As a startup founder, we know you have to wear many hats at once. But mastering every field isn’t easy, and dealing with legal matters might not be the most exciting item on your to-do list. However, missing or misstepping on legal foundations can lead a startup into dead ends from day one. This guide offers simple and actionable tips to help you avoid the classic mistakes that many founders make.
Step 01 | Choosing the Right Company Structure
Selecting the appropriate company structure is a critical step for your startup’s long-term strategy. While there’s no one-size-fits-all formula, Joint Stock Companies (Anonim Şirketler) generally offer significant advantages over Limited Liability Companies (Limited Şirketler), especially for startups aiming to grow through investment.
In Joint Stock Companies, shareholders are personally liable for public debts (such as taxes and social security obligations) only if they have management authority. This liability can be entirely removed by transferring representation authority to an external professional or a member of the board of directors. Additionally, shares of Joint Stock Companies held for at least two years are exempt from income tax upon sale, whereas Limited Liability Companies have no such exemptions. This distinction can be crucial for both you and potential investors, particularly in exit scenarios.
Joint Stock Companies are also far more appealing to investors. Accessing many incentives, grant programs, and funding opportunities—or pursuing options like crowdfunding or going public—is only possible under a Joint Stock Company structure. Yes, Joint Stock Companies require a minimum capital of 250,000 TRY. However, only one-fourth of this amount needs to be paid during incorporation, and the remaining balance can be completed within two years.
DON'T
Don’t establish a Limited Liability Company just because it requires less initial capital. Personal liability for public debts, tax disadvantages in potential exit scenarios, and limited access to investment tools could create long-term challenges for you and your startup.
DO
Set up a Joint Stock Company for your startup to protect your personal assets, attract investors, and gain access to more opportunities for long-term growth. Take advantage of the payment flexibility and tax benefits that come with this structure to secure your startup’s future.
Step 02 | Share Certificates
Did you choose to establish a Joint Stock Company so you could avoid paying income tax when selling your shares after two years? Congratulations! However, simply forming a Joint Stock Company doesn’t automatically qualify you for this tax exemption. To benefit from this privilege, your shares must be documented with official share certificates.
A share certificate is an official document in Joint Stock Companies that represents and facilitates the transferability of shareholders’ equity in the company. If share certificates cannot be issued immediately, the company can prepare a temporary document called a "ilmühaber". This serves as proof of ownership and protects shareholders’ rights until the official share certificates are issued. If you attempt to transfer your shares without a share certificate or a temporary "ilmühaber", you won’t qualify for the income tax exemption.
It’s important to note: the two-year countdown for tax exemption starts when these documents are signed and issued.
DON'T
Don’t neglect to issue share certificates or temporary "ilmühaber" documents after incorporating your company. Failing to prepare these documents on time could result in losing eligibility for the income tax exemption during a potential share transfer.
DO
As soon as your company is incorporated, issue share certificates or prepare temporary "ilmühaber" documents. This ensures the two-year countdown toward income tax exemption begins immediately, protecting your interests in future share transactions.
Step 03 | Allocating Founder Equity
One of the earliest challenges you’ll face as a startup founder is determining how to divide equity among your co-founders. Naturally, you’ll want to ensure that each founder’s share reflects their contribution to the company. These contributions could include professional expertise, intellectual property, capital, networks, or other value-adds. However, there are often no objective criteria for measuring these contributions. Every assessment inevitably involves subjective judgment, requiring an honest—though difficult—discussion between co-founders about how equity should be divided.
Beyond the inherent challenges of valuing contributions, there’s another layer of uncertainty: the future. Dynamics within the team or personal priorities may shift unexpectedly. In fact, it’s common in the startup ecosystem for a co-founder to leave the company within the first 12 months. To safeguard founder equity in such cases, implementing a reverse vesting mechanism for co-founders is highly recommended.
Reverse vesting ensures that if a co-founder fails to meet their expected contribution—whether in terms of time, effort, or commitment—or decides to leave the company, their unvested shares must be returned to the company. These shares can then be reallocated to recruit a new co-founder or a critical team member, giving your startup the flexibility to recover from unexpected departures. This mechanism provides a vital safety net, ensuring your startup remains agile and well-equipped to navigate challenges.
DON'T
Don’t divide founder equity without securing commitments for future contributions (e.g., time, effort, or specific deliverables). Failing to implement a system that reclaims shares when a co-founder leaves early can make it harder to fill gaps in your team later on.
