Startup and Venture Environment Law Comes into Force in Azerbaijan

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

As reported by AZERTAJ, the document introduces for the first time into Azerbaijani legislation the concept of an employee stock (equity) participation program agreement. This will allow the management or founders of companies to provide employees with shares or equity stakes on preferential terms or free of charge.

The transfer of shares into the full ownership of an employee depends on two conditions: the employee must work at the company for a specified period; the employee or the company must achieve certain business performance targets.

If the employment contract is terminated due to staff reduction, at the employee's initiative, or for health reasons, a portion of the shares not yet vested may be recognized as belonging to the employee. In addition, the company will be able to buy back the shares received by the employee at a fair market price.

If, however, an employee is dismissed for disciplinary violations or through their own fault, they lose the right to shares not yet vested, and may be required to sell already vested shares back to the company at nominal or lower price.

At the same time, shares or equity stakes received under such programs will not be considered wages, will not be included in their composition, and cannot be used as a substitute for wages.

The amendments also provide for the introduction into the Civil Code of modern corporate governance mechanisms for startups and venture investors.

Shareholders and company participants will be able to enter into corporate agreements governing voting procedures, the sale of shares, business valuation, dispute resolution through arbitration, and the application of foreign law. Such agreements will be concluded in written form and will not require notarial certification. In relations between the parties, the provisions of the corporate agreement will take priority over the company's charter.

In addition, mechanisms widely used in the venture industry are being introduced into legislation: Tag-along (co-sale right); Drag-along (forced sale right); ROFR (right of first refusal). To protect investors, mechanisms such as Valuation Cap (limitation on the maximum company valuation) and Discount (discount relative to the valuation for new investors) are provided.