A funding round is one of the most legally consequential processes in a startup's life. Every stage — from term sheet to due diligence, shareholder agreement to closing — carries legal implications. This guide walks through the stages of an investment process, critical contract terms and the legal pitfalls founders frequently encounter.
A term sheet is the formal expression of an investor's intent to invest. It is generally non-binding; however, confidentiality, exclusivity (no-shop) and expense provisions are typically binding.
Turkish law generally governs domestic investment rounds, but English or Delaware law may be preferred where foreign investors are involved — a choice that affects both the document language and legal structure used.
Legal due diligence covers corporate documents, existing contracts, IP rights, employment agreements, tax obligations and pending litigation. Issues discovered late in this stage can negatively affect the valuation or deal terms.
The shareholders' agreement (SHA) and share purchase agreement (SPA) are the core transaction documents. They are not binding until closing, but protracted negotiation creates both cost and delay.
The process closes with the transfer of investment funds and completion of share transfers. All conditions precedent must be satisfied before closing.
Pre-money or post-money? Pre-money disclosure tends to favour founders; post-money disclosure tends to favour investors. Ensure the basis is clearly specified.
Protects the investor's share from dilution in a down round. Two main mechanisms:
Governs the investor's priority return on a sale or liquidation. A "1x non-participating" structure is more founder-friendly; "participating" structures give investors a double benefit.
Drag-along allows majority shareholders to compel a minority sale. Tag-along protects the minority's right to sell on the same terms as the majority.
Following term sheet execution, the founder is restricted from negotiating with other investors for a set period (typically 30–60 days). Parallel negotiations during this period constitute a breach.
At Koru Legal, we support term sheet negotiation, due diligence preparation, SHA/SPA review and closing processes.
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