programs have been established to support start-up ventures and to promote the development of the Turkish start-up ecosystem. These programs can be grouped as follows:
The TUBITAK BIGG, or Individual Young Entrepreneur, is a support program provided by TUBITAK for technology and innovation-based projects with economic value-adding potential. The program is also known as the “1512 Program” within the context of TUBITAK’s support programs. The goal of the program, as stated in relevant legislation, is to support the activities from the idea stage to market for technology and innovation-focused business ideas in order to transform them into high-potential ventures for creating value-added and qualified employment.
Individual Participation Investor Accreditation: “Accreditation of Individual Participation Investors” by authorized institutions provides them with certain incentives and benefits. The accreditation process for “Individual Participation Investors” is carried out by the Ministry of Treasury and Finance under the 253rd article of Presidential Decree No. 1. In this context, the document that grants the opportunity to benefit from government support and given to individual participation investors who meet the established criteria is called an “Individual Participation Investor License“. For example, Individual Participation Investors who meet the criteria set by the Ministry of Treasury and Finance and hold the equity shares of fully taxable venture companies for at least two full years are able to benefit from tax support according to the temporary 82nd article of Income Tax Law of Turkey.
Venture Capital Investment Funds: “Venture Capital Investment Funds” are non-corporate entities that are authorized by the Capital Markets Board to collect money or equity shares from qualified investors in exchange for participation shares and manage a portfolio, in accordance with the principles of trust-based ownership, based on the provisions of the Capital Markets Law no. 6362. Through a statute, portfolio management companies can periodically establish Venture Capital Investment Funds, venture capital portfolio management companies, and real estate and venture capital portfolio management companies. These funds primarily aim to provide financial and/or corporate support to start-up companies and to develop the Turkish technology entrepreneurship ecosystem.
The “Technology Transfer Accelerator Turkey” (TTA Turkey) is a support program that aims to commercialize research in applied sciences at universities, focusing on spreading to less developed regions in the country and increasing the technology transfer market in Turkey. The TTA Turkey Program has supported technology-based ventures in cooperation with institutions of the European Union and the Republic of Turkey since 2014.
The “Turkish Growth and Innovation Fund“ is a fund established to support innovative and technology-focused businesses with high growth potential, established with the cooperation of the European Union institutions, the Ministry of Treasury and Finance, the Small and Medium Enterprises Development Organization (KOSGEB), and the Industrial Development Bank of Turkey (TSKB). This Fund, the successor of the Istanbul Venture Capital Initiative, continues to contribute to developing the venture capital ecosystem in Turkey.
The KOSGEB TEKMER Support Program: This support program aims to establish and operate structures that provide pre-incubation, incubation, and post-incubation services in cooperation with actors in the entrepreneurship ecosystem in order to ensure the establishment and sustainability of businesses in the fields of R&D, innovation and technological entrepreneurship in line with national plans and programs.
The Venture Capital Support Program: TUBITAK’s “1514 code” Venture Capital Support Program aims to commercialize early-stage innovations with high development potential by supporting the establishment of venture capital funds that participate in the commercialization of products and/or technologies resulting from R&D and innovation activities of early-stage technology-based companies, in the form of non-repayable grants (subsidies) to Technology Transfer Offices, Technology Development Zones, and Research Infrastructure that the eligibility criteria have approved.
Capital Market Board Crowdfunding Regulations: Crowdfunding, as defined by the Crowdfunding Regulation issued by the Capital Market Board, refers to the process of raising funds for a project or start-up venture through platforms without being subject to the provisions of the law regarding investor compensation, as determined by the board, per the established rules to provide the necessary funding for a project or start-up company. Crowdfunds can be established based on equity and debt, aiming to finance start-ups through small investors.
Crowdfunding by The Capital Markets Board: Crowdfunding, as defined in the Crowdfunding Regulations issued by the Capital Markets Board, refers to the process of raising funds for a project or start-up company through platforms without being subject to the provisions of the law regarding investor compensation, following the principles established by the board. Crowdfunds can be established based on shares or debt and aim to finance start-ups by small investors.
Brand and Turquality® Support: The “Branding and Turquality Program“, established under the Decision on Export Supports, dated 08.2022 and numbered 5973, which came into effect by Presidential Decree, is implemented within the Ministry of Trade of the Republic of Turkey. This program foresees the provision of specific support to Start-ups in the following areas:
- Promotional support,
- Trade fair support,
- Consultancy support,
- Franchise support,
- Storage service, unit rental/basic setup/concept architectural design support,
- Employment support,
- Patent, utility model, industrial design registration and overseas trademark registration/renewal/protection support,
- Market entry document, certification, and clinical testing support,
- Market research study and report support.
Keywords: Start-up, Start-ups in Turkey, What is a Start-up?
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