SAFE Agreements (Simple Agreement For Future Equity) In Turkish Law

1. Introduction and Conceptual Background

The start-up ecosystem, which has become one of the main driving forces of the global economy, plays a critical role in enabling technological innovation and new business models. These venture undertakings develop new technologies or business plans and have high growth potential, yet they are typically at the very beginning of their commercial operations. For this reason, they are subject to financing dynamics that differ from those of traditional companies. Start-ups generally lack a long and reliable financial track record, stable cash flows, or the in-kind collateral commonly required by the conventional banking system. As a result, access to debt-based financing, such as bank loans, is often practically unavailable. This makes it necessary for start-ups to meet their funding needs through external sources, primarily by way of equity financing models described as investment, through angel investors and venture capital funds.

Early-stage periods, where venture investments are typically made, are also the stages with the highest uncertainty. For a start-up that has not yet launched a product or service, has not proven product market fit, or does not have a clear revenue model, determining company value through classical valuation methods does not yield rational outcomes. In investments made through a traditional share issuance, the parties must conduct lengthy negotiations over valuation, carry out detailed financial and legal due diligence, and prepare complex shareholders agreements and articles of association amendments. These steps may turn the completion of a funding round into a bureaucratic process that takes months, while the legal and operational costs may become disproportionately high, particularly for small seed checks.

The need to access funding in a fast, simple, and low-cost manner in order to preserve competitive advantages has pushed the legal and financial markets to develop new contractual models. As a result of this search, US law and Silicon Valley practice have produced flexible investment instruments that standardize the financing relationship between investors and founders and defer valuation discussions to a later stage. The most advanced model of these instruments, which has today become a global industry standard, is the Simple Agreement for Future Equity, commonly referred to as a SAFE. SAFE agreements are sometimes translated into Turkish as a streamlined standard agreement for future equity financing.

This analysis addresses the emergence of SAFE agreements, their structural features, the economic benefits they provide, and, in particular, their legal character and enforceability under Turkish law, with a focus on the Turkish Commercial Code and the Turkish Code of Obligations.

2. Where Do SAFE Agreements Come from and Why Were They Developed?

In early-stage start-up investments, convertible notes were initially used widely in order to overcome valuation difficulties and reduce transaction costs. Under a convertible note structure, the investor provides a certain amount of debt financing to the company, and this debt converts into shares in a future financing round where a concrete valuation will be determined, for example in a Series A round. While this model accelerated investments by deferring the valuation discussion, it also carried serious structural risks that did not align with the nature of the venture ecosystem, primarily because it is, in legal terms, a debt instrument.

Convertible notes typically include two core elements: an interest rate accruing on principal and a maturity date at which repayment or conversion may be demanded. If, when the maturity date arrives, the company has not completed a new funding round, the investor may demand cash repayment of the debt together with accrued interest. For a start-up that is not generating revenue and is allocating its cash to product development, such a repayment request may push the company into insolvency and bankruptcy risk. This bankruptcy pressure may also allow investors to exert disproportionate leverage over founders and seek additional privileges they would not obtain under normal circumstances, such as control rights or higher ownership percentages. In addition, under US law, particularly in Delaware practice, while directors' duties do not directly convert into a duty owed to creditors merely because the company becomes insolvent, creditors may be viewed as residual claimants and may gain standing to bring derivative actions on behalf of the company, as reflected in decisions such as North American Catholic Educational Programming Foundation, Inc. v. Gheewalla and Quadrant Structured Products Co., Ltd. v. Vertin. This dynamic can further enable convertible noteholders to create pressure on management by reference to potential derivative claims. Accruing interest also causes the conversion terms to shift over time, making the cap table more difficult to model.

To eliminate these economic and legal downsides and to make venture financing truly simple, standardized, and aligned with venture capital dynamics, Y Combinator introduced the SAFE in 2013, largely through the work led by its in-house legal team, including Carolynn Levy. The SAFE preserves the most useful feature of convertible notes, namely deferring valuation and equity issuance to a future round, while completely removing both the maturity date and the interest rate.

The absence of a maturity date removes the investor's right to request repayment, thereby eliminating time pressure and bankruptcy risk for the company. The absence of interest enables the number of shares to be issued in the future to be modelled more clearly and transparently. The SAFE therefore moves away from being a debt instrument and instead becomes a conditional undertaking to grant equity, effectively a future right to shares. Following the initial 2013 version, updated SAFE forms based on post money valuation logic were released in 2018, aiming to make dilution outcomes more predictable for both founders and investors. These updated forms have since become the industry standard.

