How Does the Startup Investment Process Work?

Are you looking for an investor for your startup, or considering investing in one? This article takes you through the full process, from the first contact with an investor through the term sheet and due diligence to signing the investment agreement and registering changes in the KRS. You will learn who invests in startups, what investors expect and which documents to prepare at each stage.

Why startups attract investors

Startups are often a source of breakthrough ideas and innovation that can transform entire industries. In Poland, a country with strong intellectual and technological potential, many promising projects emerge, including in artificial intelligence, fintech and biotechnology.

Investing in startups gives companies access to new technologies and business models that help them remain competitive. That is why companies invest in independent businesses to develop technology they need.

There is also the potential return. Although startups involve substantial risk, successful investments can generate returns in the hundreds of percent, far more than traditional ways of investing capital. That is why startups attract both individual investors and investment funds.

If you are wondering how a startup investment process works, the stages are described below.

I also invite you to listen to a conversation with me, intended for people interested in learning about the startup investment process. The video was produced by the Polish Agency for Enterprise Development (PARP) as part of the SME Development Center project.

Who invests in startups?

There are several groups of investors. The most common include:

1. FFF (Family, Friends and Fools): family, friends and “fools.” This is, of course, tongue-in-cheek, but the first investors in an idea are often close friends and family, as well as people most likely to believe it will work.
2. Business angels: individual investors who often invest their own money at a very early stage of a company’s development. They are usually experienced entrepreneurs or managers who provide advice, business contacts and mentoring as well as capital. For startups, this is often the first step toward professional external financing.
3. Venture capital (VC) funds: organized funds that invest in startups with high growth potential. VCs provide management support, help scale the business and play a significant role in later funding rounds. A VC fund pools money from a larger group of investors and is managed by a professional team. VC funds usually invest in several or a dozen or so startups at the same time, diversifying risk.
4. Business incubators and accelerators: offer support through mentoring programs, access to business networks and help with product development, and sometimes financial support. Incubators focus on very early-stage development; accelerators help existing startups grow faster. Unlike business angels and VC funds, incubators and accelerators do not receive equity in the company in return for their support and funding.
5. Strategic or industry investors: companies that invest in startups to gain direct access to innovative technologies or products. These investments often involve long-term partnerships that may include joint ventures, licensed technologies or other forms of cooperation.
6. Crowdfunding investors: crowdfunding raises capital from the public, usually through online platforms. Read more here. It lets startups present projects directly to potential investors, who may invest smaller amounts, reaching a broad pool of retail investors.

Different types of investors can participate in the same funding round. In early rounds, business angels and VC funds often invest together. Strategic investors may sometimes join them.

How to attract investors

Investors look for startups with unique ideas that can scale into larger markets. Check whether your startup meets these conditions:

• It solves a real market problem and has a clear advantage over competitors.
• It has a capable management team: investors look for people with the skills, experience, passion and ability to achieve goals.
• It demonstrates a growing market: from the start, investors want to see market research, competitor analysis and a clearly defined target group.
• It shows evidence of market validation: early tests, product prototypes, preliminary sales data and feedback from initial customers.

You do not have to commission these analyses from specialist firms or hire experts, which a startup often cannot afford. You can do the work yourself as a founder or use publicly available research. Any approach that demonstrates demand for your idea can be useful.

Why investors may reject a startup idea

Looking for an investor is a little like a talent competition: you need to attract attention right away. Hundreds of companies are seeking financing, so make a good impression from the first contact.

Investment teaser and pitch deck

Two documents can help:

• Investment teaser: a short document, often one page, intended to interest an investor and encourage further discussion. It should include the startup’s vision or mission, basic product or service information, what differentiates it from competitors and basic financial information, such as revenue to date and the business model.
• Pitch deck: a more detailed presentation of your business to potential investors. It explains the idea in greater detail, makes the market case and often presents the team more fully.

Common reasons a startup is rejected

• No evidence of market demand: if you cannot convincingly show real demand for your product, investors may consider the project too risky.
• Insufficient scalability: if the idea does not show potential for rapid growth, it may be rejected.
• A weak management team: investors invest in people as well as ideas. A lack of experience or management skills is a common reason to decline.
• High financial risk: investors may withdraw if the investment seems too risky relative to its potential return.
• No differentiation from competitors: a product that offers no unique value compared with existing solutions may discourage investors.
• No clear exit strategy: investors want to know how they can recover their investment and make a return. The absence of a clear exit strategy is a serious problem.

In short, investors reject ideas they consider insufficiently developed or too risky, or when a startup does not present a clear and convincing vision of market success.

Term sheet: why sign one?

Have you found a potential investor and attracted their interest? You can move to the formal stage of agreeing on the investment.

A term sheet is prepared before the investment agreement is signed. In Poland it is often called a letter of intent. It sets out preliminary financing terms and the parties’ arrangements concerning a potential agreement. A term sheet is sometimes described as establishing the investment’s boundaries.

What should a term sheet contain?

• The parties.
• Financing terms, including payment stages.
• The investor’s role in the project or company: passive, or involving a commitment to contribute more, such as smart money.
• Corporate matters: who will serve on the management board and whether there will be a supervisory board.
• Conditions precedent to carrying out the transaction.
• Rules for overseeing the investment and exiting it. At this stage, you do not define the detailed wording; you agree whether these provisions will be part of the transaction.

Read more about term sheets in our article, which explains what the document is.

Due diligence: legal review as the next step in the investment process

After the term sheet is signed, and often while it is still being negotiated, due diligence begins. It is a detailed review carried out by the investor or their team to verify information provided by the startup and assess investment risk.

