Over the past decade, Turkey’s startup ecosystem has witnessed tremendous growth, attracting angel investors, venture capital firms, and international accelerators to a diverse portfolio of tech, fintech, and deep-tech ventures. As the ecosystem matures, convertible loan agreements (CLA), often referred to as convertible notes or investment loans with equity triggers, have become one of the most preferred instruments for early-stage investment. These flexible funding tools allow investors to inject capital into a startup without determining valuation upfront—postponing equity conversion until a future financing round or liquidity event. However, while common in the US and Europe, the legal framework governing convertible loan agreements under Turkish law presents unique challenges and structural limitations that foreign and local investors must understand.
At ER&GUN&ER Law Firm, our English Speaking Turkish Lawyers provide comprehensive legal advisory to both investors and Turkish startup founders during convertible loan negotiations, drafting, and enforcement. As a recognized best lawyer firm in Turkey for technology and investment law, we combine international VC transaction experience with deep understanding of Turkish legal infrastructure. From clarifying tax implications to aligning investor rights with Turkish Commercial Code, we ensure that your investment instruments are enforceable, tax-compliant, and strategically structured for scalability.
What Is a Convertible Loan Agreement?
A convertible loan agreement (CLA) is a financial instrument where an investor provides a loan to a startup with the contractual option (or obligation) to convert the loan into company equity at a later date. Typically used in early-stage financing, CLA terms may define triggers such as a qualified financing round, a valuation cap, a discount rate, or maturity conversion clauses. In some structures, interest may accrue and convert into equity alongside principal. CLA models offer an alternative to direct equity investment and avoid immediate valuation negotiation—which can be difficult for pre-revenue or pre-product-market-fit startups.
However, under Turkish law, CLAs must be carefully structured to avoid reclassification as unauthorized share issuance, hidden capital contributions, or invalid capital increases. Since share capital in Turkey is tightly regulated by the Turkish Commercial Code (TCC), any equity-related arrangement must comply with formal registration, capital increase procedures, and shareholder consent protocols. Our Turkish Law Firm assists clients in aligning their CLA structure with the company’s Articles of Association, trade registry requirements, and potential foreign capital registration (if applicable).
Difference Between Convertible Loan and SAFE Agreements in Turkey
In startup ecosystems such as Silicon Valley, many early-stage investors prefer using the SAFE model (Simple Agreement for Future Equity), which is even lighter than a CLA—it provides capital in exchange for a future equity promise without debt characterization or repayment obligations. While SAFE notes are popular in global venture deals, they are not yet directly recognized under Turkish law, and may create enforceability gaps in the absence of statutory or contractual protections.
In contrast, a convertible loan agreement is structured as an actual loan, with a defined repayment obligation, maturity date, and interest—unless conversion is triggered. Turkish courts are more likely to recognize and enforce properly drafted CLAs, especially if they comply with general contract law (Turkish Code of Obligations) and corporate governance rules. At ER&GUN&ER Law Firm, we often advise foreign VCs to choose convertible loan structures over SAFEs unless they are accompanied by enforceable side agreements and tailored clauses that mimic debt-backed obligations.
Core Terms of a Convertible Loan Agreement in Turkey
A well-drafted convertible loan agreement in Turkey must go beyond standard international templates. It should include core commercial and legal terms that satisfy both the investor’s protection needs and Turkish law’s formalities. Among the most critical clauses are:
- Principal Amount: The loan sum, repayment currency, and drawdown structure
- Interest Rate: Whether the loan accrues interest, and if interest is converted or paid in cash
- Valuation Cap and Discount: The ceiling valuation at which conversion occurs and discount rate at next equity round
- Qualified Financing Definition: Threshold for triggering automatic conversion
- Conversion Mechanism: Timeline, share class, and percentage issued upon conversion
- Repayment Terms: Options if conversion does not occur by maturity
- Investor Rights: Information rights, protective provisions, preemption or veto clauses
Our venture capital lawyers in Turkey customize each convertible note based on the startup’s existing shareholding structure, financing roadmap, and cap table complexity.
Tax and Capital Markets Considerations
Convertible loan agreements can have significant tax consequences for both the startup and the investor—especially when foreign funds are involved. Incorrect structuring may trigger VAT, withholding tax, or income recognition for the startup at the time of conversion or repayment. Moreover, if the investor is a foreign legal entity, Central Bank reporting obligations may apply. If the loan is classified as quasi-equity or “atypical contribution,” Turkish corporate tax laws may recharacterize it as equity and impose penalties.
We work closely with tax advisors to ensure the convertible instrument is documented in a way that minimizes tax risk. Where necessary, we obtain advance rulings from tax authorities or structure investment through holding vehicles that benefit from double tax treaties or tax-exempt jurisdictions.
Internal Legal Resources for Startup Investment
- How to Form a Startup in Turkey
- Technology Contracts for Startups
- Director Liability in Turkish Companies
- Corporate Tax for Foreign-Backed Startups
- Trademark Licensing in Turkish Startup Models
Frequently Asked Questions (FAQs)
- Is a convertible loan agreement legal in Turkey? Yes, but it must comply with Turkish Code of Obligations and corporate governance law. Unregistered share issuances may be deemed invalid.
- Can I use a SAFE agreement in Turkey? Not directly. SAFE models are not defined in Turkish law and may face enforceability issues unless supplemented with hybrid clauses.
- Does the convertible loan have to be notarized? No, but it must be signed by authorized representatives and compliant with company articles. Share conversion may require notary steps.
- What happens if the startup is sold before conversion? The agreement should define change-of-control consequences—e.g., automatic conversion, repayment premium, or equity participation.
- Can the investor demand repayment if conversion doesn’t happen? Yes, unless otherwise waived. Maturity and default clauses govern repayment or extension rights.
- What tax applies on conversion? There is no tax on share issuance, but capital gains and VAT risks may apply on exit or resale.
- Is Central Bank approval required? Not for the agreement itself, but foreign currency inflows must be declared through banks for regulatory reporting.
- How can a Turkish Law Firm help? We structure the CLA, negotiate terms, ensure enforceability, and guide the entire lifecycle from investment to conversion or exit.
Secure Your Startup Investment in Turkey with Expert Legal Structuring
Convertible loan agreements are among the most flexible and founder-friendly ways to fund early-stage companies—yet under Turkish law, they require deliberate drafting and strategic legal input to function as intended. Whether you are a Turkish entrepreneur raising your first round or an international investor entering the local ecosystem, legal missteps in a convertible agreement can jeopardize future equity rights, trigger tax liability, or complicate exits.
At ER&GUN&ER Law Firm, our experienced English Speaking Turkish Lawyers provide end-to-end legal support for startup investments, convertible instruments, and early-stage deal structuring. As a best Turkish law firm for startup transactions, we combine commercial insight with deep regulatory understanding to deliver investor-ready, enforceable solutions. Let us help you navigate the legal landscape of Turkey’s growing innovation market with confidence and legal clarity.