Venture Deal in Uzbekistan: Term Sheet, Equity Stakes & Investor Rights

Venture Deal in Uzbekistan: Term Sheet, Equity Stakes & Investor Rights

Venture investments in Uzbekistan follow the same stages as anywhere else: negotiations, term sheet, due diligence, signing the deal documents, and wiring the funds. But the legal implementation has local quirks—from how equity capital is structured to restrictions on profit repatriation. When we built Pactum and brought in our first investors, the main challenge was translating "venture English" into Uzbek corporate law in a way that protected both founders and investors.

Key takeaways:

• A term sheet is a preliminary agreement; it sets the deal economics but has no legal force until you sign the amended charter and shareholders agreement.
• The investor's stake is determined by the startup's pre-money valuation and the investment amount; typical dilution at pre-seed/seed is 10–25%.
• Investor rights (veto powers, board representation, drag-along, anti-dilution) are enshrined in the LLC charter or shareholders agreement—make sure they're compatible with Uzbek LLC law.
• For larger rounds and foreign investors, a holding structure abroad is common; the local LLC remains the operating company.

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What is a term sheet and why you need one

A term sheet (also called a memorandum of understanding) is a short document—3 to 7 pages—where parties outline the key terms of the future investment:

• Valuation (pre-money).
• Investment amount and resulting investor stake (post-money).
• Form of investment—ordinary equity in the authorized capital, convertible loan (SAFE/convertible note equivalent), or preferred shares (if structured through a holding).
• Key investor rights: board seats, veto on certain decisions, anti-dilution, liquidation preference.
• Closing conditions (milestones, due diligence, regulatory approvals).

In Uzbekistan, term sheets are usually drafted in English and are not legally binding (except for confidentiality and exclusivity clauses). The goal is to save legal fees: if the economics don't work at the term sheet stage, there's no point drafting the full package.

Important: a term sheet is not a contract. Obligations arise only after signing the amended charter (or shareholders' resolution admitting a new member) and the shareholders agreement.

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How the investor's stake is determined

The classic formula:

Investor stake (%) = Investment / (Pre-money valuation + Investment)

Example: startup valued at $500k pre-money, investor puts in $100k → investor stake = 100 / (500 + 100) = 16.7%.

At early stages (pre-seed, seed), founder dilution is typically 10–25%. If you give away more than 30–40% in your first round, you risk losing control by Series A.

Option pool (ESOP): investors often require 10–15% to be reserved for a future employee option pool. This pool is usually carved out of founders' shares before the investor comes in (included in pre-money), so the investor's dilution is minimized.

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Investor rights: what to document in the charter and shareholders agreement

In Uzbekistan, LLCs are governed by the Law on Economic Partnerships. The charter is a public document; the shareholders agreement is a private contract between members. Key investor rights:

1. Board representation

The investor typically gets a board seat (if a board exists) or participation rights in general meetings. If the investor's stake is below the blocking threshold (usually 25% + 1 vote for decisions requiring a supermajority), they'll demand a separate veto on key decisions.

2. Veto rights

A list of decisions that cannot be made without the investor's consent:

• Amending the charter, increasing/decreasing authorized capital.
• Approving budgets, major transactions (typically >10–20% of assets), related-party transactions.
• Taking on new debt above a limit.
• Paying dividends (or conversely, prohibition on dividends until exit).
• Selling the company, mergers, reorganizations.
• Hiring/firing the CEO, changing key option program terms.

You can specify in the Uzbek LLC charter that certain decisions require unanimous consent or approval from a specific member. The shareholders agreement adds the mechanics.

3. Anti-dilution protection

If the next round closes at a lower valuation (down round), the investor gets additional equity or the right to buy shares at a favorable price. Two main variants:

• Full ratchet—investor receives enough new shares as if they'd originally invested at the new (lower) price. Very harsh for founders.
• Weighted average—adjustment is proportional to the volume of the new round; more balanced.

In an Uzbek charter, this is implemented as an option or an obligation of founders to transfer part of their shares.

4. Drag-along and tag-along

• Drag-along: if founders (or majority holders) sell the company, they can force minority investors to sell their stake on the same terms. Protects majority from deal blockage.
• Tag-along: if founders sell their stake, minority investors have the right to join the transaction and sell their shares to the buyer on the same terms. Protects minority from being "left behind" with an unknown new majority owner.

Both mechanisms go in the shareholders agreement; the charter provides a general reference to member obligations.

5. Liquidation preference

Upon sale or liquidation, the investor gets their money back before the remainder is distributed among all members pro rata. For example, 1x liquidation preference means the investor first recovers the investment amount, then the remainder is split proportionally.

