Term sheet in Poland — key clauses before the investment agreement

A term sheet is often treated as a short business document, but it sets direction for the entire investment. Even when many provisions are non-binding, parties usually negotiate the final investment agreement within the framework created by the term sheet. For Polish companies receiving investment from UK, US, Canadian and Australian investors, term sheet structures combine international templates (often from Y Combinator, NVCA Model Documents, BVCA) with Polish corporate law constraints. Understanding which provisions translate cleanly and which require adaptation is critical.

→What this guide covers

1. 01Term sheet structure
2. 02Binding vs non-binding clauses
3. 03Valuation and investment structure
4. 04Liquidation preference
5. 05Founder vesting and lock-up
6. 06Control rights and protective provisions
7. 07Polish-law adaptations

01.Term sheet structure

Standard structure for Polish-relevant term sheets:

• Parties — investor, target company, founders;
• Investment amount and tranches;
• Valuation — pre-money, post-money, share price;
• Type of securities — preferred shares, convertible loan, SAFE;
• Use of proceeds;
• Economic rights — liquidation preference, dividend, anti-dilution;
• Control rights — board composition, reserved matters, information;
• Founder commitments — vesting, lock-up, non-compete;
• Transfer restrictions — ROFR, drag-along, tag-along;
• Exit rights — IPO procedures, redemption;
• Conditions precedent — due diligence, board approvals, regulatory consents;
• Process — exclusivity, costs, confidentiality, governing law.

Length typically 5–15 pages. Final investment agreement (umowa inwestycyjna or share purchase agreement) significantly longer — 50–150 pages including schedules.

02.Binding vs non-binding clauses

Term sheet typically partly binding, partly non-binding. Standard binding clauses:

• Confidentiality — protects deal information;
• Exclusivity (no-shop) — prevents shopping deal to other investors during defined period (typically 30–60 days);
• Costs allocation — typically caps investor's legal fees recoverable from company;
• Governing law and jurisdiction;
• Term sheet duration.

Standard non-binding (commercial assumptions for later documentation):

• valuation and investment amount;
• economic rights (liquidation preference, dividends);
• control rights (board composition, reserved matters);
• founder commitments (vesting, non-compete).

Distinction must be clearly drafted — ambiguous "non-binding" provisions can become contractually binding through estoppel-like arguments. Polish courts recognise binding force of clear binding clauses even in otherwise non-binding term sheets.

03.Valuation and investment structure

Key valuation elements:

• Pre-money valuation — company value before investment;
• Post-money valuation — pre-money + investment;
• Fully diluted basis — including ESOP, warrants, convertibles;
• Investment amount;
• Investor's stake = investment / post-money valuation.

Tranching common: investment paid in installments based on milestones (revenue targets, product launches, customer counts). Tranching reduces investor risk but creates complexity — clear definition of milestones essential to avoid disputes.

Polish-specific consideration: PCC (tax stamp duty) of 1% applies to share purchases of Polish company shares. For new share issuance, no PCC but other costs apply (notary fees for capital increase, KRS registration).

04.Liquidation preference

Liquidation preference defines distribution priority on exit (sale, dissolution, IPO of preferred). Standard structures:

• 1x non-participating — most founder-friendly; investor gets investment back OR proportional share, whichever larger;
• 1x participating with cap — investor gets investment back + proportional share until cap reached;
• 1x participating without cap (rare in Poland) — investor double-dips: gets investment back AND proportional share with no limit;
• Multiple preference (2x, 3x) — increasingly rare in normal markets.

Cumulative effect across rounds important — later investors typically get senior preference, complicating returns for earlier investors. Stacked preferences common in venture-funded Polish startups.

Polish corporate law recognises preferential shares (akcje uprzywilejowane) up to 2x preference per share. Higher preferences require contractual mechanisms (e.g. preferred returns through SHA) rather than direct share class privileges.

05.Founder vesting and lock-up

Standard founder vesting structures:

• 4-year vesting with 1-year cliff — quintessential US/UK pattern; 25% vests after 1 year, then monthly thereafter;
• 3-year vesting — increasingly common, particularly later-stage companies;
• Reverse vesting — founders own 100% but subject to forfeiture on departure within vesting period (preferred Polish-law structure);
• Forward vesting — founders earn shares over time (less common, requires specific corporate procedures);
• Acceleration on change of control — single trigger (acceleration on acquisition) or double trigger (acquisition + termination without cause);
• Founder lock-up — prohibition on share transfers for defined period.

Polish-law adaptation: reverse vesting through shareholder agreement with put/call options is most common structure. Forward vesting through stock option plans requires careful tax structuring. Polish tax treatment of founder shares can differ from acquisition basis — early advice critical.

06.Control rights and protective provisions

Investor control rights typically include:

• Board composition — investor board seat(s); independent directors;
• Reserved matters — investor consent required for specified actions: budget approval, capital changes, M&A, executive hiring/firing, debt financing, related-party transactions, IP licensing/transfer, employment of family members, salary increases above thresholds;
• Information rights — monthly/quarterly financials, annual budget, board materials, audit rights;
• Pro-rata rights — right to participate in future rounds proportionally;
• Anti-dilution — broad-based weighted average standard; full-ratchet rare;
• Drag-along — majority/qualified majority can force minority to participate in sale (typically requires investor consent);
• Tag-along — minority can join when majority sells.

Polish corporate law (KSH) imposes some mandatory rules — supermajorities cannot be reduced below statutory minimums (e.g. 2/3 for share capital decrease, 75% for transformation/merger). Reserved matters in shareholder agreement can supplement but not contradict KSH minimums.

07.Polish-law adaptations

International term sheet templates often need adaptation for Polish corporate law:

• Notarial form requirements — share transfers above EUR 50,000 (sp. z o.o.) require notarial form;
• KRS registration — many corporate actions effective only on registration;
• Share class restrictions — sp. z o.o. has limited share class flexibility; complex preferred structures sometimes require S.A. transformation;
• Withholding tax on dividends and interest (15–20% standard, reduced under treaties);
• Capital increase procedures — strict timing requirements;
• SAFE/convertibles enforceability — not native Polish concepts, require careful drafting;
• Foreign currency considerations — Polish accounting in PLN, currency conversion mechanisms needed.

For early-stage companies, transformation from sp. z o.o. to S.A. (or P.S.A. — prosta spółka akcyjna for startups) often considered before major equity rounds to access greater corporate flexibility.

FAQFrequently asked questions

∎Summary and next steps

Term sheet in Polish investment context combines international template structures (often US/UK based) with Polish corporate law adaptations. Critical: clear binding/non-binding distinction; Polish corporate law constraints on share classes and procedures; notarial form requirements; tax considerations; founder vesting through reverse vesting structures. Final investment agreement significantly elaborates term sheet but rarely changes core terms.