Venture capital momentum: New rules for Azerbaijani startups Analysis by Khazar Akhundov

Azerbaijan is exploring new ways to finance startups. Alongside preferential lending through state funds and international grant programs, the country is developing mechanisms to support local technology companies through specialized venture capital structures. 

As part of legislative reforms introduced this year, Azerbaijan has established a legal framework for new investment instruments, including SAFE agreements and convertible securities, aimed at making it easier to attract funding for innovative projects. Specialists from the Innovation and Digital Development Agency (IDDA) discussed these new opportunities at the conference “Development of the Digital and Innovation Ecosystem in Azerbaijan: New Legislative Opportunities.”

Venture capital involves investing in early-stage, high-growth companies, where the risks are significant, and investors can potentially lose their entire investment. At the same time, successful startups can deliver extraordinary returns, as demonstrated by companies such as Zoom, Uber, Slack, Airbnb, Meta and Google.

In recent years, Azerbaijan has taken targeted steps to strengthen its innovation ecosystem. The country has launched incubation and acceleration programs and organised hackathons and ideathons, supporting more than 600 startups with the involvement of local universities, research institutions, and international partners.

Azerbaijan currently has three venture capital funds. The first, Caucasus Ventures, was established in 2022 with the participation of the Innovation and Digital Development Agency (IDDA), PAŞA Holding, and private investors. SABAH.fund and INMerge Ventures followed in 2024. In addition, Israeli venture capital firm OurCrowd and the Azerbaijan Investment Company (AIC) have signed a cooperation agreement.

Despite these developments, the overall capitalisation of Azerbaijan’s domestic startup ecosystem remains relatively modest. According to IDDA, 22 startups raised a combined total of just over $2.62 million in investment in 2025.

To improve local startups’ access to financing on preferential terms, Azerbaijan continued to strengthen the regulatory framework governing venture capital activities in 2025–2026. The reform process was given further impetus by a presidential decree approving the “Action Plan to Accelerate Digital Development” on February 21, 2026. The decree introduced amendments to 26 laws, five presidential decrees, and two resolutions of the Cabinet of Ministers.

“This is not only about venture capital. We have also laid the legislative groundwork for the future use of crowdfunding and other international financial instruments,” said Sabina Humbatzada, head of the Legal Support Department at the IDDA, at the recent conference. “Important changes have also been introduced in public procurement rules for innovative products, while a legal framework has been established for sandbox mechanisms operated by private entities. At the same time, we have created a legal basis for a dedicated financing mechanism for public-sector and digital projects.”

The legislative package includes tax incentives, as well as measures covering migration, customs, and social insurance. Provisions governing banking and foreign exchange operations facilitate access to financial services and the repatriation of income for accredited digital nomads, investors, and venture capital funds.

Overall, these measures are intended to reduce the legal and administrative barriers facing participants in the innovation ecosystem, from developing an initial idea to bringing a finished product to market. The reforms are also designed to encourage investment, strengthen intellectual property and copyright protection, develop talent, and build human capital.

The law “On Investment Funds” underwent some of the most significant changes. Amendments introduced the concepts of venture capital funds, professional investors, and accredited investors, while also dividing funds into two operating regimes: a simplified regime based on free reporting and a licensed regime.

Unlike licensed venture capital funds, which are subject to the Central Bank’s prudential requirements and identification procedures, funds operating under the free-reporting regime face significantly fewer documentation requirements. This has created two distinct legal frameworks for venture capital funds, allowing them to operate either under a simplified registration and reporting regime or under a licensing regime.

The Civil Code was also amended to establish a legal framework for convertible loans, or convertible notes, and Simple Agreements for Future Equity (SAFE).

Turkan Hajiyeva, head of the Corporate Law Department at IDDA, said the new instruments are intended to make early-stage investment easier while protecting investors’ future rights to equity.

“A legal framework has been established in Azerbaijan for new financial instruments such as SAFE agreements and convertible securities, designed to facilitate investment in startups,” Hajiyeva said at the conference. “The SAFE mechanism simplifies investment in early-stage startups, when their shares or ownership interests may not yet have been formally established.”

If a startup subsequently succeeds and grows to the point of commercialising its products or technologies, the SAFE mechanism protects the investor’s right to receive shares or other property rights in the future, in accordance with the terms of the agreement.

The law “On Investment Funds” also incorporates the principles of shareholders’ agreements and provisions governing special investor rights. It establishes a legal framework for mechanisms such as tag-along and drag-along rights, pre-emptive rights, liquidation preferences, anti-dilution provisions, reserved matters, conversion rights, and various voting rights.

The amended law also includes provisions on Employee Stock Ownership Plans (ESOPs), which allow employees and management of technology companies and startups to receive equity stakes or shares in addition to their salaries. This instrument can help companies attract highly qualified specialists while encouraging them to build long-term relationships with the company.

Taken together, these reforms are intended to reduce barriers to investment and make Azerbaijan’s market more attractive to foreign investors. At the same time, ensuring a high level of transparency and establishing clear criteria for selecting startups for government tenders and access to state grants remain key conditions for the further development of the country’s innovation ecosystem.