Entrepreneurship in Turkey: Startup Law and Incentives and Supports for Entrepreneurs

Startup Law, also called Entrepreneurship Law, is an innovative business model that is rapidly developing and we have frequently come across in recent years. The first Startup model emerged in Silicon Valley in the USA and then spread all over the world. Advancements and changes in technology around the world have also contributed to the spread of the entrepreneurship ecosystem. Startups have an important place in the developing entrepreneurship ecosystem in Turkey. According to the “Global Startup Ecosystem Index 2021”[1] report published by the global startup ecosystem research center Startup Blink, Turkey ranked 44th among the 100 countries with the best startup ecosystem. In accordance with the data published by the Investment Office of the Presidency of the Republic of Turkey, in 2020, 179 startups received a total investment of 137 million dollars from angel investors and venture capitalists, while 61 Turkish Startups received 509 million dollars in the first quarter of 2021.

A startup, which does not have a proper equivalent in the Turkish language yet, is also called an “enterprise” (girişim) or “new venture” (yeni girişim) in Turkish, although it is not exactly the same concept. Even though there is no common definition, Startups are projects and initiatives that aim to grow rapidly, offer and use technology suitable for this purpose, appeal to large audiences, deliver the service they offer to customers, meet needs, have continuity, and are suitable for development. In this context, a Startup could be defined as a customer-oriented organization with a growth index, aiming to reach a large audience from a small audience in a short time. Steve Blank, an entrepreneur and a business professor who first introduced the definition of a Startup, defines a startup as “an organization formed to search for a repeatable and scalable business model”. [2]

Although Startup Law does not have separate legislation under Turkish law yet, it is involved in general law areas such as Commercial Law, Law of Obligations, Intellectual Property Law, Labor Law, and Tax Law. In addition to these general legal regulations, Startups should also be evaluated in terms of special regulations such as Personal Data Protection Law, Banking and Finance Law, Capital Markets Law, Investment Law, Competition Law, IT Law, and Consumer Law within the scope of their activities, and in terms of legal areas with the supervisory authorities. Along with Startups, new branches of law such as E-Commerce Law, E-Sports Law, Blockchain Law, and Artificial Intelligence Law have also come to the fore in recent years. In the light of all these general and special legal regulations, it is of great importance to manage efficiently the processes such as the official studies and applications of the Startups before the venture, the necessary legal protections, the protection of the project after the start of the initiative, the realization of the project activities in accordance with the law.

Legal Phases of a Startup

Legal processes can be encountered in almost all phases of the Startup from the beginning. In order to avoid legal risks and disputes that may arise in the future, it is crucial to manage legal processes very carefully and get appropriate legal advice and support. Detailed research should be done on the issues such as that the entrepreneur is not subject to a ban on trading and other profitable activities, that the product or activity subject to the venture is in compliance with the legal order, and that the new venture does not in any way violate the trade name, business name, domain names, intellectual and industrial rights of third parties, etc. In addition, it must be evaluated before starting the activities whether a permit, approval, or authorization from an administrative authority is required for the services or activities subject to the new initiative. Besides, in order to construct each phase of the Startup on a solid legal basis and to protect the Startup afterwards, it is necessary to act in accordance with the law and legal regulations. In cases where the aim of the new venture is to operate in the international arena, it will be necessary to determine the legality of the product or activity subject to national legislation, as well as its compliance with the relevant laws in other countries where it will take place. Fulfillment of these requirements is also very crucial within the scope of the search for future investors and partnership relations, which is one of the primary objectives of Startup projects.

1. Legal Protection of the Idea

The emergence of the idea is the first phase of the Startup project. First of all, it is important to conduct preliminary research on how the new idea differentiates itself and how these differences should be protected within the framework of intellectual and industrial rights. Within the scope of this preliminary research, it should be evaluated whether the idea violates the intellectual and industrial property rights of other real persons or companies. It is essential for Startups to put these ideas under legal protection at the beginning in order to avoid problems such as the use or copying of the new idea by others.

