Convertible Investments in Turkey: A Guide to Convertible Notes, Loans and SAFEs for Foreign Investors

A convertible investment is money advanced to a company as a loan that later turns into shares instead of being repaid in cash, which makes it useful at the seed stage when a firm valuation is hard to set. This guide explains how convertible notes, convertible loans and SAFEs work under Turkish law, the foreign-exchange rule that requires the funds to be added to share capital within 12 months, and the key terms every overseas investor should negotiate before wiring money to a Turkish company.

What Is a Convertible Investment?

A convertible investment is a financing structure in which an investor advances money to a company as a loan that can later be converted into equity instead of being repaid in cash. Convertible notes (also called loans convertible to shares) originated in US venture capital practice and are designed to fund startups in their early stages, when setting an accurate company valuation is difficult.

Instead of fixing a price per share at the outset, the parties defer valuation to a future event, usually the next priced funding round. The investor lends capital today and receives shares later, once agreed conditions are met. This avoids a costly independent valuation at the seed stage and gives both sides flexibility on conversion terms.

There are three closely related instruments you will hear about, and they are not the same thing:

• Convertible note (convertible loan): a genuine loan that carries interest and a maturity date, and converts into shares on a trigger event.
• SAFE (Simple Agreement for Future Equity): not a loan at all, with no interest and no maturity. It is a promise of future shares in exchange for money paid now. We cover SAFEs in detail below, because Turkish regulators recognised them for venture capital funds in September 2024.
• Priced equity round: the investor buys shares today at an agreed valuation, with no deferral.

Are Convertible Notes Legal Under Turkish Law?

Yes. Turkish law has no statute that names or regulates the convertible note as a contract type, but the instrument is enforceable. It rests on the freedom of contract principle in the Turkish Code of Obligations (TBK, Law No. 6098, Articles 26-27), which lets parties design agreements that reflect their genuine intentions, provided the terms do not breach mandatory law, morality or public order.

Because conversion ends in the issue of new shares, the mechanics also engage the Turkish Commercial Code (TTK, Law No. 6102), which governs capital increases and share issuance in joint-stock and limited liability companies. In practice, a convertible investment in Turkey is completed in two steps:

• Symbolic share issuance (optional): a small number of shares may be issued to the investor shortly before the capital increase, so the investor becomes a shareholder of record.
• Capital increase and set-off: the general assembly resolves on a capital increase, and the investor's loan receivable is set off against the subscription price of the newly issued shares (the debt is exchanged for shares rather than paid in cash).

Because no single statute prescribes the procedure, the documentation has to be drafted so that the loan, the trigger conditions and the corporate capital-increase steps fit together cleanly. This is a job for lawyers who draft and negotiate the convertible note agreement alongside corporate counsel who structure the capital increase.

Foreign-Exchange Rules for Cross-Border Convertible Loans

Once money crosses the Turkish border, foreign-exchange rules apply on top of contract and company law. Convertible investments sit inside the regime built on the Law on the Protection of the Value of Turkish Currency (Law No. 1567), the related Decree No. 32, and the Capital Movements Circular issued by the Central Bank (TCMB).

Article 6 of that Circular contains a dedicated regime for foreign-currency convertible loans, first introduced by a Treasury letter dated 11 May 2020. The scope is wider than many older guides suggest. It allows three categories of offshore lender to extend a foreign-currency convertible loan to a Turkey-resident company:

• offshore venture capital funds (yurt dışında kurulu girişim sermayesi fonları);
• offshore collective investment institutions (yurt dışında kurulu kollektif yatırım kuruluşları); and
• offshore-resident persons holding an angel-investor licence (melek yatırımcı lisansı).

This matters if you are a foreign angel rather than a fund: the regime is open to licensed angels too, not only to institutional venture funds.

