How not to give away 38% of your company too early
Founders of technology companies often fall into euphoria when they see the first serious investment proposal on their laptop screen. The problem is that 2 million PLN in the account is only one side of the coin; the other side is the quiet clauses in the term sheet. In Katowice, we have already seen 14 cases where a lack of business diplomacy at the start led to the dismissal of the CEO in less than 11 months after the transfer.
The trap of the first valuation and dilution mathematics
Many founders in Poland believe that giving away 38% of shares in the first round is a standard price for rapid growth. This is a mistake resulting from a lack of hard facts on the negotiating table. If your company is valued at 5.2 million PLN before investment and you take 2 million, you must realize that every subsequent step will drastically limit your room for maneuver. Investors often use mechanisms that take up only 3 pages in the documentation but in practice block every significant board decision without their express consent. (By the way, most funds have been using the same contract template since 2019, only changing the amounts).
Analyzing 47 projects that passed through our office at Chorzowska 50, we noticed a repetitive pattern. The founder focuses on the percentages visible in the National Court Register (KRS), forgetting about the investor's personal rights. Money likes silence, so the fund rarely boasts that with 38% of shares, it can install its own operations director with a right of veto over expenses exceeding 14,000 PLN. Such a tight share structure on the investor's side means you stop being the owner and become just a highly-paid employee in your own office.
Instead of agreeing to the first offer that comes along, it's worth checking alternative dilution scenarios. In March 2023, one of our SaaS clients negotiated with a fund for 8 weeks. By restructuring the transaction into tranches dependent on specific results, they retained 12% more shares than originally assumed. The game for control is about knowing when to say 'no' and wait for better terms. Remember that once given away, shares can almost never be recovered without massive financial outlays.
Money likes silence, but shares require loud and hard negotiations right at the beginning of the road.
Intellectual property as the main bargaining chip
In the IT industry, source code is your most valuable asset, but funds often try to take it over for a fraction of its value. A standard clause on transferring economic copyrights to the company is obvious, but the devil is in the details regarding license-backs and fields of exploitation. We saw a situation in Gliwice where a founder lost the right to use his own code libraries in other projects because he signed a contract without an IP analysis. This was a mistake that cost him about 85,000 PLN when trying to launch another business two years later.
During an investment round, you must demonstrate that your IP is 98.7% secured. A fund will conduct an audit that usually lasts from 4 to 7 business hours. If you have 5 developers on B2B contracts in your team and each of them has a different clause regarding the transfer of rights, you have a problem. We help organize these matters before the documents reach the investor's lawyers. A clean legal situation in GitHub repositories is a stronger argument in negotiations than the most optimistic charts in Excel.
Investors value security more than promises of profit. If you prove that your intellectual property has a tight structure, their willingness to compromise on shares increases. In October 2024, we worked on a project for a software house where, by organizing 23 contracts with subcontractors, we managed to raise the company's valuation by nearly 19%. These are hard facts that convince the other side faster than any other argumentation.
The Board and the right of veto – where power ends
Many people think that owning 51% of shares guarantees them full power. In the world of business diplomacy, this is an illusion. An investor with 38% can include a list of reserved matters in the articles of association that require unanimity. This could be changing the salaries of key employees, taking out a lease on 3 company cars, or even choosing an accounting firm. In this way, despite having a majority in capital, your real control over the operational side of the company is limited to a minimum.
Our team consists of 4 specialists who analyze such traps every day. We once saw a contract where the fund had the right to appoint the chairman of the supervisory board with a casting vote in the event of a tie. This is a subtle move that in practice hands the reins to a minority shareholder. The game for control is not just a fight for percentages in a table; it is primarily a fight for the content of the board regulations and the company's statutes. Without a tight legal structure, your vision for growth can be blocked at any time.
Effective negotiations require an understanding of investor psychology. The fund wants to minimize risk, but you must protect your autonomy. A good solution is to introduce monetary thresholds for decisions requiring investor consent that grow with the company's revenue. If your turnover exceeds 120,000 PLN per month, it would be absurd to ask the investor for permission to buy a new server for 8,000. Setting clear boundaries of competence is the foundation of a healthy long-term relationship.
Control over the company ends where imprecise veto rights in the articles of association begin.
Exit strategy and Drag-Along clauses
Drag-Along clauses are another point where founders lose control over the future of the company. If an investor finds a buyer for their 38%, they can force you to sell your shares on the same terms. This can happen at a time when you believe the company is worth 3 times more. Without proper protection of a minimum sale price (the so-called floor price), you are pushed out of your own business at the least appropriate moment.
At Alians Business Diplomacy, we always advise that the drag-along right be limited in time or financially. For example, an investor can only use this right 3 years after entry or only when the price for the entire company exceeds a set threshold, e.g., 16 million PLN. This protects you from a premature 'exit' that only serves the fund to close their own investment cycle. Such hard facts in the contract build your negotiating position.
The last element is Tag-Along clauses, which work in your favor. If an investor sells their shares, you have the right to sell yours on the same, often very attractive terms. This is a defensive mechanism that ensures you won't be left in the company with a new, unknown partner with whom you don't share a common vision. In 2022, we helped a founder from Katowice exit an investment on terms that were 27% better than market rates, precisely thanks to a well-phrased Tag-Along clause.