Liquidation preference is harder to implement in an Uzbek LLC (no preferred share class), so it's written into the shareholders agreement as an obligation of founders to compensate the investor for the difference upon exit.

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The closing process: from term sheet to funds transfer

• Sign the term sheet (usually non-binding except confidentiality).
• Due diligence—investor checks legal clean-up (charter, licenses, contracts, IP, compliance), financials, taxes, employment. Takes one week to one month.
• Draft documents:

- Amended charter or resolution admitting a new member and increasing authorized capital.

- Shareholders agreement.

- Subscription agreement (capital contribution agreement) or loan agreement (if using a convertible loan).

• Register changes with the Tax Committee (or via e-uzb.uz): updated charter, new member in the legal entity register, registered capital increase.
• Transfer of funds—investor wires money to the company's bank account (if it's a capital contribution) or to an escrow account (if using a holding structure).

Timeline: with a well-prepared data room and no red flags—4 to 8 weeks from term sheet to closing.

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Founder's checklist before a venture deal

• [ ] Clean cap table: all previous member changes are registered, no "lost" or disputed stakes.
• [ ] IP belongs to the company: code, design, trademarks transferred via agreements from founders and contractors; copyrights or patents registered where critical.
• [ ] Compliance in order: licenses (if required), employment contracts, tax filings without material violations.
• [ ] Prepare a data room: charter, financial model, cap table, list of key contracts, IP documentation, compliance documents.
• [ ] Agree on valuation and deal structure: discuss with your lawyer and tax advisor which structure (direct stake/holding/convertible loan) is optimal for your stage.
• [ ] Read the term sheet carefully: especially anti-dilution, liquidation preference, veto rights—they heavily impact your future flexibility and exit economics.

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FAQ

Q: Can a foreign investor invest directly in an Uzbek LLC?

A: Yes, foreign legal entities and individuals can be members of an Uzbek LLC. You need to register charter amendments and enter the investor in the legal entity register. However, repatriating dividends abroad requires withholding tax (rate depends on the double taxation treaty), and exit via sale of shares to a foreign buyer may require currency control. For rounds from $300–500k+, funds typically prefer a holding structure.

Q: What are SAFE/convertible notes and do they work in Uzbekistan?

A: A SAFE (Simple Agreement for Future Equity) and convertible notes are instruments where the investor provides money now, and the stake is determined later, at the next round (usually with a discount or valuation cap). Uzbekistan has no direct legal equivalent. Legally, it's structured as a loan with conversion rights, but the tax and corporate consequences of conversion are poorly regulated—I recommend using these only for bridge rounds and with solid tax advice.

Q: How much equity should I give away in the first round?

A: At pre-seed/seed—typically 10–25%. If you give away more than 30–40%, it'll be hard to maintain control and motivation in subsequent rounds. Also factor in the option pool (ESOP)—usually 10–15% is reserved for the team and carved out of founders' shares before the investment.

Q: Do I need a shareholders agreement if all rights are in the charter?

A: Yes. The charter is a public document, constrained by LLC law. The shareholders agreement lets you detail drag-along, tag-along, dispute resolution mechanisms (arbitration), exit conditions, founder non-competes, vesting, and other things that are awkward or impossible to put in the charter. Plus, the shareholders agreement is confidential—competitors won't see your arrangements.

Q: What if the investor demands 2x liquidation preference or full ratchet anti-dilution?

A: These are aggressive terms, typical of late-stage or distressed deals. Liquidation preference above 1x means that if the company sells at a price close to the current round valuation, founders may get zero. Full ratchet anti-dilution fully shifts down-round risk to founders. If you're early-stage and have alternative investors, negotiate: industry standard is 1x liquidation preference (non-participating preferred) and weighted average anti-dilution. If this is the only capital available, consult a lawyer on damage-limitation mechanisms (cap on anti-dilution, sunset clause).

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Conclusion

A venture deal in Uzbekistan requires balancing international practice (term sheets, investor rights, founder protection) with local corporate law. The key is to structure your company upfront so that all parties' rights are clear and protected, and a future exit or next round doesn't turn into a legal nightmare.

This material is for informational purposes only and does not constitute individual legal advice. Specific deal terms depend on many factors and require analysis by a qualified attorney.

If you're raising capital or planning a venture round—the Pactum team can help structure the deal, prepare documents, and manage negotiations to protect your interests while keeping the process transparent for investors. Book a consultation—we'll review your situation and propose the optimal structure.