In order to legally protect the project idea as well as the product and service created within the scope of the idea, patents, trademarks, models, and ideas are registered and copyrights are determined in accordance with the Law on Intellectual and Artistic Works No. 5846 and the Industrial Property Law No. 6769. Protection for trademark, design, geographical indications, utility models, and patents are provided within the scope of industrial property, and the work is protected by copyright within the scope of intellectual rights. In this context, in order to protect products, services, and works against third parties, an intellectual property strategy should be established at the very beginning of the process and necessary application and registration procedures should be carried out within the scope of this strategy.

2. Contracts

Startups also encounter contracts, which are one of the indispensable elements of commercial life, at every stage. Within this scope, starting from the first emergence of a new idea, Startups should prepare contracts that will provide them with the necessary legal protection and analyze the contracts they encounter well. The benefits of the contracts prepared in accordance with the processes of the startup are numerous. In general, the contracts: (i) provide the protection of the idea and the enterprise; (ii) contribute to the healthy and stable growth of the enterprise; (iii) bring the relations with investors and customers to a more professional dimension; (iv) contribute greatly to the legal compliance process; (v) facilitate legal review processes for additional investments, share sales, loan purchases transactions, etc. that may occur in the future, and (vi) prevent possible disputes and problems.

The most common types of contracts that startups encounter are as follows: Non-disclosure/Confidentiality Agreement, Term Sheet/Letter of Intent, Articles of Association and Partnership Agreement, Shareholders Agreement, Share Purchase and Sale Agreement, E-Trade Agreements, Franchise/Dealership/License Agreements, Employment Agreements, Agreements and Protocols on the Protection of Personal Data.

3. The Phase of Incorporation

Deciding on the type of company during the incorporation phase of startups is crucial in terms of taxation, the responsibilities of the company and its partners in case of any dispute, and the legal obligations of the company. For this reason, it is necessary to determine the most suitable company type for the activities, purposes, and characteristics of the Startup during the establishment phase of the company. It will be in favor of the company to outline the future business plan during the establishment phase.

According to Turkish legislation, a startup can be established as a sole proprietorship or any type of capital company. However, since the sole proprietorship (private company) is riskier in terms of individual liability, joint-stock or limited liability companies are usually preferred. The reason being that while the partners are responsible for the debts of the company with all their assets in a sole proprietorship, partners are not personally liable in limited and joint-stock companies.

In accordance with the Turkish Commercial Code No. 6102, a joint-stock company is “a company whose capital is determined and divided into shares, and which is liable only for its debts with its assets” and can be established with a capital of at least 50,000 Turkish Liras. Shareholders are liable only to the capital shares they have committed and only to the company. On the other hand, a limited company is “established by one or more real or legal persons under a trade name, its basic capital is determined and this capital consists of the sum of its basic capital shares” and can be established with a capital of at least 10,000 Turkish Liras. The maximum number of partners can be 50 and the partners are not responsible for the company's debts and are only obliged to pay the basic capital shares they have committed.

4. The Phase of Investment

One of the main starting points of Startups is that the project can survive in commercial life and then turn into a revenue-generating value with rapid growth momentum. Parallel to this, there are partnership and investor models in the Startup culture, either by hiring an investor in exchange for the company's share or by transferring the company after the company reaches a certain value. It is important to receive investment for the development, growth, and profit of the Startup. In this context, the types of investors that will potentially apply during the establishment phase of the venture are Angel Investors, Venture Capital, Private Equity, and Crowdfunding.

When partners or investors decide to invest in a Startup project, they consider not only the new business idea but also whether it has a professional financial and legal structure in terms of the values created by the project.

Angel investors are individual investors who want to invest in new ventures with a high potential of risk and return and have sufficient financial background and experience for this. Venture capital investors, unlike angel investors, are institutional investors who invest larger amounts in later phases of the company. Crowdfunding, on the other hand, is the financing of a project or initiative by a small number of people via the internet with small amounts.