The main purpose of due diligence is to reduce the investor’s risk by developing a thorough understanding of every aspect of the startup’s business. This supports an informed investment decision and negotiation of final terms with a clearer view of potential risks and benefits.

It is a time-consuming and complex process, but necessary for a transparent and secure transaction.

Due diligence is most often divided into two types: legal and financial.

Investment agreement: the final stage of preparing the investment

An investment agreement sets the terms of the investment and the parties’ future cooperation. It defines how capital is contributed to the startup, often in exchange for shares or another form of participation in the business. Its purpose is to give both sides a clear framework for working together and to minimize the risk of future disputes.

What an investment agreement usually contains

• Financial terms: the amount invested, startup valuation, form of payment and payment schedule.
• Investor rights and obligations: participation in company management, access to financial and operational information, and investment-protection mechanisms.
• Exit terms: the conditions and method for selling shares, for example in a public offering, a sale to a strategic investor or a founder buyback.
• Dispute resolution: provisions identifying the jurisdiction for any court proceedings.

If you would like to learn more, read our article about what an investment agreement should contain.

What should the company’s articles of association contain?

How the articles of association differ from an investment agreement

The articles of association govern how the company operates and is managed. An investment agreement focuses on the financial terms and investor rights, and is concluded between the founders and the investor. The articles of association provide the legal basis for the company itself: they define relationships between shareholders, their rights and obligations, and the management structure.

What to look for in the articles of association

• Corporate governance: the company’s bodies, such as the management board and supervisory board, their powers, decision-making processes and representation rules. Governance should be transparent and enable effective management without unnecessary complexity.
• Future capital increases: provisions on how and under what conditions new shares are issued, balancing financing needs with the interests of existing shareholders. This is especially important in later funding rounds that may change the company’s ownership structure.
• Employee Stock Ownership Plan (ESOP): an employee equity program. An ESOP can motivate staff and help retain talent. The articles should clearly define how equity is granted, its type, vesting period and buyback conditions.
• Decision-making speed: draft provisions so they do not slow down processes or prevent timely management decisions. Balance protection of shareholders’ interests with flexibility to respond to changing market conditions.

Read more about articles of association in our article, “What should a company’s articles of association contain?”

Closing: the end, or just the beginning?

The investment process reaches its final stage when all conditions are met and the parties are ready to sign the investment agreement.

Signing list and finalizing documents

A signing list is a list of documents required to complete the transaction. It includes the investment agreement and/or shareholders’ agreement and any required amendments or other agreements. Make sure the documents accurately reflect what was agreed earlier, especially each party’s rights and obligations.

Interim period

After the agreements are signed and the investor joins the company, but before changes are formally registered in the KRS, there is often a period of interim arrangements. This may include temporary management of investment contributions or protective measures. Set these rules out clearly to avoid misunderstandings and disputes.

Payment of funds and registration of changes

• Payment of funds: this is often made through an escrow account or notarial deposit, providing security for both parties.
• Filing changes with the KRS: adding a new investor or changing the ownership structure requires updating the company’s details in the National Court Register (KRS).
• Updating the CRBR: under anti-money laundering rules, update the information in the Central Register of Beneficial Owners (CRBR).

At this stage, it is worth seeking help from a law firm specializing in corporate law to ensure compliance with the law.

Summary

Investing in startups in Poland offers significant opportunities, but it requires careful analysis and informed risk management. The process has multiple stages, but with good preparation and support it can benefit both sides.

For an investor, it is an opportunity to achieve a high return and participate in developing innovative technologies. It is also a chance to use experience, business contacts and resources to help young companies scale.

For a startup, obtaining investment means access to funding as well as mentoring, business relationships and operational support. Investment also sends a signal to the market and other potential investors by confirming the company’s credibility and growth potential.

Frequently asked questions

What are the steps for securing startup investment? The process begins by preparing an investment teaser and pitch deck to interest an investor in your idea. Next, you sign a term sheet setting out preliminary investment terms, complete due diligence, the legal and financial review of the company, negotiate and sign the investment agreement and articles of association, and then receive the funds, often through escrow, register changes in the KRS and update the CRBR.

How does a term sheet differ from an investment agreement? A term sheet is a preliminary document, often called a letter of intent in Poland, that sets the boundaries of an investment. It records high-level arrangements such as financing terms, the investor’s role and corporate matters, but does not set out all the details. The investment agreement is the final document: it specifies the capital contribution, investor rights and obligations, exit terms and dispute resolution. It is the agreement that binds the parties.

What does startup due diligence involve before an investment? Due diligence is a detailed review by the investor or their team to verify information supplied by the startup and assess investment risk. It most often includes legal and financial reviews. The goal is to reduce investor risk, support an informed investment decision and help negotiate final terms. It begins after the term sheet is signed and sometimes while it is still being negotiated.

What should a startup investment agreement contain? It should specify financial terms, including the amount of capital, startup valuation, form and schedule of payments; investor rights and obligations, such as involvement in management, access to financial and operational information, and investment protections; and exit terms, such as a public offering, sale to a strategic investor or founder buyback. It should also address dispute resolution, including jurisdiction for any court proceedings.

What should be addressed in a company’s articles of association when a startup brings in an investor? Review four areas: corporate governance, including company bodies, their powers and representation rules; future capital increases, including issuing new shares in later rounds while protecting existing shareholders; the ESOP, including how employee equity is awarded, the vesting period and buyback terms; and decision-making speed. Draft the provisions so they do not obstruct day-to-day management, balancing shareholder protections with the flexibility to respond to market changes.