Each startup funding stage comes with distinct legal requirements, from simple convertible loans with business angels to complex equity agreements with venture capital (VC) firms, making legal oversight crucial.

Pre-Seed and Seed Funding

In the early stages, startups in Poland typically rely on business angels, who often provide capital through convertible loans. This method offers flexibility, converting loans into equity once specific milestones are met. From a legal perspective, founders benefit from a relatively simple agreement process with fewer legal hurdles and no extensive due diligence required.

Government-backed programs also play a vital role in pre-seed and seed stages. Entities like the National Centre for Research and Development (Narodowe Centrum Badań i Rozwoju), the Polish Development Fund (Polski Fundusz Rozwoju) and the Polish Agency for Enterprise Development (Polska Agencja Rozwoju Przedsiębiorczości, PARP) offer non-dilutive funding through grants and loans. However, startups must adhere to strict reporting and compliance standards, making legal expertise essential to avoid pitfalls.

Venture Capital

As startups move to the seed stage and beyond, venture capital funds become the dominant source of investment. Several VC funds have also emerged that focus on pre-seed stages, offering support to startups even in their earliest phases. The majority of these VC funds receive support from government-related entities. VC funding involves complex legal processes, including investment agreements, shareholder agreements and due diligence. The stakes are higher, with VCs often seeking control through board seats or veto rights over strategic decisions. This can impact the founders' autonomy, making it critical to negotiate terms carefully.

Debt financing

For startups with stable revenue streams, debt financing, such as bank loans, becomes an option in later stages (Series B and C). Although this allows startups to raise capital without diluting equity, it requires solid creditworthiness and collateral. The legal process here is also more involved, with founders needing to ensure they can meet repayment terms without stifling growth. Securing capital is vital for growth, but founders need to understand the legal implications of these agreements to protect their long-term interests. In other countries, more financing options are available, but efforts are also underway in Poland to expand the availability of debt options for startups.

One of the most common risks is giving up too much equity to early investors, which can hurt future funding rounds by leaving little room for new investors. Early agreements must clearly define conversion terms and ensure founders retain a meaningful stake in the company.

Another significant risk is related to intellectual property (IP). Founders must ensure that employee and contractor agreements clearly state that all IP developed belongs to the company. Without this, founders may face disputes that can delay product development and scare off investors.

Finally, while Poland provides an excellent environment for early-stage startups, it lacks liquidity in later stages, particularly when looking at international expansion. Founders may consider establishing operations abroad, even if that comes with significant financial and organizational hurdles.

Founders must grasp the business implications of term sheets and shareholder agreements, even if they aren't legal experts. Lawyers will handle the drafting, but entrepreneurs should understand how these agreements impact control, decision-making and future fundraising. A high valuation may seem attractive, but looking beyond the numbers is important to assess any hidden challenges that may limit the founders’ autonomy or slow down growth.

Key elements to scrutinize in term sheets include voting rights, board composition, anti-dilution clauses and exit provisions. Negotiating these terms early on can save founders from future disputes and ensure their vision remains intact as the company grows.

When deciding between equity and debt financing, founders must weigh control versus financial pressure. While debt financing allows founders to retain full control, it comes with repayment obligations that can strain the company’s cash flow. On the other hand, equity financing dilutes ownership but may offer more breathing room for growth without the immediate pressure of repayment.

Founders must also carefully consider the distribution of ownership (cap table). Losing too much equity can undermine the founders’ ability to steer the company. Legal counsel can help design a cap table that balances founder control with investor interests, ensuring sustainable governance.

Founders can use various legal mechanisms to protect their decision-making power. For example, in the legal forms of some companies (such as simple joint-stock companies), a dual-class share structure allows founders to retain shares with enhanced voting rights. 

Negotiating anti-dilution provisions can also prevent excessive dilution in future funding rounds, safeguarding the founders’ equity stake. Additionally, vesting schedules for both founders and employees can ensure long-term commitment and protect the company from instability caused by early departures. Negotiating investor rights is another critical step, particularly in limiting investors’ interference in daily management while maintaining oversight over significant decisions.

While experienced founders may feel comfortable navigating early discussions, a lawyer’s involvement becomes crucial during the investment-agreement phase. Legal counsel should be involved as early as the term-sheet stage to streamline negotiations and mitigate risks.

Legal experts also play a crucial role during the due-diligence process, ensuring that the startup’s legal, operational and financial records are in order. Proactively addressing potential issues, such as equity distribution and IP ownership, can instill confidence in investors and increase the likelihood of securing funding.

Law firms like DZP specialize in helping founders manage the complex legal landscape, offering legal support and valuable connections to potential investors. DZP has a project called DZP Future in which startups with the biggest potential are chosen and offered preferential terms when it comes to legal assistance (including not only financial rounds but also day-to-day problems they have to combat), mentoring support and the opportunity to connect with the wide network of contacts DZP has built for more than 30 years.

For entrepreneurs in Poland, understanding the legal intricacies of startup funding is essential for long-term success, even if they have the best support from their lawyers. As Poland’s startup ecosystem matures, well-prepared founders will be in the best position to attract investors, expand globally and retain control of their vision.