Future of Polish VC Industry and Phantom Rights

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Polish VC Ecosystem & Funding Restrictions

Most Polish VCs have a restricted investment mandate (PFR restrictions) and can only invest in companies organized in the European Union or the United Kingdom. Nonetheless both Polish VCs and Polish startups acknowledge that future equity rounds into Polish startups will come most likely from US based investors that can only invest in a Delaware based entity. It’s a catch 22 situation, which is hard to solve and impedes the growth of the Polish tech and startup ecosystem.

In order to bridge this gap both parties may wish to structure future equity investments into Polish startups as a Phantom Rights transaction. Under the Phantom Rights structure a Polish VC can invest into a Polish company but can also acquire “phantom” preferred shares in a parallel US company funded by Silicon Valley VCs. This novel structure has been utilized in Silicon Valley by non-US VC funds that can not own US shares or for tax reasons can not hold US shares.

Below we share some insights on how to set up Phantom Rights.

Deal Structure

  • US Holding Company — The end goal of the transaction is to allow the Polish VC to invest in the Polish company and satisfy its investment restrictions, while allowing the Polish startup to receive additional funds into the US company. At the end of the transaction the US company will control directly and indirectly the Polish company through the “call option”. The Polish entity will become a subsidiary of the US company. The Polish VC’s shares in the Polish company will be subject to the “call option”. On the other hand, the Polish VC will have the right under “put option” to request a “liquidity event” or “share swap” through the exercise of the “put option”.
  • US Corporate Governance — Corporate governance will take place in the US company under the standard Silicon Valley legal terms (NVCA), whereas the operations and R&D will occur in Polish company.
  • US Company Capitalization — The US company will have preferred and common stock structure plus a “shadow” phantom right series tied into the authorized but unissued and outstanding preferred stock.
  • Phantom Rights — Polish VCs will have full economic and control rights in the US company, even though they will not own any US shares on paper until the “call option” or “put option” is exercised.

Phantom Rights

Phantom Rights are contractual rights granted by US company to investors of the Polish startup, which would entitle the Polish VC to exercise preferred rights granted to the shareholders of the US company without actually holding any shares in the US company. Pursuant to the proposed charter of the US company the holders of put options would be entitled to the same rights, privileges and powers as the holders of then outstanding preferred stock or common stock issuable upon conversion of preferred stock. The rights would be applicable regardless if the put option is exercised by the Polish VC. Phantom Rights entitle the Polish VC to the following standard investor rights in the US company:

  • Voting Rights — full voting rights to vote shares not issued under the shadow series.
  • Pro-rata Rights — A right of first offer to purchase up to the Investor’s pro-rata share of any equity securities offered by the company.
  • Liquidation Preference — Preferential right to receive pay out in case of liquidation of the US company before common stock holders.
  • Board Seat — A right to appoint a member or observer to the board of the US company.
  • Protective Provisions — A right requiring approval of preferred stock holders before the US company can take certain material actions such as amendment of charter/bylaws, creation of additional series of stock, etc.
  • Anti-Dilution Protection — To protect the investor from dilution in the event the US company issues new shares.
  • Information Rights — A right to regularly obtain information regarding the US company’s financials and inspection of the same.
  • Right of First Refusal — A right to purchase any security being sold by other shareholders of the US company.
  • Right of Co-Sale/Tag Along — A right to transfer the Investor’s own shares if any other shareholder of the US company proposes to sale his/her shares.
  • Drag Along — A right to require other shareholders of the US company to sell their shares if a sale of the US company is duly authorized by the investors and US company.

The Phantom Rights are usually worked into the financing documents of the US company at the time of equity financing in Polish company or during the reincorporation (flip) of the company to the US.

The Polish VC and its US syndicate partners (the “Syndicate Partners”) will invest in Polish company and have Polish shares, which can be “exchanged” for US company preferred shares at any moment pursuant to the “call option”. In the alternative the Syndicate Partners could also invest directly into the US company without the Phantom Rights structure as they have no ownership restrictions as to the US company.

Put and Call Option

As a part of the structuring of the Phantom Rights, the Polish VC, the US company and the Polish startup will be required to enter into a Put and Call Option Agreement. The Put and Call Option Agreement establishes a mechanism which provides for the exchange of the Polish VC’s Polish shares with the preferred shares of the US company in the future.

  • Put Option — The Put Option grants the Investor the option to require the US company, at any time, to exchange a portion or all of the Investor’s shares in the Polish company with the preferred shares in the US company
  • Call Option — The Call Option grants the US company to require the Investor to exchange its Polish Shares for preferred shares in the US company upon the occurrence of certain ‘Call Option Events.’ These ‘Call Option Events’ usually consists of (i) sale of the US company, (ii) IPO of US company, or (iii) any material breach by the Polish Investor.

Share Transfer Agreement

The US company, Polish company and the shareholders of Polish company’s including the Polish VC need to enter into a share transfer agreement whereby the current shareholders of the Polish Company will transfer their shares in the Polish company for the shares in the US company such that the Polish company, becomes a subsidiary of the US company. Furthermore, pursuant to the Share Transfer Agreement, the parties will agree to enter into a Put and Call Option Agreement with regards to the future exchange of Investor’s Polish shares for the preferred shares of the US company as described below. Future exchanges will take the form of stock purchase agreement (umowa zbycia udzialow) under Polish law.


This project can take between 8–16 weeks. The above-mentioned deal structure for Phantom Rights can be implemented any time before or after any investment in the Polish Company.

Qualifications and Assumptions

We do not discuss herein any modifications, amendments and/or adjustment required to the Polish company’s articles of association (“AoA”) or the investment agreement (“IA”) with the Polish VC in connection to the Phantom Rights. These adjustments, amendments and/or modifications will be required to create the Phantom Rights. The Phantom Rights structure implies the termination of the Polish VC’s IA in toto.

Furthermore, we do not discuss herein any tax implications under Polish law in connection with the transfer of shares pursuant to the “put option” and “call option”. We recommended that Polish tax advisors are retained regarding any and all tax implications for the founders (shareholders) of the Polish company and the Polish VC.


Phantom Rights might be the solution for the current funding constraints in the Polish VC ecosystem and as such have been used in Poland to finance several startups by Silicon Valley investors. It should be emphasized that the Phantom Rights structure is popular among Silicon Valley investors and lawyers and are acceptable to them as funding mechanism. Most importantly, Phantom Rights can help Polish startups raise funds from top tier US VCs without disrupting their lifecycle and accelerating growth.

Law firm specializing in startups, series A and US expansion. No legal advice I No attorney client relationship I Attorney advertising

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