ADR Practices in VC Agreements

Arbitration 

• Contractual Framework

An arbitration agreement may be executed as a separate agreement between the two parties, or it may take effect through the inclusion of an arbitration clause in any agreement concluded between the parties, irrespective of its subject matter. In VC agreements, the arbitration provision is typically included as a separate clause in the CLA, the SPA, or shareholders’ agreements signed between the investor and the entrepreneur. This is attributable not only to the requirement that arbitration be agreed upon through a clear and written expression of intent, but also to the fact that, for the purpose of resolving the relevant dispute, the agreement to be relied upon will be disclosed between the parties. This is significant in terms of identifying the source of the dispute within the contract.

A clause that leads the parties to prefer arbitration in the event of a dispute arising between the parties to the agreement containing the arbitration clause will also entail the necessity of scrutinizing the existence of that underlying agreement. The requirements that must be satisfied for arbitration—namely that “the signatures belong to the parties” and that there is a clear expression of intent—are also, as a rule, of a nature that affects the validity requirements of the agreement in which the clause is incorporated.

• Advantages
  • Confidentiality: Recourse to arbitration in ADR arrangements is significant in terms of ensuring confidentiality for both the investor and the entrepreneur. Before Turkish commercial courts, the likelihood that disclosed information may be shared with third parties is higher than in arbitral proceedings. Under Turkish procedural law, court proceedings are, as a rule, public; this principle does not apply in arbitration proceedings. In addition, due to the internal confidentiality rules of ISTAC (Article 21), the ICC (2021 Arbitration Rules, Appendix I – Statutes of the International Court of Arbitration, Article 8), and the LCIA (Article 30), arbitrators are subject to additional confidentiality obligations. This helps prevent investors’ other VC investments from being adversely affected as a result of a dispute. For entrepreneurs, the public disclosure of a dispute is likewise critical, as it may negatively affect both the start-up’s valuation and subsequent fundraising rounds. In a competitive VC ecosystem, the dispute becoming known to other portfolio management companies (hereinafter “PMCs”) or start-ups may be highly likely to cause significant harm to the corporate reputation the parties seek to build. 

• • Speed: The duration of a lawsuit to be filed before Turkish commercial courts is considerably longer compared to ADR. In this regard, ISTAC’s ISTAC Fast Track Arbitration mechanism (Article 7)—under which lower-value disputes may be resolved within three months—constitutes a significant advantage in Türkiye’s inflationary market when compared to ordinary court proceedings. Moreover, in VC investments, a venture’s need for rapid capital inflow is of critical importance. Start-ups often turn to VC funds precisely to meet capital needs swiftly; therefore, a protracted dispute may even jeopardize the venture’s survival. For start-ups, resolving the dispute within a short time and, depending on the outcome, pursuing new investment avenues or ensuring compliance with the terms of the existing agreement is invariably more advantageous. Particularly in newly emerging markets (particularly in newly emerging markets such as unmanned aerial vehicles or AI-based SaaS solutions), a venture being deprived of capital due to a dispute may cause it to fall behind in the market. For investors, likewise, as a corollary of operating in high-risk markets, disputes that drag on without resolution may complicate the liquidation of capital (by prolonging exit processes) or hinder prospective investments (by delaying new VC investments due to the ongoing dispute).

• • International Enforcement (New York Convention): Türkiye became a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, dated 10 June 1958, through the publication in the Official Gazette on 21 May 1991 of Law No. 3731 approving the Convention. By virtue of the Convention, and pursuant to the principle of reciprocity (Article 2), Türkiye undertook to recognize and enforce arbitral awards rendered in other Contracting States. Moreover, where the parties are of different nationalities or where an award is rendered under the auspices of an arbitral institution seated abroad (e.g., the ICC or the LCIA), such awards—being enforceable internationally—may be brought to enforcement both in Türkiye and in other Contracting States.

Mediation 

• Contractual and Legal Framework

Pursuant to the principle of “freedom of contract” prevailing in Turkish law, the parties may agree that, in the event a dispute arises, mediation will be pursued first. From the perspective of procedural law, Prof. Dr. Muhammet Özekes explains this as follows:

“Where it has been agreed, by virtue of a provision added to the contract, that the parties will have recourse to mediation in the event of a dispute, mediation retains its voluntary character; however, the consent to resort to mediation is given in advance.”