3. What Does a SAFE Do and Where Is It Used?

In its simplest form, a SAFE is an agreement under which an investor provides cash to a start-up today, and in return, the company grants the investor shares in the future once certain conditions occur, such as a new share issuance or a sale of the company, based on pre agreed favorable formulas. This instrument is used primarily in seed rounds, angel investments, and bridge financings, where start-ups need to address urgent cash needs quickly. Beyond traditional technology start-ups, similar structures are also widely used in crypto projects, under the name SAFT, meaning a Simple Agreement for Future Tokens.

The core function of a SAFE is to remove operational friction in the investment process. Instead of negotiating lengthy shareholders agreements or articles amendments, the parties can execute a short standard document by agreeing on a limited set of economic terms, mainly the investment amount and either a valuation cap and or a discount rate.

3.1. Financial Mechanics and Main SAFE Types

Because the investor provides capital at an early stage under high uncertainty, it should receive an advantage compared to investors entering later at lower risk, such as Series A investors. SAFE agreements provide this advantage through two main economic mechanisms: the valuation cap and the discount rate. Under Y Combinator's standard set, four main SAFE versions are used.

1. Valuation cap, no discount: This is the most common form in practice. The parties set a maximum company valuation used for the conversion calculation. For example, assume an investor invests USD 500,000 under a SAFE with a USD 5 million valuation cap. If the company later raises a priced round at a USD 10 million valuation, the SAFE investor's conversion is calculated using the cap of USD 5 million rather than USD 10 million. The investor therefore receives shares at half the price than the new round investors, reflecting the reward for early-stage risk. If the later valuation is below the cap, for example USD 3 million, the investor converts at that lower valuation and receives a larger number of shares.
2. Discount, no valuation cap: The parties do not set a maximum valuation, but instead agree on a percentage discount, for example 20 percent. If, in the next priced round, the share price is set at USD 1.00, the SAFE investor acquires shares at USD 0.80, reflecting the agreed discount.
3. Valuation cap and discount: This version includes both protections. Upon the conversion trigger, conversion is calculated separately using the cap and using the discount, and whichever calculation is more favorable to the investor, meaning whichever results in more shares, is applied.
4. Most Favored Nation SAFE: This version has no cap or discount. However, it includes an MFN clause under which, if the company later signs another SAFE with a different investor on more favorable economic terms, such as a lower cap or a higher discount, the earlier investor may unilaterally adjust its SAFE to match the new, more favorable terms.

3.2. Trigger Events and Their Consequences

Investors under a SAFE do not acquire shares at the time of investment. They are not recorded in the share ledger and they have no corporate rights such as voting rights or dividend rights. In legal terms, the investor holds a conditional right awaiting the occurrence of certain events. The SAFE produces its core effects upon one of three principal trigger events.

• Equity financing: This refers to a capital increase or financing transaction where the company issues and sells preferred shares to external investors based on a priced round valuation. Once this occurs, the SAFE amount converts automatically into preferred shares based on the valuation cap and or discount mechanics, and the SAFE terminates. In connection with the conversion, the SAFE investor signs the customary financing documents entered into with the new investors and becomes a shareholder.
• Liquidity event: This includes events such as a change of control, a merger, the sale of a substantial portion of assets, or an initial public offering. In such a case, the investor typically has an election between two alternatives: either it requests repayment of its principal investment amount, or it participates in the transaction proceeds on a priority basis based on the number of shares calculated by dividing the principal by the liquidity price.
• Dissolution event: This refers to the company voluntarily ceasing operations, entering bankruptcy, or undergoing liquidation. Even though there is no maturity date, the investor requires protection if the company shuts down. Upon this event, the SAFE investor has the right to receive its investment amount from the company's assets before ordinary shareholders, but after other creditors and typically pro rata alongside preferred shareholders, depending on the applicable waterfall.

3.3. Pre Money and Post Money SAFE Regimes and Dilution Impact

A key factor determining the economic impact of a SAFE is whether the valuation cap is defined on a pre money or post money basis. Y Combinator's first SAFE forms followed a pre money approach. It later issued post money SAFE forms and explanatory guidance in order to make dilution outcomes more predictable.

