Convertible Investment Agreements in Turkey: What Foreign Investors Should Check (2026 Updated Guide)

What should foreign investors check before signing a convertible investment agreement in Turkey? Learn about conversion mechanics, valuation caps, discounts, shareholder rights, corporate approvals, dilution, exit provisions and enforcement risks.

Convertible investment agreements can provide foreign investors with a flexible way to finance Turkish startups and growth companies without requiring the parties to agree immediately on a final equity valuation. Instead of receiving ordinary shares at closing, the investor generally provides funding under contractual terms that contemplate conversion into equity when a defined future event occurs. Although these structures can make early-stage investments faster, they can also create significant legal uncertainty if an agreement copied from another jurisdiction is used without adapting it to Turkish corporate law. Foreign investors should therefore examine not only the valuation cap and discount but also whether the conversion mechanism can actually be implemented, which corporate approvals will be required, what happens if no financing round occurs, how dilution is calculated and what rights the investor receives after conversion.

What Is a Convertible Investment Agreement?

A convertible investment agreement is a financing arrangement under which an investor provides capital to a company and the investment may later convert into shares when specified contractual conditions occur. The conversion event may be a qualified financing round, maturity, company sale, restructuring or another agreed trigger.

The economic objective is often to postpone the company’s final valuation until a later institutional investment round.

Why Are Foreign Investors Using Convertible Structures?

Early-stage companies can be difficult to value. A startup may have intellectual property, technology or substantial growth potential but limited revenue history. Immediate equity pricing can therefore produce prolonged negotiations.

Convertible structures can allow the investment to proceed while postponing part of the valuation discussion.

A Foreign Template Should Not Be Used Without Turkish Legal Analysis

One of the most important risks arises when investors use a document originally designed for another country’s corporate system.

Terms such as automatic conversion, preferred shares, valuation caps and liquidation preferences may have familiar commercial meanings internationally, but their implementation must be compatible with the Turkish company’s legal form, articles of association, existing shareholder arrangements and mandatory corporate procedures.

First Identify the Company’s Legal Form

Foreign investors should determine whether they are investing in a joint stock company, limited liability company or another structure.

The company’s legal form affects share issuances, capital increases, shareholder rights, corporate approvals and transfer procedures.

Is the Investment Debt or Equity?

The agreement should state clearly what the investor receives before conversion.

If the structure operates as debt until conversion, repayment, maturity, interest, default and creditor rights require careful consideration. If the parties intend a different contractual investment structure, that intention and its corporate implementation should be clearly documented.

Ambiguity can become particularly problematic during insolvency or a shareholder dispute.

Define the Conversion Event Precisely

The agreement should not simply state that the investment converts during the “next financing round.”

Define what constitutes a qualifying financing. Consider minimum investment size, type of securities issued, whether related-party funding counts and whether multiple closings are treated as one financing.

Automatic or Optional Conversion?

Determine whether conversion occurs automatically or requires an investor election.

An investor may prefer discretion where the next financing occurs on commercially unattractive terms. Conversely, the company may require certainty concerning capitalization.

The agreement should also address the corporate steps required to implement the agreed conversion.

What Is a Valuation Cap?

A valuation cap limits the valuation used to calculate the investor’s conversion price.

For example, if a later financing values the company substantially higher than the agreed cap, the early investor may convert using the contractually defined capped valuation mechanism.

However, the agreement must specify whether the cap refers to pre-money or post-money valuation and how the capitalization denominator is calculated.

Pre-Money and Post-Money Definitions Matter

A vague reference to “company valuation” can produce major disagreements.

The parties should define whether outstanding options, employee pools, convertible instruments, warrants and other rights are included when determining capitalization.

Small drafting differences can materially alter the number of shares received.

How Does the Conversion Discount Work?

A conversion discount generally permits the convertible investor to acquire shares at a lower price than new investors in the qualifying financing.

The agreement should specify whether the investor receives the better of the valuation-cap price and discounted financing-round price or whether another formula applies.