In the Turkish legal system, there is legislation governing mediation, in particular the CCP and the Mediation Law. The Mediation Law regulates the definition of mediation, its fundamental principles, the rights and obligations of mediators, the enforcement of international mediation settlement agreements, the register of mediators, the Mediation Department Presidency, and other related matters. For instance, mediation constitutes a mandatory precondition in commercial disputes, disputes arising out of labour law, and certain other categories of disputes. Since these preconditions are established by statutory regulation, failure to comply with them constitutes a procedural ground for dismissal.

Mediation is becoming increasingly widespread in international disputes, and various instruments have been developed to regulate this area, most notably the UNCITRAL Model Law on International Commercial Conciliation and the 2019 Singapore Convention. The Singapore Convention is significant in terms of the enforcement at the national level of disputes settled through mediation, and, due to this function, it resembles the New York Convention applicable in the field of arbitration.

• Advantages 

The protracted duration of judicial proceedings also results in financial loss of interest, stemming from the expenditure of businesspeople’s time and high attorneys’ fees. Indeed, disputes that remain unresolved for such extended periods may, once resolved, give rise to many new disputes. In arbitration, by contrast, the high level of arbitrators’ fees constitutes the principal cost item. Moreover, even in arbitration, the time lost by businesspeople as a result of a process that is lengthy when compared to mediation also adversely affects their financial interests. Attorneys’ fees incurred in litigation and arbitration—given the extended duration of proceedings and the existence of an ongoing dispute that affects the business—render these two avenues financially disadvantageous compared to mediation.

One of the most significant benefits mediation offers to the client is undoubtedly financial. As explained above, the magnitude of arbitrators’ fees is not comparable to the fees paid to a mediator. Moreover, in Türkiye—where court proceedings may last for years—the fact that mediation is a process that can be measured in weeks places it in a distinct position also as a means of alleviating caseload pressure. In this respect, a client who does not suffer any loss of time can devote their focus to other matters. For lawyers, on the other hand, one of the most important aspects of mediation is that it provides greater opportunities to resolve disputes, which also contributes to professional satisfaction.

Another feature that distinguishes mediation from other dispute resolution mechanisms is that it is not tightly bound to procedural law. It should be noted, however, that since mediation is an institution of the legal order, it is regulated by statute and remains subject to mandatory rules of law. Yet the flexibility inherent in mediation by its very nature requires that it be positioned differently in terms of dispute resolution. Indeed, the procedural rules that must be complied with throughout judicial proceedings are not encountered in mediation. Likewise, whereas arbitration entails an obligation to adhere to the contract, this is not the case in mediation. Accordingly, it may be said that, while mediation is grounded in past facts, it ultimately aims to shape the parties’ shared future. For these reasons, mediation—conducted without the pressure of an external authority—is far more flexible than other dispute resolution mechanisms. This enables the parties to express themselves more effectively and contributes to a resolution that, by the nature of mediation, can satisfy both parties.

Hybrid Mechanisms

• Implementation

The ISTAC Med-Arb model is a hybrid mechanism under which the parties first attempt to resolve their dispute through mediation and, if unsuccessful, proceed to arbitration. In practice, the process begins under the ISTAC Mediation Rules, with the parties seeking a solution in a confidential and flexible environment facilitated by a mediator. If a settlement is reached, it becomes binding upon obtaining an enforceability annotation from the court, and arbitration becomes unnecessary.

If, however, the parties cannot reach a settlement in mediation, the process is concluded by a final record issued by the mediator, and the matter automatically transitions to arbitration under the ISTAC Arbitration Rules. At this stage, due to the existing Med-Arb clause, the parties are not required to enter into a new arbitration agreement. One of the parties initiates the proceedings by submitting a request for arbitration to the ISTAC Secretariat; an arbitrator or arbitral tribunal is appointed, and the process ends with a binding and enforceable arbitral award.

It should be noted that the claims and evidence presented during the mediation phase do not affect the arbitration proceedings and carry no evidentiary value therein. Nevertheless, it is naturally expected that the arbitration phase will proceed more smoothly, as the parties will have become acquainted with one another during the mediation process.

• Advantages

In resolving disputes in investor–entrepreneur relationships, two considerations must not be overlooked: the protection of trade secrets and the sustainability of the relationship. The mediation phase offers the parties an amicable, confidential, and relationship-preserving avenue for settlement. In this way, the parties have the opportunity to maintain their long-term partnership; in particular, avoiding harm to start-up/fund relationships within the VC ecosystem is of paramount importance.