In a pre money SAFE, the valuation cap is based on the company's value immediately before the next priced round. However, the conversion calculation may be affected by the cap table impact of other SAFEs issued in the same round and or earlier rounds, as well as certain equity like instruments, depending on how the company capitalization definition is drafted and how the transaction is structured. As a result, the investor's final ownership percentage often becomes clear only when the priced round occurs, and dilution can be harder to predict for founders and existing shareholders.

In a post money SAFE, the valuation cap is structured by reference to a post investment perspective. If the cap applies, the SAFE investor's target ownership becomes more transparent, and the number of shares to be issued at the priced round is generally more predictable.

The key dilution difference is that, under pre money SAFEs, the combined effect of multiple SAFEs issued around the same time, as well as option pool increases, may not be fully visible until the priced round. Under post money SAFEs, each SAFE's implied ownership, based on the cap, can be tracked more clearly, and the management of total dilution is typically easier in rounds where multiple SAFEs are issued. This transparency may also mean that founders recognize the overall dilution earlier and, in some scenarios, it may appear higher.

4. Legal Character and Enforceability of SAFE Agreements under Turkish Law

Under US law, SAFE agreements are generally treated as convertible securities under the Securities Act regime. In the US, SAFE issuances to accredited investors can often be structured under Regulation D exemptions, particularly under Rule 506(b) and Rule 506(c), which allows transactions to proceed without the full registration and prospectus burdens. US corporate law, especially in Delaware, also offers flexibility through authorized but unissued shares and board level issuance mechanisms, subject to the articles of incorporation.

However, transposing this flexible structure directly into Turkish law, which is rooted in continental European and German legal traditions, raises significant doctrinal and practical issues, particularly under the Turkish Commercial Code No. 6102 and the Capital Markets Law No. 6362. In Turkish law, capital maintenance principles and strict formal requirements for share issuances create obstacles for the direct operation of an automatic conversion mechanism. Accordingly, the legal character of a SAFE under Turkish law must be assessed separately through the lenses of contract law, capital markets law, and company law.

4.1. Contract Law Dimension: Freedom of Contract and a Sui Generis Instrument

Under the principle of freedom of contract set out in Article 26 of the Turkish Code of Obligations No. 6098, parties are free to determine the content of an agreement provided that it does not contravene mandatory rules, morality, public order, or personality rights. From this perspective, a SAFE is an unnamed, sui generis agreement under Turkish law.

The relationship created between the parties is not a consumption loan under Article 386 of the Turkish Code of Obligations. The core element of a consumption loan is the obligation to return fungible goods of the same quantity and quality after use. In a SAFE, the company's primary obligation is not repayment of money, but rather, upon the occurrence of the agreed conditions, to transfer or issue shares to the investor. Repayment of principal is typically tied only to exceptional and secondary conditions, such as liquidation. For this reason, a SAFE is better characterized not as a loan, but as a deferred condition equity undertaking granting the investor a formative right, similar to a call option or subscription option.

Option rights, whether call or put, are formative rights that create a new legal position by unilateral declaration, resulting in an obligation to transfer shares. Under a SAFE, the emergence of this right is subject to a condition precedent, such as a new financing or a sale event. Once the condition occurs and the investor exercises the option right, the principal transaction, meaning the transfer of shares or subscription in a capital increase, is formed.

As recognized in academic analysis and doctrinal approaches, an option right is a formative right under Turkish law, and an option structure involves two agreements. The first is the option agreement granting the right. The second, being the principal transaction, is formed when the option is exercised and the declaration reaches the counterparty, resulting in a share purchase or share transfer agreement. Until the option is exercised and the shares are transferred, there is no direct passage of title to shares subject to the option.

4.2. Capital Markets Law Dimension: Is a SAFE a Capital Markets Instrument?

A critical question for the applicability of SAFE like instruments in Türkiye is whether they could be treated as capital markets instruments under the Capital Markets Law, for example due to similarities with bonds, shares, options, or convertible instruments. If a SAFE were to be classified as a capital markets instrument, it could trigger approval and documentation requirements under the Capital Markets Law, including prospectus or issuance document approvals by the Capital Markets Board. Such procedures may take months and impose high costs, undermining the speed and low-cost logic that makes a SAFE attractive.

Article 3 of the Capital Markets Law classifies capital markets instruments as securities, derivatives, and investment contracts.

