Interest in Start-Up culture is increasing day by day. What is the Start-Up Law in the journey from an idea to the exit? In summary, what is the legal dimension that an entrepreneur will need? We will discuss this in this article.
What is a Start-Up?
First of all, let’s start with what the Start-Up concept is, which emerged in the United States in early 2010 and spread rapidly around the world. It is the name given to the processes of entrepreneurs who set out with the idea of finding a solution to a problem.
Start-up Law was born in the United States of America, which is the place of origin, and it does not find its equivalent at every point in Turkey. But the situation is not as dire as it is thought.
The start-up ecosystem has gained a place in Turkey and we could see that it is supported by the authorities. The legal assistance that an entrepreneur needs is shaped according to the field of the start-up.
However, it is an inevitable fact that every entrepreneur needs legal assistance. Even if there is no specific Start-up law legislation, the entrepreneur will need legal assistance from the protection of the entrepreneurial idea to the establishment of a company in the State of Delaware. In other words, it is not necessary to be sued in order to need a lawyer. Such understanding can have negative consequences for both your precious time and your capital investment.
Although Turkish Law has not given entrepreneurs a separate qualification, entrepreneurs are subject to the Law on Intellectual Property, Competition, the Law of Obligations, especially shareholder and partnership agreements, the decisions of the Competition Authority, and the Industrial Property Law.
It is useful to be aware that the law they are subject to will vary according to the sector of the enterprise, for example, an internet-based start-up will be subject to the Personal Data Protection Law.
It is of great importance to follow the whole process meticulously beginning with the stage of the idea, from sales to receiving investment. Let’s take a look at Start-up Law, which we will examine under many different headings, from the protection of the idea to incorporation.
Protection of Intellectual Property
It is quite clear that a mere idea cannot be legally protected, but Intellectual Property Law is important for an entrepreneur. Namely, the concept of Intellectual Property is an area that includes many different areas and can ensure that the project you develop is protected on a legal basis.
Trade Mark Registration for Start-up
A trademark, as defined in the law, is a sign used to distinguish one company’s product or service from another company’s service or product. 45 different classes of trademark rights can be obtained separately or collectively. It is possible to provide symbolic protection to your enterprise by protecting your logo design together with the trademark on legal grounds.
Obtaining a Patent
A patent is a right that technically shows who owns an invention and how it can be used, and handles the product in a much more scientific and technical way. Naturally, the application process must be done in detail. There are three basic conditions for obtaining a patent. The former distinction of patent without examination and patent with examination has been abolished and all patents can be obtained with examination.
In the aforementioned technical application process, three basic qualifications are required,
The invention step must have been passed, industrial applicability, i.e. the possibility of mass production, and the invention must have an innovative character. When these conditions come together, your invention can be patented. If this application is examined by the Turkish Patent and Trademark Office and it is decided that the patent belongs to you, your patent can also be obtained abroad with the correct application process. The patent term is valid for 20 years from the moment it is granted, after which it is assumed that your invention is in the public domain.
A patent is a technical right that shows who owns an invention and how it can be used, and handles the product in a much more scientific and technical way. Consequently, the application process must be done in detail. There are three basic conditions for obtaining a patent. The former distinction between unexamined patents and examined patents has been abolished and all patents can now be obtained with examination.
Can Software be Patented?
While it is critical for entrepreneurs to protect their software, in Turkey, they can only benefit from copyright protection due to the legislation. In Article 2 of the Law on Intellectual and Artistic Works, where you can get protection for your source codes just like a work of art, IT software is considered a work. However, for your design to be considered as a work, it must be at a stage that can produce a program result.
Contracts for Start-Up
The key to securing the legal aspects of a start-up, both liability-wise and financially, is the drafting of appropriate contracts at many stages. Start-ups need many contracts. From non-disclosure (NDA) agreements to service agreements, or from the division of shares with entrepreneurs who contribute to the project to partnership, various contracts need to be drawn up.
It is important to remember that it is in the best interest of the parties to have these agreements reviewed by a lawyer.
Legal Aspects of Partnership Processes
The concept of partnership is seen as beneficial for a start-up by entrepreneurs and investors. The fact that the decisions to be taken about the company are not taken by a single person makes the process more consistent. It can be inferred that the investor is pleased to see more than one responsible. So, let’s discuss what the Partnership Agreement requires for this partnership to be on a legal basis and how necessary it is.
It is important to draw up the Partnership Agreement before the establishment of your company, before the start of the planned business, as it will protect the rights and interests of both partners in the start-up process. This agreement can be concluded between the two partners at the beginning of the start-up idea and fixes the operation of the business on a legal basis. This contract can be renewed, amended, and updated as the parties see fit under the freedom of contract from the incubation period to the investment.