If no settlement is achieved in mediation, the transition to arbitration ensures that disputes capable of determining the fate of the investment do not remain pending and that a binding decision—enforceable on an international scale—is rendered. This both safeguards the investor’s capital and provides a swift and final solution that enables the entrepreneur and the investor to continue their business. Moreover, the savings in time and capital throughout the process, given the critical importance of speed and efficient resource allocation in the VC ecosystem, create a significant competitive advantage for the parties.

Current Debates and Recommendations

The Number of Arbitrators with Expertise in the VC Sector

One of the current issues on the agenda in Türkiye is the limited number of mediators or arbitrators with expertise in the VC field. Indeed, given that the VC ecosystem has not yet become widespread in today’s Türkiye, the number of arbitrators and mediators who are well-versed in VC-related disputes is limited. Although all arbitrators serving under the Istanbul Arbitration Centre (ISTAC) and the Arbitration Center of the Istanbul Chamber of Commerce (hereinafter the “ITOTAM”) consist of qualified professionals, the number of arbitrators with a track record of work specifically focused on VC is unfortunately limited. 

Turkey has a limited pool of arbitrators capable of handling venture capital disputes. This shortage does not stem from a deficiency in legal knowledge; the available arbitrators are well-versed in Turkish investment law and can analyze such disputes within that framework. However, the core challenge lies in their unfamiliarity with the commercial and operational dynamics inherent to the venture capital ecosystem — a gap that legal expertise alone cannot bridge.

The principal reason for the absence of arbitrators in Türkiye who have conducted work specifically in the VC field is that the VC ecosystem has not yet become widespread. This is likely to be remedied in the coming years as the VC ecosystem expands further. By its nature, law is the last social institution to be shaped and regulated (a point comparable to the ultima ratio principle in criminal law). Accordingly, as the VC ecosystem grows, academic research in this field will gain momentum; moreover, as the number of disputes increases, the number of arbitrators specializing in VC will also naturally increase.

Power Imbalance Between the Investor and the Entrepreneur

The power imbalance that inherently arises between the entrepreneur and the investor is another key issue. The majority of entrepreneurs—particularly when seeking investment at the seed stage or earlier—often have limited command of the ecosystem and therefore sign agreements prepared by investors without being able to influence their terms. Another reason for this is that the success rate of ventures is, in any event, relatively low. For example:  “About three-quarters of venture-backed firms in the U.S. don’t return investors’ capital, according to recent research by Shikhar Ghosh, a senior lecturer at Harvard Business School.” As a result of the imbalance stemming from these factors, investors are able to stipulate in the agreements the dispute resolution mechanism of their choosing. While this is not necessarily a route that always places the entrepreneur at a disadvantage, the specific point of criticism here is that the entrepreneur’s contribution to the selection of the dispute resolution mechanism in VC agreements remains at a minimal level.

Rather than seeking the solution to the power imbalance between the entrepreneur and the investor within ADR processes, we should look for it within the VC ecosystem itself. In other words, given the market’s inherent dynamics, this imbalance may prompt entrepreneurs to market their ideas—which trigger seed-stage processes—more effectively and to conduct healthier contracting processes, even though they are, in principle, in a disadvantaged position within the VC ecosystem. It should also be noted that the issue in question arises in many areas of legal life (e.g., employee–employer relationships). In this respect, certain legislative amendments (for instance, revisions to the Mediation Law, including regulating mediation as a mandatory precondition) may help to overcome the said imbalance. 

The Status of ISTAC and ITOTAM 

Another point is that the growth of ISTAC and ITOTAM is naturally tied to the financial volume of Istanbul and its hinterland. One of the most important financial instruments for increasing the financial volume of Istanbul and its hinterland is the VC ecosystem. In this respect, the growth pace and approach of the VC ecosystems in China and India may serve as an example for Istanbul. It should not be overlooked that, for Türkiye to become an ADR hub, it must also be a financial hub.

The key obstacle to the development of ISTAC and ITOTAM is that, as noted above, such development is dependent on the financial capacity/volume of Istanbul and its hinterland. For this reason, steps aimed at increasing the financial volume of Istanbul and its hinterland will advance Türkiye on its path to becoming an ADR hub. Chief among these steps is promoting Istanbul as an ADR hub for Gulf capital and, in light of the prospective Middle Corridor, for inner Eurasian capital.

Abuse of Mediation in Türkiye

The use of mandatory mediation in Türkiye as a mechanism for delay and deferral is another issue. In this regard, it is known that Turkish lawyers use this system to postpone court proceedings and, moreover, that they often deliberately take disputes to court, particularly because attorneys’ fees in mediation tend to remain low. This constitutes one of the most significant and current obstacles to the development of ADR in Türkiye.