• From a securities perspective, a SAFE is not a share like security because, until the condition is met, it does not grant shareholder rights, such as pre-emption, voting, or dividend rights. It is also not a debt instrument such as a bond or bill, because it does not rest on a loan structure and is not typically issued in a fungible, serial manner.
• From a derivatives perspective, derivative instruments are generally instruments whose value is linked to an underlying asset and can be traded without necessarily transferring ownership of the underlying asset. A SAFE, by contrast, aims at an actual equity delivery, meaning a share issuance or transfer, and therefore does not neatly fit the derivative definition.
• From an investment contract perspective, under US law, SAFE agreements may qualify as investment contracts under the Howey test. Under Turkish doctrine and in narrower interpretative approaches sometimes reflected in practice, an investment contract is often described as an agreement under which funds are collected in return for a share in profits arising from the operation of a good or product. A SAFE is oriented toward an equity ownership transfer at the corporate level rather than merely an entitlement to profit arising from an operational activity, and it is therefore argued to fall outside this narrower concept.

Recent development: Amendments published in the Official Gazette on 21 September 2024 to the Capital Markets Board's Communiqué on Venture Capital Investment Funds (III 52.4) reportedly recognize SAFE like agreements, meaning agreements that grant future partnership rights, as venture capital investments. This development may facilitate the use of SAFE structures through venture capital funds, even if the SAFE is not treated as a standalone investment contract for broader issuance purposes.

As a result, the prevailing view is that SAFEs concluded on a negotiated basis with individual investors by closely held joint stock and limited liability companies should not be treated as a general issuance of capital markets instruments under the Capital Markets Law. Under this approach, the instrument can be implemented within a contract law framework without requiring Capital Markets Board approvals.

4.3. Performance and Enforceability Mechanisms under the Turkish Commercial Code

Once the SAFE is validly executed, the key issue is how the company will legally deliver the promised shares when the trigger condition occurs. Since an automatic conversion mechanism, in the US sense, is generally not workable in Turkish law, three main Turkish Commercial Code mechanisms may be considered.

4.3.1. Performance through Conditional Capital Increase under Article 463 of the Turkish Commercial Code

Article 463 allows conditional capital increases through granting conversion or subscription rights to holders of newly issued bonds or similar debt instruments. It provides a framework for allocating shares upon the occurrence of specified conditions, for example through conversion rights of bondholders. In doctrine, it is argued that this mechanism could, in theory, be utilized for early-stage financing instruments such as SAFEs, by granting a subscription option to the SAFE investor. This would enable a more dynamic structure, since conditional capital increases may, depending on structuring, allow the board to implement an equity delivery mechanism without requiring a new general assembly resolution each time, provided the articles of association include the required authorizing provisions.

However, conditional capital increases require an articles provision under Article 465 setting out, clearly, the amount of the increase, the beneficiaries, and the conditions. In addition, pre-emption rights of existing shareholders may need to be restricted or waived by general assembly decision for justified cause under Article 461, and the amount of the conditional increase is subject to statutory limits, including a cap tied to the existing share capital. These constraints may make the mechanism impractical in scenarios where SAFE conversion could require issuance exceeding the applicable thresholds.

Some doctrinal proposals suggest expanding the scope of conditional capital increases or introducing special flexibility for venture companies, such as adjusting statutory limits or creating exemptions, to strengthen the legal infrastructure for equity option style instruments. Separate discussions also exist as to whether a robust Turkish equivalent of self-executing conversion mechanisms would require issuance of capital markets instruments, potentially bringing Capital Markets Law approval processes into play. Such processes may undermine the simplicity of SAFE agreements. These debates highlight that a SAFE is a hybrid tool: it is not debt due to the absence of interest and maturity, but it is also not pure equity because it does not grant shareholder rights until conversion.

4.3.2. Performance through an Ordinary Capital Increase by Capital Commitment under Article 459 of the Turkish Commercial Code

In practice, the most common method is to convene the general assembly once the trigger condition occurs and to resolve on a standard capital increase by capital commitment under Article 459. In this process, the pre-emption rights of existing shareholders are restricted or waived under Article 461 based on justified cause, such as bringing in a special external investor.