Another dimension of the partnership agreement is the Shareholder Agreement. In this agreement, while the start-up is gathering investors, it is regulated what kind of intervention rights the investors have in the functioning of the process, how the shares will be divided, and which shareholder will have what kind of rights.
Another critical issue in the division of shares is to regulate what kind of influence they will have in the departmentalization process following the technical structure of the company, who will have a say, and how much they will own shares. It should not be forgotten that a lawyer who is familiar with this issue will know which articles can be included in the partnership agreement and which articles can be included in the shareholders’ agreement under Turkish law.
General Provisions to be included in the Partnership Agreement
For a contract to be valid, it must be in accordance with the law, especially in form. The main elements such as disclosure of the parties and their information and the definitions used in the contract should be included in every contract.
It should not be forgotten that provisions such as the distribution of shares of shareholders in a venture and the regulation of share groups with the contribution provided are necessary.
The validity period of the contract, the regulation of the powers in the management of the company and the partnership, and the powers to be granted to the investors must be included in the contract.
Pre-determination of conditions such as the applicable law and competent courts or arbitration tribunal will be beneficial to include in the contract as it will facilitate the legal process.
It will be in the interest of the partners to include concepts such as know-how, registration, and trademark, and to regulate the details such as who will keep this registration and whether it will be transferred to the legal entity.
The inclusion of force majeure clauses in the agreement and the period within which the agreement will expire in case of a possible force majeure and many other provisions such as this should be agreed upon by the parties and regulated within the framework of a partnership agreement, under the supervision of an expert in this field is important in terms of preventing a possible dispute.
Special Provisions to be Included in Contracts
Within the scope of freedom of contract, some concepts applied in the start-up ecosystem can be added to the contracts, even if they are not foreseen by law, but clearly stated in practice. This process must be carried out with legal rigor to avoid misunderstandings.
Among these concepts, there are drag-along and tag-along clauses that are important for shares. By predetermining whether the agreement will protect the minority shareholder or the shareholder who holds the majority of the shares, the legal path to be followed in case of a possible share sale can be designed.
The concept of vesting envisages the distribution of shares among entrepreneurs according to a certain vesting principle. It is a principle that regulates the ability to become a shareholder after a period called a cliff, and that regulates the ability to own company shares in certain periods.
The applicability and legality of the concepts existing in many start-up ecosystems such as these under the name of freedom of contract should be checked and regulated in this regard. In addition, notarization of this contract and minimizing the costs that may arise will relieve the entrepreneur financially.
Start-up Incorporation Process
In the incorporation phase, which is perhaps the most important milestone for start-ups, it will be useful to know your law in terms of both economics and time-saving. Let’s take a brief look at what are the benefits of company types such as Joint Stock and Limited Liability companies defined under the Turkish Commercial Code No. 6102, and which one is more appropriate to choose according to your business and game plan.
Joint stock companies are a type of merger that emerged to achieve great economic goals for establishment. The capital is divided into specific and small shares, and these shares are tied to negotiable promissory notes, making them easier to transfer. In this type of company, everyone in society can easily participate in the partnership, and it plays a major role in transforming small savings into large capital. Since the capital of a joint stock company is fixed and divided into shares, they are liable for their debts only with their assets.
Limited Liability Companies are established by one or more real or legal persons under a trade name and their share capital is determined. They consist of the sum of the shares of this capital and the shareholders, who are not liable for the debts of the company, are obliged to pay only the shares of the capital they have committed and to fulfill the additional payment and side performance obligations stipulated in the company agreement.
In this process, it will be useful to seek legal advice on which type of company your start-up and its purpose overlaps with.
Impact of Competition Law on Start-ups
For example, on March 4, 2022, the Competition Authority announced amendments to the Communiqué on Mergers and Acquisitions Requiring Authorization from the Competition Board and Guidelines on the Evaluation of Mergers and Acquisitions. In this context, the Competition Authority has added various concepts such as digital platforms, software, and game software to the definition of “technology undertakings”, lowered the turnover thresholds in Article 7 of the Communiqué on Mergers and Acquisitions, and paved the way for the supervision of new start-ups in terms of competition law to facilitate their acquisition. It is important to be aware of these and other legal innovations to pave the way for your project process.
All the information written above is written for informational purposes and does not constitute legal advice. If you want to be protected on legal grounds in the start-up adventure, it will be beneficial for you to get legal advice from an expert lawyer.
Juriste Baran İstanbullu
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