DO
Protect your company and its equity by subjecting founder shares to a reverse vesting agreement. This approach safeguards your startup’s flexibility and ensures you won’t be left scrambling to fill critical gaps if a co-founder unexpectedly exits. It also allows you to focus on building your business without worrying about being left in the lurch.
Step 04 | Option Pools
While your co-founders are the driving force that will transform your startup from an abstract idea into a tangible reality, reaching your ultimate goals will require building a strong team of employees, freelancers, and advisors. However, as an early-stage startup, you might lack the financial resources to offer the competitive salaries needed to attract the star players you’re looking for.
In such cases, offering a slice of the pie—equity—can be an effective way to bring in the talent you need and motivate them to become part of your story. By creating an equity pool, you can reserve a portion of your company’s shares to offer team members through structured plans and stock option agreements. This system not only incentivizes your team to contribute toward your long-term goals but also significantly increases their loyalty to the company.
DON'T
Don’t allocate all company shares unconditionally to co-founders, leaving no room for stock options to offer to employees. Doing so could cost you your best chance to recruit and retain the critical talent your startup needs to thrive.
DO
Set aside 10-20% of your company’s shares for an equity pool and design a long-term incentive plan for your team. When creating the pool, carefully and transparently outline details such as the contributions each founder will make to support the pool. Remember, stock option plans require delicate balances, and a poorly executed plan could result in losing the opportunities you sought to gain.
By strategically implementing an equity pool, you’ll ensure your team is motivated, engaged, and aligned with your startup’s long-term vision.
Step 05 | Interns
In Turkish labor law, the term “intern” is not a title you can freely assign to just anyone. It is illegal to hire students or recent graduates as unpaid interns or at wages below the minimum wage unless they are officially referred through certain educational institutions. While startups often turn to interns due to budget constraints, this approach carries significant legal risks.
Keep in mind that interns working without proper legal safeguards—such as contracts or social security coverage—may take their cases to labor courts. If that happens, you could face administrative fines, back wages, and other labor-related liabilities. What may seem like a “small oversight” could have catastrophic financial consequences for your already resource-limited startup. Therefore, it is essential to manage these relationships within the appropriate legal framework.
DON'T
Don’t hire individuals as “interns” to work in a dependent relationship without pay or social security coverage. Creating an employer-employee hierarchy without meeting the minimum legal obligations exposes you to long-term legal risks. Labor courts may classify this arrangement as formal employment, leaving you vulnerable to serious penalties.
DO
For the workforce you need, use project-based freelance contracts (also known as work-for-hire agreements). Clearly define the independent working conditions in the contract, specifying the nature and duration of the project. Pay these individuals fairly—whether it’s a small or large amount—and ensure that their status as independent contractors is preserved. This approach minimizes legal risks while creating a flexible and lawful working arrangement for your startup.
Step 06 | Intellectual Property Assignment
Unlike traditional businesses, startups are built on intellectual and industrial property rather than bricks and mortar. Software code, innovations in business models, design elements, workflows, and similar assets form the backbone of your venture. That’s why, before building your entire vision on a product or service that falls under intellectual property, you must ensure that every right related to that product or service belongs to your company.
In the worst-case scenario, you could grow your startup on a foundation that doesn’t legally belong to you. Years later, when your company is thriving, the actual owner(s) of the intellectual property could appear and demand millions in compensation. Worse yet, you might face criminal charges for intellectual property theft. Even sooner, this issue could raise a red flag for potential investors and derail everything before it even begins.
DON'T
Don’t let people work in an environment where it’s unclear who created what or who owns what. Allowing the intellectual property rights of your key asset to remain outside the company can lead to severe financial and legal problems.
DO
Have everyone who contributes to your startup sign Intellectual Property Assignment Agreements once their work is completed. These agreements ensure that all rights related to the critical “product” or “creation” in question belong exclusively to your company. In these agreements, every word, every comma, matters. Ensure they are drafted in full compliance with legal requirements and that they protect your company’s interests comprehensively.
