Paper Millionaires by Szymon Janiak

The post was originally published in Polish on Szymon’s LinkedIn profile. Szymon kindly agreed to republish what we think is of great value to our readers.

On paper they have millions, in their account they have nothing to pay their bills with. This is how a number of startups who received money from Polish VCs live today. For many, this is surprising, and the scale is significant. Only from one program financing funds in recent years, about a thousand companies have received one million zlotys each.

The mechanism is very simple. Founders receive an initial investment offer with a seven-digit valuation of the company. When the contract is signed, thanks to the value of their shares, they become paper millionaires, and money flows into the company’s account.

Initially, everything looks rosy, visions of unicorns erect, but the money gets spent extremely quickly. If you fail to build reasonable revenues or receive another round of financing from an investor, a real embarrassment is on the way.

There are two reasons: First of all, the fact that at the time of investment the shares were worth millions does not mean that they can be sold for this value. Funds in Poland can rarely buy back shares, and industry funds value it completely differently, often much cheaper. In practice, when a company has not succeeded in the market, the shares will often become worthless. Empty paper, non-negotiable.

Secondly, the mere fact that the money runs out does not mean that the liabilities before the fund have disappeared. Many forget about it. After a year – the non-competition clause is at its best, and you can no longer work in the industry, the order of operational exclusivity says that you have to pay for the company, although there is no salary. And you can not leave the company either, because the so-called bad leaver threatens with a huge financial penalty. As a result, someone who in theory has shares worth millions may have a huge problem paying their bills.

This is a side effect of the Polish investment boom. The question of whether to blame start-ups for naivety and failure to read contracts attentively, or funds for sticking to the provisions and protecting investors’ capital, remains open.

The comment section had a few opinions and amendments to share:

Two parties must play on the same team, not on opposite sides on a ‘who will win over who’ basis. Each party has its own value. If they play together and implement the assumed realistic strategy, there should be no problems.

– Dr Dominik Tomczyk, Co-Founder at POLVINYL Sp. z o.o.

In my experience, it’s often not even a matter of not reading. At the stage of signing a contract with a fund and numerous valuation zeros in front of their eyes, founders just don’t specifically focus on the potential risks of non-competing, operating exclusivity, and things like that. It is difficult – especially without reliable advisors – to assess the risk objectively, without emotions.

And then, blaming the funds for enforcing the provisions that were included in this agreement, I consider mega frivolous.

– Paweł Rasmus, Partner at Rasmus Tachasiuk Adwokaci

Investment funds are commonly included in the category of public trust institutions. Of course, you can always say that startups should read contracts better or surround themselves with a wreath of lawyers, but they are usually young people, without business experience, passionate about their niche solutions. In the clash with the investment agreement, they have as many chances as the borrower with a franc loan. Being an ‘institution of public trust’ presents not only ethical but also legal obligations.

– Marcin Babiak, Business Trainer at Kordo Edukacja

In my opinion, the ignorance comes from miseducation. Apart from you, there are few people in Poland who talk about what a startup is and how funds work. In secondary school, there is a subject of entrepreneurship which teachers teach by textbooks. In college, there is no subject related to entrepreneurship, maybe only in the fields related to management. Knowledge about startups and owning a company, about VCs we draw from – where? YT and maybe some textbooks, often some word of mouth. There is a lot of work to be done in this field.

– Waldemar Wiśniewski, Founder at DUEXSO

Everything you write about in your post is a matter of negotiation – contractual penalties, non-competition clauses or other sanctions resulting from the investment agreement. Of course, it is not always possible to negotiate 100% favorable conditions for founders because, for example, a certain issue may turn out to be a dealbreaker and you’ll have to let go. But meticulously analyzing what you sign, asking painful questions about the consequences, and remembering that ‘contracts are for bad times’ can protect you from multiple risks.

– Magdalena Druzic, Legal Counsel at Gut i Wspólnicy Kancelaria Prawna

There ain’t no such thing as a free lunch. The problem is that the investment is often treated as a gift, not as a commitment. Enthusiasm allows you not to ask yourself the question “what if it fails?”. The mixture comes out explosive.

– Tymoteusz Góral, Managing Director at STIDIA Poland