The video games industry is gaining traction from entrepreneurs and investors both globally and locally over the past few years due to increasing deployment of software, advanced technology and cloud technology, and high revenue generated by video game companies.
According to Startups Watch’s Year in Review 2021 report,1 the video games sector became the center of attraction with 52 deals for a total of US$265 million raised and valuations increased by 80 percent in Turkey. Among ten startups raising the most capital at seed stage in Turkey, in 2021, four of them were startups (Hadi, Ace Games, Brew Games and Fomo Games).
Moreover, according to Startups Watch’s 2022-H1 report,2 in the first half of 2022, Turkey not only broke its own record in gaming deals, but also became the country with the highest amount of video game deals in Europe. In the first half of 2022, US$333 million were invested in video game companies across 13 deals.
Foreign investors participated in 1 out of every 4 deals made in Turkey, including foreign investors such as Sequoia Capital, Alpha Wave Global, Qatar Investment Authority, BlackRock Private Equity Partners, Kora, Institutional Venture Partners, Griffin Gaming Partners, Index Ventures, Makers Fund, Balderton Capital and IVP. Note that, legally, foreign investors are generally treated the same as Turkish investors.
Video game companies are usually funded either through equity financing or convertible instruments. Equity financing is carried out through capital increase and the subscription price exceeding the nominal subscription value of company shares can be treated as share premium. On the other hand, while convertible instruments are preferred by most investors, they are subject to some restrictions under Turkish Law.
Term Sheet: The term sheet includes the main subjects of a transaction, such as the type of security, subscription price, the amount of subscription shares, liquidation preference, pro-rata rights, protective provisions, share transfer restrictions and deal structure in general. Term sheets are developed and signed by parties prior to drafting the subscription agreement.
Subscription Agreement: A subscription agreement is signed by the parties to agree on terms and conditions in relation to the subscription and closing provisions such as conditions precedents, closing actions and post-closing actions. Representations and warranties (“R&W”) of the parties and indemnification provisions in case of a breach of these R&Ws are also regulated under the subscription agreement.
Before or during the drafting of the R&Ws, legal, tax, financial and technical due diligence processes may be conducted, and disclosures (if any) may be made in a separate disclosure letter.
Within the scope of legal due diligence, mainly, the company’s corporate status, financial agreements, assets, intellectual and industrial properties, business model, employment matters, disputes and litigation matters, and agreements which the company is a party to, are reviewed in detail.
Shareholders’ Agreement: A shareholders’ agreement (“SHA”) is signed by founders and investors to govern the relationship between the shareholders, as a closing action. Under these SHAs, shareholders may agree on the matters listed below:
Even though the parties usually agree that the SHA prevails the articles of association of the company (“AoA”), the agreed terms are also reflected in the AoA. However, all agreed terms cannot be reflected in the AoA as per some restrictions regulated under the TCC. On the other hand, since the AoA can be reviewed by third parties through publicly available online trade registry records, the parties may prefer to keep some information, such as the valuation or price per share determined under the share transfer restrictions, confidential. In Turkey, the formation of the board of directors, veto rights of the investors (protective provisions) and liquidation preference terms are generally reflected in the AoA.
Please find below the main subjects to pay attention to:
Firstly, since the ownership of the intellectual property (“IP”) rights of a video game company are one of the most important issues since investors are in fact, investing in the IP; it is crucial that the company duly owns the IP rights in relation to its games/products. If the founders of a video game company have created their games/products while they were working for another company, then the IP rights of their games/products may belong to their former employer.
Secondly, founders may have signed a non-competition agreement with their former employers. In the event of a breach of these non-competition obligations, the founders may be liable to indemnify the former employer or to pay a penalty amount. This might have a direct effect on the founders and an indirect effect on the company and the business.
Firstly, it should be considered whether the transaction leads to a permanent change of control. As per the current legislation, a shareholder having strategic veto rights such as approval of the company’s annual budget, business plan, appointment of the Directors or the c-suites or decisions regarding the major investments might be considered as a change of control of the company.
Secondly, if the transaction is accepted as it is causing a permanent change of control in the company, the transaction must be notified to the Turkish Competition Authority if:
However, the TRY 250 million threshold mentioned under letters (a) and (b) above does not apply to transactions concerning the acquisition of technology undertakings which includes video game companies. The main reason for this exception is to eliminate the risks arising from the acquisition of newly established and developing companies (i.e. killer acquisitions).
In seed stage investments, since the approval process takes a long time, the investors may give up their strategic rights to increase time efficiency. In this context, we recommend each transaction to be reviewed by a local competition counsel.
Authors of the article:
Okan Arican, Partner, Istanbul, Turkey Dilruba Güldoğan, Associate, Istanbul, Turkey
More insights together with some numbers and statistics in our Video games industry report.