Step 07 | Data Protection Laws (KVKK & GDPR) and Online Documents
KVKK, GDPR, CPA, CCPA, HIPAA, WTF? Or from another perspective: User Agreements, Terms & Conditions, Privacy Policies, Data Protection Notices, Consent Forms, Cookie Policies, Commercial Electronic Communication Consent Forms, and so on…
Most startup founders are aware that personal data protection and privacy are becoming increasingly important topics. However, confusion often sets in when it comes to understanding what these regulations mean for their startup and what actions they need to take. In many cases, founders either do nothing or, as is often seen, copy and paste a privacy policy they find online—without permission or consideration for its relevance. Taking shortcuts like this, without understanding their implications, could pose a far greater threat to your startup than you might expect.
In the digital age, where your users are everything, finding out that you legally have no right to even one of them could unravel your entire success story.
DON'T
Don’t randomly copy a privacy policy from the internet. Generic templates not only fail to address your startup’s specific legal needs but also create an existential threat to your business’s future.
DO
In these waters, where “DIY” no longer works, seek professional help to prepare the essential data protection documentation your startup requires. Properly crafted compliance documents ensure your startup adheres to legal standards, protects user trust, and avoids regulatory pitfalls.
Step 08 | Board Compliance
One of a startup’s greatest competitive advantages is its ability to move quickly. However, remember this: the decisions you make for your company can’t simply live in your head like the personal decisions you make for your own life. In managing your startup, some critical actions require written resolutions from the board of directors or, when necessary, the general assembly.
These resolutions are essential not only to ensure that your company operates in compliance with the law but also to shield founders and company executives from personal liability. Without them, you could face risks such as transactions being deemed legally invalid, lawsuits and penalties, failed due diligence during investment rounds, or endless disputes between stakeholders over “you said this” and “I thought that.”
DON'T
Don’t neglect board resolutions and attempt to run your startup solely through individual decision-making. Such an approach could lead to non-compliance with legal requirements and undesirable consequences for your company.
DO
Document all major company decisions through board of directors or general assembly meeting minutes. Consult your lawyer throughout this process to ensure every step is legally compliant and protects your startup’s best interests. Proper governance will not only safeguard your business but also provide a solid foundation for future growth.
Step 09 | Trade Secrets and NDAs
You’ve likely heard horror stories about startups losing their intellectual property to competitors or large corporations because they failed to secure their ideas with Non-Disclosure Agreements (NDAs) or, in some cases, Non-Compete Agreements before entering business discussions. Yes, this can happen. But the truth is, it’s relatively rare.
So, when should you ask the other party to sign an NDA? Should you send a confidentiality agreement before every business development or investor meeting?
DON'T
Don’t insist on signing an NDA before every meeting. This can create unnecessary bureaucracy and slow down the pace of discussions.
DO
Understand when NDAs are necessary—and potentially mandatory. Seek professional guidance to determine in what situations and to what extent you should use confidentiality agreements. Use them at the right time and in the right way to protect your startup without impeding progress.
Step 10 | Preparing for Investment
And now, the million-dollar question: “How should a startup prepare for investment?” The best way to answer this question is by working backward. Almost every typical investment process includes a stage known as “due diligence.” At this stage, investors will dive deep into your startup’s administrative, financial, legal, and operational details to uncover any potential risks. Their goal is simple: to ensure they’re not investing in a ticking time bomb.
That inevitable “due diligence day” will come sooner or later if things go well. The best way to prepare your startup for this moment is by “buttoning up your shirt correctly” from the very start. Choosing the right company structure, solidifying relationships between founders, taking data protection seriously, ensuring compliance with legal standards, securing trademark registrations, consolidating copyrights under the company, protecting trade secrets, maintaining clear boundaries with freelancers, structuring equity option plans carefully, and managing all agreements properly—every single step matters. These measures will bear fruit on the day of due diligence.
A startup that operates “as it should” legally throughout its lifecycle will avoid red flags during investor evaluations. This, in turn, allows the founders to sit at the negotiation table with far greater confidence and leverage.
DON'T
Don’t take compliance processes lightly or cut corners. Legal gaps, incomplete documentation, or financial disorganization may raise red flags during due diligence, making it nearly impossible to secure investment.
DO
Start preparing for investment from day one. Ensure your startup is fully compliant across all areas. Proper preparation not only boosts investor confidence but also makes your startup a far more attractive investment opportunity.
18/12/24
Disclaimer: The content provided on this page is for informational purposes only and cannot be construed as advertising, promotion, or any similar intent. It should not be interpreted as legal advice or used without authorization. Reading this article does not establish an attorney-client relationship with our firm.
