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Moon

Setting up a company can be quite a challenge - find out what legal structures you can choose from and which one suits best for your business.

A joint venture is not only a chance for its originators to develop their business, but also, and above all, many challenges that await them especially in the first phase of development. Decisions taken by them at this stage may in fact permanently shape the way in which they will continue their activity. A start-up is not only the founders or people developing certain ideas, but also a structure which, if wisely arranged, can intensify and accelerate the achievement of the assumed goal, if only through the prism of obtaining additional funding for its development. At the beginning, the most important thing for every business should be to choose its optimal form of functioning and to establish the rules of the “game” between the founders. With the development, the spectrum of interests grows, of course, and is adjusted to the industry in which the entity operates. Nevertheless, it is possible to identify certain general problems with which every entity will have to cope – especially technological ones – in its initial phase, such as appropriate protection of innovative solutions against use by third parties or ensuring appropriate confidentiality against the activities of competitors, which will be discussed in detail below.

Founders’ agreement

The first stage towards the establishment of a company is the agreement between its future partners and now the originators. Founder’s agreement (also known as shareholders' agreements) are commonly used in Anglo-American cultural countries. In Poland, they are mainly associated with the start-up culture. Nevertheless, this type of agreement should not be limited to this category of entities, it is and should be used by all entrepreneurs. Many entities think that it will be sufficient for them to establish the rules of functioning of the entity within the company’s articles of association, which is an assumption that is not entirely accurate.

The articles of association regulate the formal aspects of the functioning of the entity, in particular in the context of the principles of functioning of its bodies, but they do not refer to the business intentions and development plans of the entity. This document is not a good place to indicate this type of information, due to its open nature (everyone can have free access to the articles of association, as it is included in the entity’s registration files), which could consequently lead to the disclosure of confidential information. When concluding a founders’ agreement, it is important to remember that a company is only a tool to achieve a specific objective, which should be defined in advance.

Formally the founders’ agreement has not been defined in Polish law and functions as a so-called unnamed agreement. It may be concluded by the founders in any form – even orally – however, in view of its evidentiary value it would be recommended to conclude it in electronic or written form. The lack of a specific form for the founders’ agreement is a big plus, since it may be signed with the use of, for instance, the DocuSign platform, which in turn enables simultaneous signatures by persons located in different parts of the world. Although, as indicated, the founders’ agreement has not been defined in Polish law, practice has developed its material elements, such as:

  • Determination of the nature

First of all, the founders should specify what the company they are establishing will do, its purpose and objective they wish to achieve. These issues should be described in as much detail as possible and constitute a “signpost” for further actions. Often in this type of activity milestones are set, which verify the assumed objectives.

  • Description of the role of individual founders in the structure

A start-up generally relies on the intellectual potential of its founders in the first phase of its development, so their role in the structure of the whole enterprise should be defined. This applies in particular to: (i) the contributions they make to the company – which may also be in kind, (ii) a description of the activities or services the founders undertake to perform for the company, and (iii) their proportional share of profits and losses.

  • Regulations governing changes in the company’s shareholding structure

Sustainability of membership is particularly important in ventures that rely on the knowledge and skills of the founders. The founders should be able to control who becomes and who loses their status as shareholders (partners) of the company. The lack of such regulations could lead to an unbalanced company structure. The regulations commented on are also helpful in the event that an investor appears who is interested in participating in the entity.

  • Non-competition

Undisturbed functioning of an entity is one of the necessary elements allowing it to achieve success on the market. Of course, this depends on specific circumstances, but as a rule the founders undertake towards each other that they will not undertake any actions in competition with the established company. This is to ensure that they commit all their knowledge and potential.

  • Exclusive operational order

In some founders’ agreements, especially those concerning the operation of technological solutions, one encounters so-called operational exclusivity orders. This is a clause obliging the founder to devote all professional time to work for the start-up.

  • Introductory clauses

In any entity, incentive issues are also extremely important, encouraging the founders and other employees to work. Often in founder or shareholder agreements there are clauses introducing the so-called vesting. This is a solution aimed at providing the entitled person with a specific bonus – additional shares in the company, in the event that the reserved purpose is fulfilled. For example, the founder may acquire additional shares – on a schedule basis – for each additional year worked in the company. Vesting is also sometimes used as a sanction for the founder for breach of specific arrangements, e.g. if the prohibition on operational exclusivity is breached, then it results in the loss of all or part of the shares held by the founder, depending on the arrangement.

  • Intellectual and industrial property rights regulations

Any founders’ agreement should specify the rules for handling copyrights and patents. If the founders are the authors of particular solutions to be developed in the start-up, they should, under appropriate agreements, transfer the rights to them to the entity so as to guarantee exclusive use of them.

  • Joint decisions by the founders

It is worth ensuring that the founders’ agreement describes those decisions/actions which are fundamental from the perspective of the activity conducted. Then, as a rule, they are subject to the requirement to obtain the unanimous consent of the founders or a specified majority of them, e.g. 3 out of 4. Such an action is to ensure full transparency within the framework of the activities conducted by the entity.

  • Liquidation preference

A liquidation preference is a clause that allows the founders or investor to recover the funds they have invested in the entity – in whole or in part.

  • Control rights / advisory board

Depending on the commitment of the individual founders to a particular goal, an advisory board may be set up in the company, or control rights may be granted. For example, it may be imagined that one of the founders will be the main financier of the project, who does not have strictly specialist skills to develop it. In such a case he should guarantee himself adequate verification (control) rights in relation to operational activities, e.g. it can be stipulated that certain activities such as launching the MVP version on the market will require his consent.

