A founder with 70% of the shares was to receive 51% of the price. One paragraph of the investment agreement decided the PLN 8.8 million difference

On the Friday evening before Christmas, the founder of an IT company called me. In a week he was due to close the sale of his company for PLN 47.3 million. He held 70% of the shares and was counting on PLN 33.1 million. The fund’s lawyer had just sent him a table showing how the price would be split, and it gave him PLN 24.3 million, or 51% of the price. Before calling, he had recalculated the table three times in his own spreadsheet, convinced that the lawyer had mixed up the rows.

The lawyer had made no mistake. I read the investment agreement from five years earlier, and the table matched it to the last zloty. The PLN 8.8 million difference was decided by one paragraph, which the founder had read once at the time, the night before signing.

I have changed the details so that neither the company nor the parties can be identified.

How a liquidation preference works

A venture capital fund puts cash into a company and in return gets shares and rights that the founders do not have. The most important of these concerns how the money is divided on exit, that is, on a sale of the company or of the fund’s shares. It is called a liquidation preference; in texts by Polish lawyers it appears as uprzywilejowanie likwidacyjne. In Polish companies it is usually written into the investment agreement as an undertaking by the shareholders to split the price in an agreed order. For it to work in a formal liquidation of the company as well, it must also be written into the articles of association, because the Commercial Companies Code allows them to set rules for distributing the company’s assets other than in proportion to shareholdings. When the whole company is sold, the price is split in that order, including when the fund forces the other shareholders to sell under a drag-along right, which I described when writing about a fund’s second exit.

The name is misleading. The preference applies to every event in which the shareholders divide money from the company: a liquidation, but above all a sale of the whole company or of a majority of the shares. The agreement lists such events by name.

Before the founders get anything, the fund recovers its investment, usually once (1x), sometimes one and a half or two times. What happens next depends on whether the preference gives the fund a share of the surplus above the investment it has recovered. Depending on the answer, the preference is described as participating or non-participating.

With a non-participating preference, the fund chooses one of two amounts: its investment or the part of the price that corresponds to its shares. It takes the larger. In this company the fund had put in PLN 12.6 million for 30% of the shares. In a sale for PLN 47.3 million, 30% of the price is PLN 14.2 million, more than the investment. So the fund would have taken PLN 14.2 million and the founder PLN 33.1 million, exactly what he had calculated.

The line between these two amounts runs exactly at the post-money valuation. The post-money valuation is the value of the company including the money the fund has just put in, here PLN 42 million. In a sale below that amount, the fund prefers to recover its investment. Above it, the fund prefers its 30%. A non-participating preference therefore protects the fund against a sale below the price it paid itself, and stops working in a sale above it.

With a participating preference, the fund takes both amounts. First it recovers its investment, and then it gets its percentage of what is left. In this company that meant PLN 12.6 million of investment plus 30% of the remaining PLN 34.7 million, or PLN 10.4 million. In total the fund got PLN 23 million, 49% of the price for 30% of the shares. The founder was left with PLN 24.3 million.

As long as the sale price exceeds the post-money valuation, the difference between the two versions is fixed. It equals the founder’s stake multiplied by the fund’s investment: here 70% of PLN 12.6 million, or PLN 8.82 million. In a sale for PLN 47.3 million, that is more than a quarter of the amount the founder expected. In a sale for PLN 300 million, it would be about 4% of his share. Below the post-money valuation the cost in zloty falls, but participation always takes 30% of the founder’s payout. As a proportion of the founder’s payout, participation therefore costs the most in a sale at the post-money valuation or below. At a high price it matters little.

Two offers and the four-price test

Five years earlier the founder had had two offers. The first fund offered PLN 12.6 million at a post-money valuation of PLN 42 million, with participation. The second offered the same money at a valuation of PLN 36 million, non-participating, which meant 35% of the shares. The founder chose the higher valuation. It looked better in talks with later investors and diluted his stake less.

The higher valuation starts to pay off only in a sale above PLN 176.4 million. From that amount upward, the five percentage points of shares that the founder kept thanks to the higher valuation are worth more than the fixed cost of participation. Five percent of PLN 176.4 million is PLN 8.82 million, the same as the fixed cost. The threshold is more than four times the post-money valuation.

The four-price test shows how much the founder will get if the company sells for half the post-money valuation, for the valuation itself, for three times the valuation and for ten times the valuation. For this company I compare three versions: the first offer as it would have been without participation, the offer as signed, and the second offer at a valuation of PLN 36 million.

Sale for PLN 21 million, half the valuation. Non-participating version: PLN 8.4 million for the founder. Signed offer: PLN 5.88 million. Second offer: PLN 8.4 million.

Sale for PLN 42 million, the post-money valuation. Non-participating version: PLN 29.4 million. Signed offer: PLN 20.58 million. Second offer: PLN 27.3 million.

Sale for PLN 126 million, three times the valuation. Non-participating version: PLN 88.2 million. Signed offer: PLN 79.38 million. Second offer: PLN 81.9 million.