Include Worked Examples

For significant investments, the agreement should contain or be accompanied by numerical examples showing conversion under different scenarios.

This can expose drafting ambiguities before money is transferred.

What Happens If Several Convertible Investors Exist?

Foreign investors should obtain a complete capitalization table before signing.

The company may already have convertible loans, options, warrants, employee incentives or contractual promises to issue shares.

All potentially dilutive instruments should be identified.

Review the Cap Table Independently

Do not rely solely on a percentage verbally promised by the founders.

The investor should understand the company’s current issued capital and all rights capable of increasing the number of shares.

A fully diluted capitalization analysis can be particularly important.

Existing Shareholders’ Rights Must Be Reviewed

The company’s articles of association and shareholder agreements may contain pre-emption rights, veto rights, transfer restrictions, reserved matters or other provisions affecting conversion.

A convertible agreement cannot be analyzed in isolation from those documents.

Corporate Approvals Should Be Planned Before Funding

Determine which corporate resolutions will be necessary to implement the transaction and eventual conversion.

The agreement should allocate responsibility for obtaining approvals and specify what happens if shareholders or corporate bodies later refuse to take the required steps.

Conversion Should Not Depend on Founder Goodwill

An investor should be cautious where the agreement promises conversion but provides no practical mechanism if founders refuse to cooperate.

Consider contractual undertakings, corporate approvals obtained at closing where legally possible and remedies for failure to implement conversion.

Capital Increase Mechanics Require Attention

If conversion is intended to occur through a future capital increase, the parties should understand how that capital increase will be approved and implemented.

Existing shareholder rights and applicable corporate formalities should be considered from the beginning.

What Shares Will the Investor Receive?

The agreement should identify the economic and governance characteristics of the shares to be received.

Will the investor receive the same class as investors in the qualified financing? Will additional contractual rights apply? What voting and economic rights will accompany the shares?

Avoid leaving these questions until conversion.

Preferred Economic Rights Need Careful Structuring

Foreign investors may request liquidation preference, anti-dilution protection or preferential distribution rights.

These protections should be analyzed together with Turkish corporate-law rules and the company’s constitutional documents rather than merely copied from a foreign financing template.

Anti-Dilution Protection

The agreement should address whether the investor receives protection if the company later issues shares at a lower valuation.

Any anti-dilution mechanism should define its trigger, calculation method and exceptions clearly.

Pro Rata Participation Rights

An investor may want the right to participate in future financing rounds to maintain its ownership percentage.

The agreement should specify how and when that right can be exercised.

Employee Option Pools Can Create Hidden Dilution

A financing round may require the company to create or expand an employee incentive pool.

The investor should determine whether that dilution occurs before or after calculation of its conversion price.

This can materially affect investment economics.

Founder Share Transfers Should Be Reviewed

The investor may wish to restrict founders from selling substantial shareholdings immediately after receiving investment.

Lock-up, right-of-first-refusal, tag-along and other transfer provisions can be considered depending on the transaction.

What Happens If There Is No Financing Round?

This is one of the most important questions.

The company may never complete the expected institutional financing. The agreement should therefore address maturity and alternative outcomes.

Possible contractual outcomes may include repayment, investor-option conversion or another agreed mechanism compatible with the transaction structure.

Maturity Should Not Be Ignored

A convertible instrument without a clear maturity or long-stop mechanism can remain unresolved for years.

Foreign investors should know what happens when the agreed period expires.

What Happens If the Company Is Sold Before Conversion?

A successful startup may receive an acquisition offer before completing another financing round.

The agreement should specify the investor’s rights if a change of control occurs before conversion.

Possible outcomes may include repayment, a contractual premium, conversion immediately before the transaction or another agreed treatment.

Define Change of Control

Do not limit the concept solely to a conventional share sale.

Depending on the business, a merger, transfer of substantial assets or another transaction may effectively transfer control.

The definition should reflect the commercial objective.

What Happens During an IPO?