The 12-month capitalisation rule

This is the single most important compliance term, and it is where US-style convertible-note drafting most often goes wrong in Turkey. Under Article 6 of the Circular, a foreign-currency convertible loan agreement must contain an express clause stating that the full transferred amount will be added to the company's share capital within a maximum of 12 months from the transfer date, and that, except on the company's dissolution or liquidation, the amount will definitely be added to capital. In other words, the funds cannot simply be repaid as a loan; they are committed to becoming equity.

Because the FX rule requires capitalisation, a generic clause that simply lets the company repay the loan at maturity instead of converting can be non-compliant in the cross-border setting. Reconcile the maturity and fallback terms with the 12-month capitalisation cap before you sign.

The 36-month track for tech startups

There is a specific extension for technology and innovation ventures. A company that holds a teknogirişim badge (teknogirişim rozeti, granted under the regulation on the determination and certification of technology- and innovation-focused ventures) can extend the conversion-to-equity window from the default 12 months up to 36 months. For an early-stage deep-tech company that needs longer to reach a priced round, this is a real and Turkey-specific advantage worth building into the structure.

SAFEs in Turkey: How They Differ from a Convertible Note

A SAFE (Simple Agreement for Future Equity) is the other instrument founders and investors increasingly ask about. It is not a loan. There is no interest, no principal to repay and no maturity date. The investor pays money now in exchange for a contractual right to receive shares on a future trigger, typically the next priced round, usually with a discount or a valuation cap.

The key Turkish development: on 21 September 2024 (Official Gazette no. 32669), the Capital Markets Board (SPK) amended the Communiqué on Venture Capital Investment Funds (Girişim Sermayesi Yatırım Fonlarına İlişkin Esaslar Tebliği, III-52.4) to recognise contracts that grant a future right to become a shareholder, including SAFE-type agreements and share-purchase option contracts, as valid venture-capital investments for licensed venture capital funds (GSYFs).

If you are choosing between a SAFE and a convertible note for a Turkish deal, weigh the FX position carefully. A foreign-currency convertible loan is squarely inside the Capital Movements Circular's 12-month capitalisation regime described above; a SAFE has a different legal nature, so the cross-border treatment and the documentation should be checked against the rules in force for your specific structure before you commit.

How the Loan Converts: The Capital-Increase Mechanics

Conversion is not automatic paperwork. It is a corporate transaction under the TTK, and each step needs to line up. A typical set-off conversion runs as follows:

• Trigger and notice: the agreed trigger occurs (for example a qualifying priced round) and the investor's right to convert is exercised.
• Board report: the board prepares the report supporting the capital increase and the issue of new shares.
• Confirmation of the receivable: the loan receivable to be set off must be liquid, due and enforceable. In practice a sworn-in certified public accountant (YMM) confirms the existence and amount of the receivable for set-off purposes.
• General assembly resolution: the general assembly resolves on the capital increase and the set-off of the loan against the subscription price of the new shares.
• Trade-registry filing: the capital increase is registered with the trade registry and announced, completing the issue of shares to the investor.

A simplified worked example

Suppose an investor advanced USD 200,000 as a convertible note with a 20% discount and a USD 4,000,000 valuation cap. At the next priced round the company is valued at USD 5,000,000. Because the cap (USD 4m) is lower than the round price (USD 5m), the investor converts at the cap: USD 200,000 buys shares as if the company were worth USD 4,000,000, which is a larger stake than a new investor paying the USD 5,000,000 price. Had the company instead been valued at only USD 2,000,000 (below the cap), the 20% discount would apply and the investor would convert at an effective USD 1,600,000 valuation. The discount and cap exist to reward the early investor for the risk taken before the valuation was known.

Key Terms in a Convertible Note Agreement

A well-drafted convertible note allocates risk and reward clearly. The following provisions sit at the heart of almost every agreement and should be negotiated with care.

Trigger events and qualified financing

The agreement defines the events that cause the loan to convert. Common triggers are the company closing a new priced round (often above an agreed size, sometimes called a qualified financing), reaching an agreed valuation or capital threshold, a sale of the company, or the simple passage of time at the maturity date. Define clearly what counts as the "next round" so there is no argument later.