Incentives and Supports for Entrepreneurs

Grant and incentive support for Startups in Turkey has increased considerably in recent years. Such incentives provide convenience, especially to entrepreneurs who are afraid of high insurance and tax costs, and support them in realizing their projects. Within this scope, the Capital Markets Board of Turkey has published the Communiqué on Principles Regarding Venture Capital Investment Trusts, which paves the way for the efficient operation of venture capital investment trusts, and also offered an opportunity to fund such investments with capital market instruments.

Some incentives and supports provided to entrepreneurs and investors are as follows;

  • TÜBİTAK – the Scientific and Technological Research Institution of Turkeysupports project-based R&D activities, development, and sustainability of the national entrepreneurship ecosystem through national support programs. Various supports, especially the Entrepreneurship Support Program (Individual Young Entrepreneurship), provide particularly cash incentives.
  • The Ministry of Industry and Technology of the Republic of Turkey provides important incentives for entrepreneurs operating in Technology Development Zones, such as reduced rental fees, income and corporate tax exemptions, wages, and premium support for employees within the scope of Law No. 4691.
  • KOSGEB – Small and Medium Enterprises Development Organization of Turkey – one of the most important entrepreneur support programs in Turkey, provides various opportunities for Startups which consist of the Traditional Entrepreneur Support Program (Geleneksek Girişimci Destek Programı), the Advanced Entrepreneur Support Program (İleri Girişimci Destek Programı) and the Business Plan Award Support Program (İş Planı Ödülü Destek Programı). In addition to these, entrepreneurship training is also organized by KOSGEB.
  • Young Entrepreneur Support (Genç Girişimci Desteği): With the amendment made to Income Tax Law No. 193 on 18 May 2018, an income exemption was introduced for young entrepreneurs. Accordingly, it covers exemption from 3 taxation periods and 1-year SSI (Social Security System) (4b[3]) premiums for entrepreneurs aged 18-29 who meet the specified conditions. The annual portion of 75,000 Turkish Liras of the income obtained during the 3 taxation periods starting from the calendar year in which the activity was commenced is exempt from income tax. Bağ-Kur premiums of those who are insured for the first time as of 1 June 2018 within the scope of 4b will be covered by the Ministry of Treasury and Finance of Turkey for a period of 1 year.
  • Tax support for angel investors: Angel investors who make individual investments in new ventures are defined as individual participation investors (bireysel katılım yatırımcısı) in Turkish legislation, and tax support is provided for real persons holding an individual participation investor license, with an incentive introduced with the article added to the Income Tax Law No. 193 on 15 February 2013.

In addition to these, there are also supports provided by the Ministry of Commerce, İŞKUR (Turkish Employment Agency) and various foundations, institutions and organizations.

Conclusion

Many companies that started their business lives as Startups have become some of the most valuable companies in the world in a short period of time. The best examples are startups such as Airbnb and Uber. On the other hand, Turkey's initiatives such as Trendyol and Getir received large investments in a short time, and Getir continues its growth in Europe and the United States.

Looking at the startup ecosystem researches in Turkey, it is possible to say that the most trending entrepreneurship topics in recent times are the gaming industry, e-commerce, financial technology (fintech) applications, fast delivery, and deep technology (deep tech) entrepreneurship.

As we explained in our article, incentives and supports have been provided to entrepreneurs and investors in Turkey, and favorable conditions have been created for the development of Startups. We believe that many more Turkish startups will grow in our country and around the world with the good management of legal processes from the beginning, the adoption of a correct incorporation approach and, of course, the successful management of investment processes.

Makalenin Türkçesine buradan ulaşabilirsiniz.

 

[3]  The relevant provision constituting the legal grounds for such premiums is article 4, paragraph 1, subparagraph (b) of Social Security and Universal Health Insurance Law No. 5510. Therefore premiums within this scope are practically referred to as 4b.