We often get the phone call a few months after a seed round closes: the founder wants to set up a small subsidiary abroad, but the veto list in the shareholders’ agreement makes that conditional on investor consent; the investor is on holiday, and the transaction waits. The problem is neither the investor’s bad faith nor the founder’s carelessness — the problem is that when investor rights were negotiated, nobody asked how the list would operate in daily life two years later.
An investor coming in with a minority stake has a legitimate need for protection: their money is in the company, they have no control, and the statutory minority protection rights Turkish law provides fall well short of what a venture investor expects. Protection is therefore built by contract: veto lists, information rights, board representation. The issue is not the existence of these rights but their calibration.
The three families of rights are really three answers to a single question: how does an investor without control monitor the fate of their money, and how do they intervene when necessary? The veto list is the instrument of intervention, information rights are the instrument of monitoring, and board representation stands between the two. In healthy agreements the three complement each other; in problematic ones the same protection is built three times over in three layers, and the company has to pass through three separate doors for every decision.
Where does the line between protection and management run?
The test of a healthy structure is simple: the investor should have a say in decisions that change the company’s destiny, and no say in its daily operation. Destiny-changing decisions are well defined — new share issues, a sale of the company, liquidation, amendments to the articles, transactions the founder enters into for their own benefit. Daily operation is equally well defined — hiring, pricing, product decisions, ordinary commercial contracts.
In practice the line is breached almost always from the same direction: the veto list expands towards daily operation. The cause is usually not bad faith but template laziness; the investor’s lawyer starts from the widest list, and the founder side signs it as “looks reasonable” without working out what each item actually means. Yet every veto item is a turnstile placed on one of the company’s decision arteries, and the sum of the turnstiles determines the company’s reflex speed.
Where does the veto list swell?
The core of a typical set of protective provisions is uncontroversial: capital increases and new share issues, creation of preference rights, mergers and acquisitions, liquidation, amendments to the articles, dividends, related-party transactions. That core protects the value and ranking of the investor’s stake; the founder has no reason to resist it.
The swelling starts with thresholded and operational items. In the agreements that have crossed our desk over the past two years, the trouble has kept coming from the same items:
- Low-threshold spending and borrowing vetoes. If the threshold is written to the template rather than to the company’s budget, several transactions a month get stuck in approval as the company grows; thresholds should be designed to update automatically with the annual budget.
- Key personnel vetoes. Making the hiring and dismissal of defined positions subject to investor consent takes the founder’s most basic management tool away; a notification obligation is sufficient instead.
- A veto over every budget deviation. Making the budget itself subject to approval is reasonable; making every line-item deviation subject to approval turns the budget from a management tool into a handcuff.
- Vetoes that lock the next round. A veto over new share issues is legitimate; but drafted so as to allow a reasonable financing round to be blocked arbitrarily, it leaves the company’s ability to survive at the mercy of a single investor.
Each of these items should be discussed at the term sheet stage; by the time the draft shareholders’ agreement arrives, the room for bargaining has already narrowed. A good middle way is to build a review mechanism rather than freezing the whole list: thresholded items are revisited annually with the budget, and the list itself at every new round. An item that looks reasonable today then comes back to the table automatically when, three years on, it has grown too tight for the company’s scale.
How wide should information rights run: reporting or inspection?
Contractual information rights usually come in three layers: periodic financial reporting (monthly or quarterly management accounts, annual audited statements), notifications of material events (litigation, loss of a licence, departure of key personnel) and an inspection right on request. The first two layers are the minimum of a healthy investor relationship; founders should treat them not as a burden but as a discipline that turns the investor into a reference at the next round. An investor who receives regular, honest reporting also receives bad news early; and an investor who receives bad news early tends to behave like a partner in the solution rather than panicking. The form and timetable of reporting should be written precisely into the agreement, avoiding interpretable phrases such as “reasonable information”.
The trouble comes in the third layer. An unlimited clause of the “the investor may inspect any record at any time” kind produces two risks in practice: a concern about trade secret leakage where the fund also works with competitors, and an instrument of harassment where the relationship sours. The reasonable calibration is well established: inspection on reasonable prior notice, during business hours, without disrupting the company’s operations; for records containing personal data, a condition of compliance with data protection legislation; and a strict confidentiality obligation on the investor itself. Where the investor is a fund, the level of detail at which information may be passed to the fund’s own investors should also be written down.
A board seat or an observer?
The difference between the two forms of investor representation is larger under Turkish law than is commonly assumed. An investor representative who sits on the board of directors is a full board member within the meaning of the Turkish Commercial Code: they are under duties of care and loyalty, must put the company’s interest ahead of the interest of the fund they represent, and are subject to the liability regime. Membership of the management organ also carries a separate liability dimension for public debts. That is why some funds deliberately prefer observer status to a seat: the observer attends meetings and receives the papers but does not vote and, as a rule, carries no member liability. Where a seat is to be given, taking out directors’ liability insurance for the investor representative and writing down in advance the procedure the representative will follow in conflicts of interest between the fund and the company are standard measures that protect both sides.
Seen from the founder’s side, the balance is struck like this: at an early stage a small, fast board — usually the founders plus one investor representative — is functional; start giving a seat with every round and, a few rounds later, the board becomes a diplomatic table incapable of deciding. Observer status is the middle solution that meets the investor’s information needs while preserving the board’s capacity to decide. It should also be checked whether qualified-majority requirements granted to the investor member at board level duplicate the veto list at shareholder level; making the same decision subject to veto both at the general assembly and at the board turns a single disagreement into a double lock.
The real cost of an oversized veto list
The price of an over-wide veto list is invisible on signing day; it surfaces in three places. The first is speed: every routine transaction made subject to approval lengthens decision times and redirects the management team’s energy into chasing consents. The second is the next round: when the new lead investor’s lawyers review the existing agreement, every excessive right granted to the earlier investor will either be demanded for the new investor too or required to be cleaned up; in both cases the round slows down and the bargaining lands on the founders as fresh concessions. The third is deadlock risk: in a deteriorating relationship, a wide veto list gives the minority investor the power to bring the company to an effective standstill, and that power is used as leverage in exit negotiations of the kind we see in founder separations.
Let an anonymised example sharpen the picture: a marketplace startup had granted a wide veto list to a small-stake investor at seed; when a new round offer arrived two years later, the lead investor made narrowing that list a condition of closing. The small investor demanded additional shares for the waiver, the negotiation dragged on for months, and the company had to cover the period with bridge financing. The list that looked free on signing day ended up costing both time and equity.
The practical summary is this: trying to refuse investor rights is unrealistic; the right approach is to place them in the right layer. Confine the veto list to decisions that affect the company’s destiny, write monetary thresholds so they update with the budget, structure information rights as a reporting discipline and put the inspection right on procedural rails, weigh a board seat against observer status with the liability dimension in view, and avoid making the same decision subject to veto in two layers at once. A structure built on that frame protects the investor, leaves the company manageable and comes out of the next round’s legal review clean.
This article is provided for general information only and does not constitute legal advice. Please seek legal support for an assessment of any specific matter.
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