  • Failure clause

Although it is true that the founders’ agreement is drafted at the business idea stage, it is worth thinking at that stage about what will happen in the event of its failure, i.e. the so-called exit plan. This type of regulation should be aimed at ending the activity of the company, with the rights and powers of the founders preserved as much as possible.

A properly structured founders’ agreement should in practice minimise the risk of potential disputes and misunderstandings that may arise between the founders at a later stage of the business.

Start-up in which form?

In Poland, mainly due to the desire to commercialise and to raise investment capital, start-ups are run as capital companies, i.e. in the form of: (i) limited liability company, (ii) joint-stock company or (iii) a simple joint-stock company. Each has its advantages and disadvantages, and the final choice should be made taking into account the specifics of the activity to be carried out within the start-up. Currently, due to the high degree of de-formalisation and low costs, start-ups prefer to start in the form of a limited liability company, although the simple joint-stock company (PSA) is becoming increasingly popular.

The form of a joint-stock company is usually intended for more developed businesses – often start-ups reach this form in the course of their development, deciding to transform a limited liability company into a joint-stock company, which results, for example, from the fact that only an entity in the form of a joint-stock company can apply for a debut on the Warsaw Stock Exchange or in the Alternative Trading System (ATS) NewConnect.

Limited liability company

Advantages
Disadvantages
  • low set-up costs
  • possibility of establishment via Internet
  • low initial capital (5,000.00 PLN)
  • no personal liability of partners
  • possibility of exemption from paying social security contributions
  • informal meetings of shareholders
  • possibility of raising capital through crowdfunding
  • double taxation
  • lack of possibility to debut on a public market
  • limited possibilities to introduce incentive programmes
  • provision of work or services by a shareholder cannot be the subject of contribution

Joint-stock company

Advantages
Disadvantages
  • the possibility of being listed on a public market
  • limited influence of small shareholders on company management
  • wide range of possibilities to shape the rules of obtaining financing for the entity’s operations
  • possibility to raise capital on the capital market by issuing shares or bonds
  • lack of personal liability of shareholders
  • recognition in trading
  • mandatory supervisory authority
  • double taxation
  • the provision of work or services by a partner may not be the subject of a contribution
  • formalised rules of functioning of the bodies
  • high initial capital (min. 100,000.00 PLN)
  • necessity to accumulate a certain part of profit on own capitals
  • possible institutional supervision
  • high costs of own activity

Simple joint-stock company

Advantages
Disadvantages
  • possibility to choose the structure of the functioning of the bodies and the appointment of the board of directors (monistic system or classic tripartite system)
  • no-nominal shares
  • low share capital (PLN 1.00)
  • possibility of covering shares with non-cash contribution in the form of work and services
  • simplified share trading
  • possibility of raising capital through crowdfunding
  • simplified liquidation rules
  • lack of personal liability of shareholders
  • possibility of postponing the obligation to make contributions in time (up to 3 years)
  • unlimited preference for shares
  • double taxation
  • lack of possibility to be listed on a public market

Non-disclosure agreement

In the initial phases of companies, the key is the idea and its adequate protection from disclosure to competitors. As part of the discussion on the founders’ agreement, it has already been pointed out that it is not worth revealing or defining the idea in the articles of incorporation, as these are publicly available in the register of entrepreneurs. In principle, revealing the company's concept of operation and its business idea to competitors will, in most situations, lead to failure to achieve the intended objectives. Therefore, it is particularly important to bind key persons from the perspective of the start-up to confidentiality of information (especially valuable, unique).

Provisions regarding the confidentiality of certain information should be one of the elements of the founders’ agreement, or other agreements concluded in connection with the functioning of the start-up.

The NDA agreement is a non-disclosure agreement. In this agreement, the parties or one of them undertakes to keep confidential the data and information exchanged between them. The conclusion of an NDA, if it is not a part of another contractual relationship, in the context of the activities of start-ups is important because these entities often conduct innovative activities in their field, based on a particular type of -know -how that affects the competitiveness of the start-up. Therefore, when establishing business relations with other entities, it is worth protecting your information by reserving an appropriate level of confidentiality.

The content of the NDA agreement depends on the specific situation. Confidentiality may apply in particular to information concerning the technology used, the start-up model and any information that is important for the development of the company. Special attention should be paid to defining confidential information in the NDA and indicating in what specific situations such information may be disclosed. The NDA may also contain a provision on contractual penalties in the event of its breach.

Innovation and its protection

Just like information or a business idea, its output should also be protected. It is common knowledge that start-ups are highly technologically advanced entities, often producing unique solutions on a global scale. In order to be absolutely sure that our solution will not be copied (duplicated), it should be properly protected. This refers in particular to the situation when, as part of a business activity, a device (solution) is manufactured, to which the features of the invention may be ascribed, i.e. it is new, suitable for industrial application and has the so-called appropriate inventive step (the invention is not obvious from the state of the art).

A patent is a protection right that allows the exclusive use of an invention. It is temporary, and can be limited to a specific territory (e.g. a given country). Importantly, a patent is formally a specific asset of a company and can be sold which build its value. In practice, inventions for which protection rights have been obtained are much more valuable, as this builds up their value. A patent can be filed both in Poland with the Polish Patent Office and with the European Patent Office.

Dr Marcin Śledzikowski, Legal Counsel / Partner | SDZLEGAL Schindhelm

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