The principal reason mediation is used by lawyers as a delay mechanism is that the current mediation fee levels are very low. In practice, mandatory mediation proceedings are occasionally instrumentalized by counsels not as a genuine dispute resolution mechanism, but as a procedural tool to suspend the running of the statute of limitations. This strategic use of the process is further compounded by the prevailing expectation among mediators that the parties will promptly conclude the session without substantive engagement. Since lawyers, like other components of the service sector, provide services on an hourly basis, and because mediation fees do not correspond to the Turkish Bar Association’s Minimum Fee Schedule, the majority of lawyers today do not prefer mediation and, in line with their interests (also in light of practical legal realities), opt instead to resolve disputes through the courts.

In order to address this structural deficiency, a comprehensive revision of the mediation fee schedule is imperative. Such a revision should not merely adjust existing fee levels in nominal terms, but should establish a fee framework that is proportionate to the complexity and duration of the dispute, aligned with the Turkish Bar Association’s Minimum Fee Schedule, and capable of incentivizing lawyers to engage with mediation as a substantive alternative to litigation. Without a financially viable framework for legal practitioners, mandatory mediation will continue to function as a procedural formality rather than an effective dispute resolution mechanism — a trajectory that fundamentally undermines the legislative intent behind its introduction into Turkish law.

Arbitrators’ Fees 

Although ADR is in many respects compatible with the VC ecosystem, some investors refrain from opting for these mechanisms due to the high level of arbitrators’ fees. This is undoubtedly not merely a Türkiye-specific concern; rather, it constitutes one of the most significant obstacles within the global ADR system.

This issue is, in fact, of particular importance for arbitration, both globally and in Türkiye’s ADR landscape. The solution, in essence, lies within ADR itself. In particular, the wider adoption of integrated mechanisms that require the use of mediation—such as mediation generally, or combined models similar to ISTAC’s Med-Arb system—would not only address this perception of cost, but could also reduce fees by decreasing the number of disputes that ultimately proceed to arbitration.

Conclusion

As noted above, one of the most critical elements in resolving disputes arising under VC agreements is the necessity for the process to be concluded expeditiously. In this respect, it is evident that mediation and arbitration are more advantageous than proceedings before the commercial courts. This stems from the high level of risk inherent in the VC ecosystem. Indeed, a gap in the dispute resolution framework for disputes arising under VC agreements may, for the investor, jeopardize the continuity of the investment and disrupt the bilateral relationship; and, for the entrepreneur, may lead to the cancellation of an investment process of vital importance and even to the venture’s bankruptcy. As is clear, the importance of clauses governing dispute resolution in VC agreements cannot be overstated.

While arbitration provides investors with assurance through its emphasis on confidentiality and the international enforceability of awards, mediation offers advantages for entrepreneurs due to its low cost, speed, and relationship-preserving character. Hybrid mechanisms such as Med-Arb, by combining the complementary features of these two methods, foster confidence that disputes will ultimately be resolved and strengthen the likelihood of achieving an early outcome by utilizing both processes. Nevertheless, the limited number of arbitrators and mediators specialized in VC disputes, the high level of arbitrators’ fees, and the abuse of mandatory mediation continue to exist as factors that constrain the effectiveness of ADR in Türkiye.

In conclusion, the systematic preference for ADR mechanisms in VC agreements will not only ensure the efficient resolution of disputes but will also contribute to the development of Türkiye’s entrepreneurship and investment ecosystem. For this reason, strengthening ADR mechanisms at the legislative level, enhancing institutional capacity, and diversifying areas of expertise are of key importance for Türkiye. Accordingly, ADR is not merely a field concerned with the resolution of disputes; it is an integral component of high-risk, speed-oriented financial systems such as the VC ecosystem.

Muhammed Emirhan Özdemir

Bibliography:

Strauss, E., & Cable, A. (2026). Venture capital litigation in the unicorn era. SSRN. https://doi.org/10.2139/ssrn.6129866 

Pekcanıtez, H., Atalay, O., & Özekes, M. (2018). Pekcanıtez usûl (15th ed., Vol. 3). On İki Levha Yayıncılık.

Gage, D. (2012). The venture capital secret: 3 out of 4 start-ups fail. The Wall Street Journal. https://www.wsj.com/articles/SB10000872396390443720204578004980476429190