Name the wrong assumption first: venture debt is cash without dilution. Founders arrive at it easily enough — the cap table stays where it is, there is no valuation to argue about, and the process is short next to an equity round. Now the correction. The description is not wrong, only incomplete. The real price sits in the acceleration, event of default and security clauses rather than the coupon. The question worth asking is not “how much does this dilute me” but “on what trigger can it be called, and what am I left holding that day”.
The second assumption is that this debt will sit quietly until the next round. It will not. Principal repayments begin in the months when the company is burning hardest, the lender’s reporting requirements reshape management accounts, and the security package is among the first things the next round’s investor looks at. Venture debt does not simplify a capital structure; it adds a layer that is easy to lose sight of.
For a company incorporated in Türkiye there is a further layer. Drawing a foreign-currency loan from a fund based abroad is not a freely negotiable commercial preference; it is permitted only so far as the foreign exchange legislation allows — a limit more teams than one would expect discover a week before signing.
Where venture debt makes sense, and where it does not
There are three defensible uses. Extending runway: debt taken while there is still real cash in the bank buys the chance to open the next round on more mature metrics. Bridging: if deferring a Series A by a couple of quarters produces a better valuation, that delay may cost less than the dilution avoided. And funding a capital-intensive investment with a predictable payback — hardware, site installations, inventory, sometimes a sales team’s up-front cost.
The case against fits in one sentence: taking on a fixed payment obligation while revenue visibility is weak. Where the renewal rate has not settled, where one customer carries the revenue, or where collection keeps stretching, the monthly instalment comes not out of the product roadmap but out of the team. For that profile, structures whose repayment breathes with collections, such as revenue-based financing, are the more honest match.
A simple test we apply: principal repayment should start after the month the thing financed begins generating cash. Where those calendars overlap, the structure amounts to a liquidity problem with a delay built in.
On what trigger can the loan be called?
The first passages we mark up are the repayment schedule and the length of any interest-only period. The second is the breadth of the event of default definition. In market drafts it reaches well past payment default and captures events outside the company’s control.
- Material adverse change (MAC). A MAC clause drafted around “in the lender’s reasonable opinion” hands the lender a unilateral acceleration switch. Tying that test to an objective threshold, or at least an objectively assessed standard, slows the negotiation down and is worth pursuing anyway.
- Financial covenants. Minimum cash, minimum revenue or burn-rate covenants look reasonable at signing; measured each quarter, they turn one poor quarter into an event of default. Measurement frequency, cure periods and a one-off breach allowance all deserve attention.
- Change of control. Most drafts treat a shift in shareholding beyond a stated threshold as an acceleration event. If the next round falls within that definition, the company has signed a document that converts its own growth into a default.
- Cross-default. A late payment by a group company under a modest lease triggering default under the main facility is not theoretical; we have seen it. Both the de minimis threshold and the group definition need narrowing.
Information undertakings deserve their own pass. What a lender asks for overlaps with, or exceeds, the information rights existing investors hold; aligning calendar and content across both documents saves the finance team two packs a month.
The warrant and deferred dilution
Warrant coverage gives the lender the right to acquire shares later at a stated price. Under Turkish law the warrant is not a creature of the Turkish Commercial Code (Türk Ticaret Kanunu); it is purely contractual — flexible and demanding in equal measure. Unless the document settles which class of shares, at what price, within what period and on which corporate approvals the right is exercised, the parties will be reading different texts on the day it matters.
The harder question is how the right is satisfied. A capital increase requires pre-emption rights to be restricted and a general assembly (genel kurul) resolution. A transfer from an existing shareholder runs into that shareholder’s transfer restrictions under the shareholders’ agreement. Using the company’s own shares is the route raised most often and the one that causes the most trouble.
In a joint stock company (anonim şirket), TTK art. 379 caps the acquisition of a company’s own shares at 10% of the share capital or issued capital, requires the general assembly to authorise the board for a maximum of five years, requires the consideration for the shares acquired to have been paid in full, and requires net assets after the acquisition to be no less than the sum of the share capital and the reserves that may not be distributed. Alongside it, the financial assistance prohibition (finansal yardım yasağı) in TTK art. 380 stops the company advancing funds, lending or giving security to a third party for the acquisition of its own shares; arrangements in which the company indirectly funds the lender’s purchase collide with it.
In a limited liability company (limited şirket) the picture narrows further: under TTK art. 595 the transfer of a capital share requires general assembly approval, so whether the lender can actually take the shares is left to an assembly convened on that day. Where a warrant-bearing structure is contemplated, company form belongs in the conversation before the loan documents are drafted.
Can a foreign-currency loan be drawn from abroad?
Most venture debt providers are resident outside Türkiye and lend in foreign currency, which engages article 17 of Decree No. 32 on the Protection of the Value of Turkish Currency (Türk Parası Kıymetini Koruma Hakkında 32 sayılı Karar) together with article 14 of the Capital Movements Circular (Sermaye Hareketleri Genelgesi). The rule: where the loan balance is USD 15 million or above, no foreign-currency income condition applies; below that figure, the loan to be drawn plus the existing balance may not exceed the total foreign-currency income of the last three financial years.
For many early-stage companies this test decides the matter. In a SaaS business with export revenue, the foreign-currency income of the last three financial years may comfortably cover the facility contemplated; in a company selling domestically and invoicing in Turkish lira, the same arithmetic shows it cannot be drawn at all. The principal exceptions where no foreign-currency income is required include public institutions and organisations, banks and financial institutions, companies holding an Investment Incentive Certificate (Yatırım Teşvik Belgesi), companies wholly owned by a foreign-capital group, and contractors on defence industry projects.
The first task in a venture debt discussion is therefore not the term sheet but working out the company’s foreign-currency income for the last three financial years and its existing loan balance. The structure follows from that figure: whether the Turkish entity draws the facility, whether an offshore group company borrows with the Turkish company as guarantor, or whether part of the financing belongs in equity.
The lender’s identity and the reach of the security package
Lending in Türkiye is, as a rule, a regulated activity. Where a non-bank institution extends credit as ordinary business, the regime under Law No. 6361 on Financial Leasing, Factoring, Financing and Savings Financing Companies applies. The line between a one-off drawing from abroad and a Türkiye-resident structure lending regularly is read from the substance of the activity, not the heading on the agreement.
On the security side, Law No. 6750 on Pledge over Movable Property in Commercial Transactions (Ticari İşlemlerde Taşınır Rehni Kanunu) allows movables such as trade marks, receivables, machinery and inventory to be pledged. In software businesses the contested item is intellectual property. A pledge over the core codebase and the brand is an ordinary enough request, but it becomes a live negotiating point in the next investor’s due diligence and can make the round harder to close.
Three points in the security package repay close reading: that its scope is proportionate to the amount actually drawn; that partial release is available as the loan amortises; and that priority and release procedures in favour of the next round’s investor are written in from the start. Founder guarantees are a separate matter; before accepting one at early stage, the founder should price the acceleration scenario in concrete terms.
In the right company, at the right moment and on the right documents, venture debt is a sound instrument. Deciding calls for three things on one table: whether the cash generation calendar and the repayment calendar line up; whether the default, MAC and change of control definitions turn the company’s own growth into an acceleration event; and, where the facility is in foreign currency, whether the limit set by Decree No. 32 permits the structure at all. Debating warrant ratios before those answers are clear puts the sequence back to front. For a company that has closed a seed round but whose revenue has yet to settle, the soundest advice is usually to leave the debt to a later round.
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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