M&A and Equity Exit
An exit is decided long before the buyer appears. Clean IP title, an unambiguous cap table and completed data compliance are what the price is calculated on — and what diligence discovers when they are missing.
Exit value is set by what diligence finds, not by what the model is worth
An AI company’s exit price is negotiated against a technical asset, and a technical asset is only worth its valuation if the title is clean. Three findings reduce price faster than any market argument: core IP whose ownership is ambiguous because a founder developed something similar before incorporation; an open-source component whose licence reaches the proprietary codebase; and a data compliance position that was never completed.
Each of these is cheap to fix two years before a transaction and expensive to fix inside one, because a buyer prices uncertainty and a seller cannot manufacture time. Exit preparation therefore belongs at the Series B stage, not at the first letter of intent.
What we do
- Sell-side readiness review: cap table, IP title, open-source exposure, data compliance, employment and tax — the six findings that move price
- Transaction structuring: share deal versus asset deal, onshore and offshore layers, earn-out design, escrow and deferred consideration
- Investor rights management: drag-along, tag-along, liquidation preference, repurchase and redemption mechanics
- Documentation and negotiation: SPA, SHA amendments, disclosure schedules, warranty and indemnity positions
- IPO preparation: share reform, historical equity clean-up, compliance remediation, legal opinions for the filing
- Liquidation and tax: solvent liquidation design, creditor protection, distribution, and tax-efficient exit structure
What is different for an AI company
- Diligence centres on title and compliance. The IP chain, data provenance, algorithm filing and employment are the main sources of price cuts and closing conditions.
- Share versus asset deals carry different costs. An asset deal avoids historical liabilities, but qualifications, contracts and the filing entity must be re-established.
- Earn-outs must be calculable. Define the metric, adjustments and compensation mechanics, or the dispute outlives closing.
- Founder retention and non-compete are signed together. Term, scope and compensation directly affect team stability after closing.
- Plan filing and data-entity changes early. Algorithm filing, ICP and cross-border data arrangements may need re-filing after a change of control.
Typical situations
Situation 1: A strategic buyer discounts 30% for IP uncertainty
A strategic buyer indicates interest at a valuation of RMB 800 million. Diligence then finds that the core algorithm patent has unclear title — a founder worked on comparable technology at a previous employer — the open-source position was never reviewed, and the data compliance framework is incomplete. The offer is revised to RMB 550 million, framed as technology-asset uncertainty.
Our approach: run the sell-side review twelve months before going to market. Title clean-up, open-source remediation and compliance completion are all achievable in that window; none is achievable during exclusivity, which is when the buyer has the leverage.
Situation 2: Drag-along exercised, founder exits at a price they did not set
The investment agreement contains a drag-along right. After a later round, the investor exercises it and requires the founder to sell alongside. The founder does not want to sell and the document does not permit refusal.
Our approach: negotiate the conditions at signing, not at exercise — a minimum valuation floor, a window during which the right may be exercised, a notice period, and in some structures a founder consent right. A drag-along is almost impossible to resist once signed, and almost always possible to condition when signed.
Situation 3: Cash exit with no tax structure
A founder’s shares are acquired for cash at RMB 200 million. No holding structure was established, so the gain is taxed as individual income at 20%, an immediate liability of RMB 40 million. A holding platform put in place earlier would have allowed deferral or a different characterisation.
Our approach: design the holding structure before the exit, not during it — limited partnership platforms, onshore-onshore layers, and where available, deferral treatment for qualifying restructurings. Timing is the whole of the benefit; restructuring after a binding agreement rarely achieves it.
Process and deliverables
| Stage | Work | Deliverables |
|---|---|---|
| 1 | Sell-side readiness review | Readiness report + remediation list |
| 2 | Structuring and tax design | Structure alternatives + tax analysis |
| 3 | Diligence response and document negotiation | Diligence pack + SPA/SHA mark-ups |
| 4 | Closing and post-closing obligations | Closing checklist + integration compliance plan |
| Ongoing | Post-exit covenants, non-compete scope | Non-compete schedule + obligation register |
AI-specific deliverables
- Model ownership and data-provenance list: ownership chain, licences and source records, each item marked as provable or not.
- Data-compliance defect schedule: transfer, authorisation and labelling defects graded, with remediation and deal impact.
Frequently asked
When should we first involve counsel? Before the first letter of intent. The structuring window is widest before the LOI, because price, form of consideration and warranty scope are substantially fixed once it is signed. Advisors brought in after exclusivity are negotiating within a frame someone else set.
Can a founder keep working in AI after an acquisition? Depends on the non-compete negotiated. Buyers typically ask for two to three years. The scope is negotiable — limited to the business actually acquired, defined by product and customer rather than by “artificial intelligence” as a field — and negotiating that definition at signing preserves the ability to work elsewhere later.
Is the drag-along avoidable? Rarely after signature. It is conditionable at signature: valuation floor, exercise window, notice period, and in some cases founder consent. The time to negotiate is when the investor wants the money, not when the investor wants the exit.
IPO or trade sale? It depends on stage and market window rather than on preference. A listing offers a higher valuation and liquidity but takes two to three years and imposes ongoing compliance cost; a trade sale closes faster with greater certainty of consideration. For AI companies in the current cycle, trade sales account for the majority of realised exits.
Legal basis
- Company Law (2024 revision): share transfer and pre-emptive rights, capital reduction, merger and division, liquidation
- Securities Law: listing, registration and disclosure obligations
- Anti-Monopoly Law: merger control filing for concentrations reaching the thresholds
- Enterprise Income Tax Law: taxation of gains on equity transfer
- Caishui [2009] No. 59: special tax treatment for qualifying reorganisations
- Caishui [2015] No. 41: instalment treatment for individual investment of non-monetary assets
- Labour Contract Law: treatment of employee equity and non-compete on change of control