Azerbaijan will implement a new law on startups and venture capital

Azerbaijani President Ilham Aliyev approved the law on amendments to the Labor Code, the Civil Code, as well as the laws “On Currency Regulation,” “On Banks,” “On Investment Funds,” and “On the Securities Market,” adopted by the Milli Majlis on July 14.

Important mechanisms facilitating startup management and improving the investment climate have been included in the Civil Code.

Company participants and shareholders can now enter into a shareholder corporate agreement among themselves. This agreement may define voting rules at general meetings, conditions for the sale and valuation of shares, procedures for resolving disputes through arbitration, and the application of foreign law. Corporate agreements are concluded in writing and do not require notarization. In case of conflict between the terms of the agreement and the company’s charter, the corporate agreement shall prevail in internal relations between the parties.

Corporate agreements legalize three main rights that are standard for venture capital:

— Tag-along right ensures that if a majority shareholder sells their stake, minority shareholders have the right to sell their shares to the same buyer under similar conditions and at the same price

— Drag-along right allows a majority shareholder negotiating the sale of the entire company to compel minority shareholders to join the sale of their shares

— Right of First Refusal (ROFR) obliges a shareholder wishing to sell their stake to first offer it to existing shareholders.

Agreements may also include liquidation preferences, ensuring that in the event of company liquidation, investors recover their investments before founders. Additionally, anti-dilution provisions protect the ownership stake of the initial investor by recalculating conversion ratios in case the company’s valuation decreases during subsequent funding rounds.

The board of directors may be empowered to issue new shares without convening a general meeting, up to a maximum limit clearly established in the charter within the authorized capital.

Companies are now allowed to use modern convertible financial instruments, which are not classified as securities or derivative financial instruments until conversion:

— Convertible Note means that an investor provides a loan to the company, which upon maturity or during a subsequent major funding round converts into a stake in the company along with accrued interest. To reduce investor risk, such instruments may include a valuation cap or a discount relative to the price offered to new investors

— Simple Agreement for Future Equity (SAFE) means that an investor provides capital without creating debt obligations or accruing interest. Funds convert directly into shares upon sale, liquidation, or a subsequent investment round. In case of liquidation, investor claims take priority over common shareholders, following immediately after the claims of unsecured creditors.

The transfer of capital by venture funds and accredited investors for investments in innovative projects and startups outside Azerbaijan — through future equity agreements, convertible debt, and similar financial instruments — will be carried out in accordance with the rules and limits set by the Central Bank.

Source: president.az