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

Startup.az reports that, for the first time, Azerbaijani legislation introduces the concept of an Employee Equity Participation Plan Agreement. Under this mechanism, a company's management or founders may grant employees company shares or equity interests either free of charge or on preferential terms.

The transfer of full ownership of these shares to employees may depend on two types of vesting conditions:

• Time-based vesting, requiring the employee to remain with the company for a specified period; and
• Performance-based vesting, requiring the employee or the company to achieve predetermined business objectives.

If an employment contract is terminated due to reasons such as staff redundancy, voluntary resignation, or the employee's health condition, part of the employee's unvested equity may still become vested. In addition, the company may repurchase the employee's vested shares at their fair market value.

However, if an employee is dismissed due to misconduct, violation of employment duties, or disciplinary reasons, they will forfeit all unvested equity rights. Any vested shares may be subject to mandatory repurchase by the company at their nominal value or an even lower price.

The law also clarifies that shares or equity granted under these agreements do not constitute official salary, are not considered part of wages, and cannot be used as a substitute for salary payments under any circumstances.

The amendments to the Civil Code introduce several major mechanisms designed to simplify startup governance and improve Azerbaijan's investment ecosystem.

Company participants and shareholders may now conclude corporate agreements governing voting procedures at general meetings, share transfer and valuation terms, dispute resolution through arbitration, and the application of foreign law. These agreements must be made in writing and do not require notarization. Where the provisions of a corporate agreement conflict with the company's charter, the corporate agreement will prevail in regulating the internal relations between its parties.

The legislation also formally recognizes three key venture capital rights commonly used in international startup investments:

• Tag-along rights, allowing minority shareholders to sell their shares on the same terms and at the same price when a majority shareholder sells their stake;
• Drag-along rights, enabling majority shareholders to require minority shareholders to participate in the sale of the company under the same terms; and
• Right of First Refusal (ROFR), requiring a shareholder wishing to sell their stake to first offer it to existing shareholders.

Corporate agreements may also include liquidation preference provisions, allowing investors to recover their invested capital before founders in the event of company liquidation.

In addition, anti-dilution protections may be included so that if the company's valuation declines during future financing rounds, conversion ratios can be adjusted to preserve the value of an early investor's ownership stake.

The company's charter may authorize the Board of Directors, within a predetermined limit, to allocate new equity interests or issue new shares without convening a general meeting of shareholders.

The amendments also permit companies to use new financing instruments that may later be converted into equity. Until conversion, these instruments will not be treated as securities or derivative financial instruments.

Under a Convertible Note, an investor provides a loan to the company, which, upon maturity or upon a qualified financing round, converts—together with accrued interest—into equity. To protect investors, mechanisms such as a valuation cap and discount rate may be applied.

The law also recognizes the Simple Agreement for Future Equity (SAFE). Under a SAFE, an investor contributes funds to the company without creating debt or interest obligations. The investment converts directly into equity upon a future financing event, company sale, or other triggering event. In the event of liquidation, SAFE investors' claims rank ahead of ordinary shareholders but behind other unsecured creditors.

Finally, the law provides that venture capital funds and accredited investors may transfer funds, within the limits and procedures established by the Central Bank of Azerbaijan, to invest in innovative projects (startups) operating outside Azerbaijan through instruments such as SAFE agreements, convertible notes, and other similar mechanisms designed to acquire future equity interests.