If an initial public offering occurs before ordinary conversion, the agreement should state how the investment will be treated.

This issue may seem remote for an early-stage company but should still be addressed in sophisticated financing documentation.

Insolvency Risk Requires Special Attention

The investor should understand its position if the company becomes insolvent before conversion.

An expectation of future equity ownership does not necessarily provide the same rights as an existing shareholder interest, and a debt-based instrument can create different consequences.

The agreement’s legal characterization therefore matters.

Review Existing Bank Debt and Security

The company may already have bank loans, shareholder loans, pledges or other secured obligations.

Foreign investors should identify creditor priority and restrictions contained in existing financing agreements.

Representations and Warranties Are Important

The company and, where appropriate, founders may provide representations concerning incorporation, authority, capitalization, financial information, intellectual property, litigation, tax, employment, regulatory compliance and material contracts.

The scope should reflect the investment size and risk profile.

Intellectual Property Can Be the Company’s Most Important Asset

For technology companies, confirm that intellectual property actually belongs to the company.

Founders, employees and independent contractors may have developed important software or technology before appropriate assignment documentation was signed.

This should be investigated before investment.

Founder-Owned Intellectual Property Is a Major Warning Sign

If essential technology remains personally owned by a founder, the investor may be financing a company that does not legally control its principal asset.

Appropriate assignment arrangements should be completed where necessary.

Regulatory Licenses Should Be Checked

FinTech, healthcare, energy, education, aviation, e-commerce and other regulated businesses may require specific licenses or approvals.

A strong investment agreement cannot compensate for a business model that lacks necessary regulatory authorization.

Foreign Investment Restrictions Should Be Reviewed

The investor should determine whether the company’s particular activity creates sector-specific restrictions, approvals, notifications or licensing considerations.

The analysis should be transaction-specific.

Foreign Currency and Payment Mechanics Matter

The agreement should clearly identify investment currency, payment account, timing and conditions precedent.

Bank compliance requirements and the documentation supporting the incoming investment should be prepared in advance.

Know Your Customer and Source-of-Funds Checks

Banks may request corporate documents, ultimate-beneficial-owner information, investment agreements and source-of-funds evidence.

These requirements should be anticipated so that banking delays do not disrupt closing.

Conditions Precedent Protect the Investor

The investor may make funding conditional upon completion of specified matters such as corporate approvals, capitalization confirmation, intellectual-property assignments or delivery of key documents.

Conditions should be objectively verifiable.

Founder Vesting May Be Considered

Where the company’s value depends heavily on individual founders, investors may seek arrangements designed to encourage founders to remain with the business.

Any vesting or leaver structure should be drafted consistently with the company’s corporate arrangements.

Information Rights Should Begin Before Conversion Where Appropriate

A convertible investor may remain outside the formal shareholder structure for some time.

The agreement should therefore consider whether the investor receives financial statements, management reports, budgets or other information before conversion.

Reserved Matters Can Protect Major Investors

Depending on investment size, the investor may seek consent rights concerning significant debt, asset sales, related-party transactions, new share issuances or major changes to the business.

The enforceability and corporate implementation of these rights should be structured carefully.

Most-Favored-Nation Clauses

If the company later issues another convertible instrument on materially better terms, an early investor may seek a contractual right to adopt some or all of those more favorable terms.

The scope and exceptions should be defined precisely.

Tax Consequences Should Be Reviewed Before Signing

Conversion, interest, repayment, share issuance and exit can have different tax consequences.

Tax treatment should therefore be examined alongside corporate structuring rather than after the transaction has closed.

Governing Law Requires Strategic Analysis

Foreign investors sometimes request foreign governing law because their investment template was originally prepared abroad.

However, mandatory Turkish corporate rules can remain relevant to a Turkish company’s share issuance and corporate actions regardless of the contract’s governing law.

The contractual and corporate layers should therefore be coordinated.

Arbitration or Court Litigation?

International investors may prefer arbitration for investment-contract disputes.