In this scenario, new round investors, such as Series A investors, subscribe in cash, while the SAFE investor acquires the newly issued shares, often at a premium, by setting off its prior SAFE payment against its capital commitment obligation. In practice, the SAFE amount may have been booked as an advance or as other liabilities in the company's accounts, and it is then netted against the subscription debt at the time of issuance. The key risk here is execution risk: the general assembly may not be convened, or shareholders may refuse to adopt the capital increase resolution or to approve the restriction of pre-emption rights, thereby breaching the SAFE.

4.3.3. Founders' Share Transfer Undertaking and the Company's Acquisition of Its Own Shares under Article 379

To mitigate the risk that a capital increase is not implemented, founders are often added as parties to the SAFE and provide a share transfer undertaking, stating that if, upon the trigger event, the company cannot affect a capital increase, the founders will transfer to the investor the portion of shares reflecting the investor's entitlement.

As an alternative, the company could consider acquiring its own shares and then transferring them to the SAFE investor. However, Article 379 limits a joint stock company's paid acquisition of its own shares to 10 percent of its share capital and requires general assembly authorization for the board. This statutory cap is likely insufficient for high conversion ratios and therefore creates a practical bottleneck. For this reason, founders' personal share transfer undertakings are commonly viewed as a stronger safeguard.

5. Specific Performance, Disputes, and Enforceability

If founders avoid performing the promised share transfer even though the SAFE conditions, such as a new financing round and relevant valuation parameters, have materialized, what remedies are available to the investor?

Under the principle of pacta sunt servanda, share transfer undertakings and transfer restrictions in shareholders agreements and SAFE texts are binding between the parties. If founders refuse to transfer their shares to the investor or transfer their shares to third parties through sham transactions, the investor may file a claim seeking specific performance and the transfer of share title.

A key limitation applies. If the investor's share acquisition requires a new capital increase, the court cannot substitute for the general assembly and adopt a capital increase resolution. In such cases, the investor may generally be limited to claiming damages.

5.1. Deterrent Measures Securing Performance

Given that court proceedings in Türkiye may take a significant time, investors typically seek to incorporate strong contractual safeguards into the SAFE to deter breach, mainly through two mechanisms grounded in contract law.

1. First, a penalty clause. For cases where founders refuse to convene the general assembly, fail to adopt a capital increase resolution, or do not perform the share transfer despite the condition having occurred, a deterrent level contractual penalty may be agreed under Articles 179 et seq. of the Turkish Code of Obligations. The risk of having to pay a substantial penalty may push founders to perform.
2. Second, an escrow style structure and custody arrangement. To make nonperformance practically difficult, blank endorsed share certificates or interim share certificates belonging to founders may be deposited with a neutral third party, such as a lawyer or custodian, under a fiduciary deposit arrangement. Once the trigger event occurs, the custodian may deliver the certificates directly to the SAFE investor without requiring founders' further consent or a court decision, subject to the agreed escrow mechanics.

6. Conclusion and Assessment

Start-ups, as a global engine of technology, should not be forced into rigid and bureaucratic company law procedures and traditional financing instruments that do not match their dynamic structure. SAFE agreements developed by Y Combinator are a transformative financing innovation: they defer valuation discussions, avoid interest burdens and maturity driven bankruptcy pressure, and significantly accelerate investment processes.

However, a direct, US style transposition of SAFE as a self-executing, automatic capital markets instrument is unlikely to be workable under Turkish law due to capital maintenance principles under the Turkish Commercial Code, the structure of closely held companies, and strict formal requirements for share issuances and transfers. In the Turkish context, it is generally more accurate to characterize the SAFE not as a security requiring Capital Markets Board approval, but as a valid sui generis contract law agreement under Article 26 of the Turkish Code of Obligations, incorporating a conditional undertaking to grant equity and a promise of capital subscription and or share transfer.

For a SAFE to be practically enforceable in Türkiye under this characterization, it should be implemented through ordinary capital increase processes under Article 459, supported by founders' personal share transfer undertakings. It is also prudent to integrate contractual safeguards such as penalty clauses and escrow style custody arrangements to address potential nonperformance.

Finally, to strengthen Türkiye's ability to compete in the global venture capital ecosystem and to reduce incentives for regulatory arbitrage, including re domiciliation of Turkish start-ups abroad, legislative steps may be needed in the medium term to introduce more flexible venture company specific rules, including mechanisms that expand and modernize conditional capital increase structures under Article 463 and facilitate equity option style instruments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.