Sale for PLN 420 million, ten times the valuation. Non-participating version: PLN 294 million. Signed offer: PLN 285.18 million. Second offer: PLN 273 million.

The lower valuation without participation gave the founder more at the first three prices. Of the four prices, the signed offer gives more only at ten times the valuation. A founder who chooses it is therefore assuming, in practice, that he will sell the company for more than four times the post-money valuation. Some founders are right about that.

This calculation has to be done before the term sheet, the preliminary terms of the investment, is signed. While two offers are on the table, the founder can give up part of the valuation in exchange for a simpler split of the price. Once the term sheet is signed, the other investor usually walks away and the fund gets exclusivity in negotiating the investment agreement. Removing participation in a later round or before a sale then has to be paid for, because a fund rarely gives up a privilege for free. At Capital One Advisers we run the four-price test with founders before the term sheet is signed, when changing one sentence still costs nothing.

In mature venture capital markets, participation has almost disappeared. The law firm Cooley reported that in the second quarter of 2026, 95.8% of the 166 rounds it worked on had a 1x preference and 96.4% had a non-participating preference (Cooley, Q2 2026 Venture Financing Report, August 17, 2026). The law firm Orrick analyzed more than 400 of its clients’ investments in Europe from 2025. Of these, 77% had a 1x non-participating preference and about 1% a 1x participating preference, compared with 7% a year earlier. In 14% of the rounds there was no preference at all (Orrick, Deal Flow 6.0, March 31, 2026).

I have not found statistics for Poland. The law firm Kondracki Celej writes in the 2026 Chambers guide that in Polish rounds the preference is often 1x non-participating. I come across participation more often in proposals from investors outside classic venture capital, who do few deals and calculate the return on each one separately. I also come across it in rounds where the company has no other offer. A fund that proposes uncapped participation is proposing a term that large investors in Europe and the United States hardly ever use.

What to negotiate in the term sheet

The preference does not end with the first round. Each later investor usually gets its own, and the agreement sets the order. With preferences that rank equally (pari passu), the investors from all rounds stand in a single line. If the price is not enough to cover them all, they share it in proportion to the amounts they are entitled to. With stacked preferences, the latest round is usually paid first, then the one before it. In both structures the founders wait at the end and get whatever is left after all the preferences. Most often, employees who received shares or options under an incentive plan stand in the same queue.

For them, the total of the preferences matters more than the order. The order mainly decides which fund loses when there is not enough money for everyone. After three rounds, the total of the preferences can exceed the price anyone would realistically pay for the company. The founders then hold a high percentage of the shares and little money.

Negotiations start with the multiple. A 1x preference is the standard: in Cooley’s data, 95.8% of rounds have one. A higher multiple needs a justification.

Participation matters more. It is best not to accept it. If the fund will not give way, a cap is negotiated: participation ends once the fund has received a set multiple of its investment in total. Above the cap, the fund chooses between the capped amount and its percentage of the whole price. The cap has to be calculated, though. In this company a cap at twice the investment, or PLN 25.2 million, would not have given the founder a single zloty, because in a sale for PLN 47.3 million the fund takes PLN 23 million. The cap comes into play when the investment plus 30% of the rest of the price together exceed PLN 25.2 million, which happens in a sale for more than PLN 54.6 million, and above PLN 84 million the fund would prefer a plain 30% of the price.

Then there is the definition of an exit and of the price. The agreement should list which events trigger the preference. A sale of a majority of the shares and a sale of the business are standard. Just as important is the amount on which the split is calculated. Ideally it is the price net of transaction costs, and the part of the price held back in an escrow account or paid later should be borne by the fund and the founders in proportion. In the sale processes we run at Capital One Advisers, we check how the price will be split among the shareholders before the buyer sees the first draft of the sale agreement.

When the fund is right

The fund has its reasons, and this story shows them well. In five years the company’s value rose from PLN 42 million to PLN 47.3 million. Without participation, the fund would have got back PLN 14.19 million on its PLN 12.6 million investment, a return of about 2.4% a year. With participation it gets PLN 23.01 million, about 12.8% a year. For a venture capital fund the first result is a failure, the second a decent return. The higher valuation was a promise of growth that did not materialize, and participation protected the fund against an inflated valuation.

A plain 1x non-participating preference has an even simpler justification. Without it, the founders could sell the company the day after the round for an amount close to the cash in the bank and take 70% of the money the fund had just put in. The preference closes off that possibility, and in a sale above the post-money valuation it takes nothing from the founders.

Participation is sometimes the price of a round that nobody else wants to finance. A company with two months of cash does not get to choose between offers. Capped participation can then be better for the founders than a valuation cut in half, because at a high sale price the extra payment to the fund falls away.

What the company will sell for

Which of the two offers was better depended on one assumption: what the company would sell for. A founder who believes in a sale at more than four times the post-money valuation can knowingly choose the higher valuation with participation. A fund that sees such a forecast as an empty promise has a reason to demand protection in return for the higher valuation.

The buyer in this story paid PLN 47.3 million for the company, just under 27% of the price at which the higher valuation would have started to pay off for the founder.

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