The dispute-resolution clause should address seat, language, institution or rules, interim measures and enforcement considerations.

Corporate disputes that involve matters beyond purely contractual obligations should also be considered separately.

Turkish and English Versions Must Be Consistent

Bilingual transaction documents can create disputes where translations differ.

The parties should identify the prevailing language and ensure that corporate terminology is translated accurately.

Due Diligence Should Not Be Eliminated Because the Instrument Is Convertible

The fact that the investor is not immediately receiving shares does not eliminate investment risk.

At minimum, foreign investors should examine corporate ownership, capitalization, intellectual property, material liabilities, litigation, regulatory status and key contracts.

Warning Signs for Foreign Investors

Particular caution is appropriate where founders cannot provide an accurate cap table, the company promises a fixed future ownership percentage without explaining dilution, intellectual property remains outside the company, existing convertible instruments are undisclosed, corporate approvals are unclear or the agreement relies on automatic conversion without addressing how shares will legally be issued.

2026 Transaction Strategy

Foreign investors using convertible financing in Turkey should treat the transaction as both a commercial financing agreement and a future corporate implementation project. Before transferring funds, the investor should model conversion under several valuations, confirm the fully diluted capitalization, review existing shareholder rights, determine the corporate steps required for conversion and establish clear consequences for financing, maturity, exit and default scenarios.

Lawyer Fırat Fesih Kaya advises foreign investors to focus particularly on whether the contractual economic promise can actually be implemented through the Turkish company’s corporate structure. A favorable valuation cap has limited value if the documentation does not provide a workable path to receiving the agreed shares.

Frequently Asked Questions

Can foreign investors use convertible investment agreements in Turkey?

Convertible investment structures may be used, but the agreement and eventual conversion mechanism should be structured consistently with Turkish contract and corporate-law requirements.

Is a convertible investment automatically equity?

Not necessarily. The legal structure of the particular instrument must be examined. The parties should clearly define the investor’s rights before and after conversion.

What is a valuation cap?

It is a contractual mechanism limiting the valuation used for calculating the investor’s conversion price under specified circumstances.

What is a conversion discount?

It generally allows the early investor to convert at a price below the price paid by investors in a later qualifying financing, subject to the agreement’s formula.

What if the company never raises another financing round?

The agreement should address this expressly through maturity, repayment, alternative conversion or another agreed mechanism appropriate to the transaction.

Can the investor receive shares automatically?

The contract may contemplate automatic conversion upon a defined event, but the required Turkish corporate procedures for issuing or transferring the relevant shares must still be considered.

Should the investor review the company’s cap table?

Yes. Existing shares, options, warrants, convertible instruments and other potential dilution should be identified before investment.

What happens if the company is sold before conversion?

The agreement should contain a clear exit or change-of-control mechanism explaining whether the investment converts, is repaid or receives another agreed treatment.

Should foreign investors conduct due diligence for a convertible investment?

Yes. Convertible financing does not eliminate corporate, intellectual-property, regulatory, tax or litigation risk.

What is the most important issue to check before signing?

The investor should verify that the promised conversion economics can actually be implemented through the Turkish company’s corporate structure. The valuation cap, discount and projected ownership percentage should be tested against the cap table, existing shareholder rights, required corporate approvals and future dilution scenarios.

Client-Focused Legal Support for Convertible Investments in Turkey

Fırat Fesih Kaya Law Office assists foreign investors, international companies, startups and shareholders with convertible investment agreements, startup financing, shareholder agreements, capital increases, corporate due diligence, foreign investment structuring and investment disputes in Turkey. Lawyer Fırat Fesih Kaya provides legal assistance from term-sheet and due-diligence stages through drafting, negotiation, closing, conversion and exit.

Phone: +90 312 434 22 22

Mobile / WhatsApp: +90 532 769 22 22

Email: info@firatfesihkaya.av.tr

Address: Mevlana Boulevard No:221, Yıldırım Tower, Office No:148, 06520 Balgat, Çankaya, Ankara, Turkey