Conversion price, discount and valuation cap

The conversion price is the per-share price applied when the loan converts, usually derived from the valuation of the triggering round. A discount (commonly 10-25%) lets the early investor convert below the new round price, and a valuation cap sets a ceiling valuation for conversion, protecting the investor if the company's value jumps. Note how a down round (a lower valuation than expected) interacts with the cap, and consider a most-favoured-nation clause if later investors might get better terms.

Maturity period

Convertible notes carry a maturity period, the window within which conversion must occur, commonly 12 to 24 months in domestic deals. For a cross-border foreign-currency note this must be reconciled with the Capital Movements Circular's 12-month capitalisation cap (extendable for force majeure, or up to 36 months for teknogirişim ventures). Do not copy a US maturity clause into a Turkish FX note without checking it against that rule.

Repayment and fallback terms

State what happens if no trigger occurs before maturity, for example automatic conversion at a fallback valuation, an extension, or repayment of principal with interest. Be careful here: for an offshore foreign-currency loan inside Article 6 of the Circular, the funds are committed to capitalisation, so a free "repay at maturity" fallback may not be available. Clear, compliant fallback terms prevent disputes when a financing round does not materialise.

Advantages and Disadvantages for Foreign Investors

Convertible investments offer real benefits to both sides, but they carry trade-offs that overseas investors should weigh.

Advantages

• For startups: faster, cheaper financing without setting an immediate valuation, and lighter documentation than a full priced round.
• For investors: exposure to future equity upside, the ability to watch the company's progress before locking in a valuation, and a discount or cap that rewards early risk.

Disadvantages and risks

• Valuation and dilution risk: if the company's value shifts sharply between investment and conversion, your eventual ownership percentage may differ from what you expected.
• Trigger risk: if no qualifying event occurs, you may not obtain shares and are left relying on the fallback terms.
• FX and capitalisation risk: for a cross-border foreign-currency note, the 12-month capitalisation rule constrains repayment, and using the funds without adding them to capital bars you from the mechanism in future.
• Enforcement and compliance gaps: because Turkish law does not codify the instrument, weak drafting can create enforceability problems and FX non-compliance.
• Control and regulatory risk: a large conversion can create a controlling stake, which can raise competition-law compliance and merger-control issues.

This is why due diligence on the company's financial health, growth potential and market position is essential before you sign. There are also tax points to check, including stamp tax and any withholding on cross-border interest, so take Turkish legal and tax advice on your specific facts.

Governing Law, Jurisdiction and Enforcement

For a cross-border deal, the agreement should state which law governs it and where disputes are resolved. Parties often choose foreign governing law and arbitration, and the Turkish private international law statute (MÖHUK, Law No. 5718) generally respects a genuine choice of law and forum in international commercial contracts.

Because conversion is completed through a Turkish capital increase registered at the trade registry, enforcement of the equity outcome ultimately runs through Turkish corporate procedure. Coordinate the dispute-resolution clause with the corporate steps so the two do not pull in different directions.

How Lexin Legal Helps Structure Convertible Investments

Because Turkey has no bespoke statute for convertible notes or SAFEs, the quality of the documentation does the work. Counsel can align the loan, the trigger mechanics, the FX capitalisation requirement and the corporate capital-increase steps so that conversion actually completes when the time comes.

Lexin Legal advises foreign investors and Turkish startups on:

• Drafting and negotiating convertible note, convertible loan and SAFE agreements that fit TBK and TTK requirements.
• Structuring the capital increase and share set-off with corporate and M&A counsel at the general-assembly stage.
• Confirming foreign-exchange and capital-movement compliance, including the 12-month capitalisation rule and the teknogirişim track.
• Coordinating the wider shareholding and company formation structure.

To discuss a specific investment, contact our Istanbul team for a tailored review. We work in English with foreign clients throughout the process.

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