The Role of Legal Uncertainty and Regulatory Gaps in Reducing the Effectiveness of Venture Capital Investment Agreements for Startups in Iran: Practical Challenges and a Proposed Legislative Framework

Abstract

Venture capital, as a driving force of the knowledge-based economy, represents a financing model in which investors assume the substantial risks associated with early-stage startups in exchange for equity ownership and participation in corporate governance. Nevertheless, the effective implementation of venture capital investment agreements within the Iranian legal system faces fundamental legal challenges. The principal issue addressed in this study concerns the extent to which traditional legal rules and regulatory deficiencies undermine the effectiveness of contractual mechanisms such as preferred shares, veto rights, and exit mechanisms thereby increasing transaction costs and contributing to higher rates of contractual failure. This research adopts a descriptive-analytical methodology based on documentary analysis of Iranian statutory law, particularly the Commercial Code and the Civil Code, to examine the inconsistencies between modern venture capital agreements and the existing legislative framework. The identified research gap demonstrates that the Iranian legal literature has predominantly focused on the theoretical dimensions of venture capital agreements while paying insufficient attention to their practical enforceability and the challenges arising before domestic courts. The rationale for selecting this topic lies in the pressing need to enhance judicial certainty for investors and to prevent capital flight from the technology sector. The findings indicate that the absence of formal legal recognition for several key venture capital contractual mechanisms under Iranian commercial law, together with their potential conflict with mandatory legal rules, has significantly weakened the enforceability of venture capital agreements and diminished their effectiveness in dispute resolution. The study further demonstrates that the current legal framework lacks the flexibility required for efficient risk allocation and management within startup financing transactions. Accordingly, it recommends the enactment of a dedicated Venture Capital Act, the establishment of specialized technology arbitration institutions, and the adoption of standardized model agreements approved by competent regulatory authorities in order to enhance legal certainty and strengthen mutual confidence between investors and entrepreneurs.