Equity Financing and Investor Terms
Every term sheet allocates control, not just valuation. What decides the outcome is rarely the price — it is liquidation preference, anti-dilution and repurchase.
The most expensive thing in a financing is not the valuation
Founders focus on valuation because it is a visible number. But what determines exit proceeds is the term sheet: a RMB 1bn valuation with a 2x participating liquidation preference can leave the founder with nothing on a RMB 1.5bn sale, while a RMB 800m valuation with 1x non-participating can pay more.
AI companies carry an extra layer. Valuation rests on technology and data assets, and the ownership and compliance status of those assets is exactly what diligence attacks. Whether the algorithm is a work-for-hire or a personal creation, whether training data was lawfully sourced, whether open-source components are viral — unresolved before the term sheet, these become price cuts or closing conditions afterwards.
What we do
- Transaction structuring: capital increase, secondary transfer, convertible notes, SAFE; onshore and offshore paths
- Term sheet review: valuation and dilution, liquidation preference, anti-dilution, board composition, protective provisions
- SPA / SHA negotiation: representations and warranties, closing conditions, repurchase and performance adjustment, pre-emptive and tag-along rights
- Due diligence response: equity history, IP ownership, data compliance, employment legacy issues and disclosure
- Closing execution: registration, escrow, cap table and articles update, post-closing information rights
Typical situations
Situation 1: 2x participating preference and the valuation illusion
The company raises RMB 200m at a RMB 1bn valuation with a 2x participating preference. Three years later it sells for RMB 1.6bn. The investor takes RMB 400m first, the remainder is shared pro rata, and the founder team receives far less than the headline percentage suggests.
Our approach: negotiate 1x at term sheet stage, push for non-participating or capped participation, and add automatic conversion to ordinary shares above a valuation threshold.
Situation 2: Performance adjustment triggers personal repurchase liability
The agreement requires the founder to repurchase investor shares at 8% annualised if no IPO within three years. The window closes, the obligation falls on the founder personally, and the amount exceeds the value of all his shares.
Our approach: limit the repurchase obligor to the company (subject to capital reduction procedures, which in practice cannot be specifically enforced), keep the founder out of joint liability, and where a personal guarantee is unavoidable, cap the amount and define triggers narrowly.
Situation 3: Unclear algorithm ownership stalls closing
Diligence finds that part of the core model code was developed at the founder’s previous employer without an ownership separation. The investor requires an IP assignment and a non-dispute declaration before closing, or a 20% valuation cut.
Our approach: run a pre-financing compliance check 3-6 months ahead — IP chain of title, open-source review, lawful data sourcing — and resolve issues before the term sheet.
Process and deliverables
| Stage | Work | Deliverables |
|---|---|---|
| 1 | Pre-financing health check, structuring | Compliance report + transaction structure memo |
| 2 | Term sheet review and negotiation | Marked-up term sheet + clause comparison |
| 3 | Due diligence response | DD response pack + legacy issue disclosure |
| 4 | SPA/SHA negotiation and closing | Transaction document review + closing checklist |
| Ongoing | Post-closing governance, next-round alignment | Shareholder rights register + alignment advice |
Frequently asked
Can a signed term sheet still be changed? Most term sheets state that only confidentiality and exclusivity bind. Commercially, core terms are very hard to reopen. The real window is before the term sheet — structuring and clause sequencing happen there.
What forms of anti-dilution exist? Full ratchet (full repricing to the new low) and weighted average (formula-based partial adjustment). Push for weighted average and carve-outs for option pool and strategic issuances.
Should we grant the investor a veto? Grant protective provisions, but limit them to charter amendment, capital increase or reduction, liquidation, and material asset disposals — not day-to-day operations or budget approval.
Is the deal over when funds arrive? No. Information rights, pre-emptive rights, tag-along, board seats and observer rights all surface at the next round and at exit.
Legal basis
- Company Law (2024 revision): capital increase, share transfer, shareholder and board authority
- Civil Code, contract part: validity and breach
- Securities Law and implementing rules: boundaries where public offering is involved
- Foreign Investment Law: market access and reporting where foreign shareholders are involved
- Measures for the Administration of Overseas Investment (NDRC Order No. 11): offshore structure approvals