Jingwei Venture Capital: We have studied the financing terms of more than 200 companies and tell you how to prevent being "routine"
2017-09-01 09:34 WeChat public account: Matrix Partners
"Vambling is not a customary investment clause. We recommend entrepreneurs to be cautious about the terms of gambling. On the one hand, entrepreneurs' mentality is prone to change due to performance commitments and make short-sighted decisions; on the other hand, uncontrollable policy factors also increase the risk of fulfilling commitments. risk."
We once sent out a manuscript titled "In Good Times and Bad Times, Grab What You Should Catch - We're Talking The Laws of Efficient Funding", which goes into great detail about how to identify and advance the law in fundraising as a founder related matters to complete financing faster.
But the reality is that when the negotiation of financing transactions is deadlocked, one of the lawyers is often heard helplessly: "Don't worry about this anymore, this is an industry practice." One side tried to end it hastily, while the other side was confused.
Unlike international trade, VC/PE financing has written and prevailing industry practices. Most of the “conventions” spoken by lawyers on both sides in financing transaction negotiations are perceptual cognitions formed based on the project experience they have handled. Without enough data to support it, it is really unconvincing just by the word "industry practice".
A few days ago, Han Kun Law Firm released a report. They selected more than 200 VC/PE financing projects completed in 2016, and made a detailed statistical analysis of the common terms. In order for the founders to grasp the "industry conventions" more intuitively, grasp the key points. The Jingwei legal team, which has "hundreds of financing events over the past year", carefully extracted 7 of the core clauses and shared them with their own comments.
Graham said: "It is best to go against the two most basic human instincts - greed and fear, in order to make the right investment decision." Financing is actually roughly the same: more than emotion, it needs rationality. Below, Enjoy:
Title image / Nikola Miljkovic
Data source / Han Kun Law Firm (ID: hankunlaw)
director
Among the 217 projects in the statistics, nearly 99% of projects in which investors have the right to appoint directors; 7% of the projects have set shareholding thresholds for investors to appoint directors.
Longitude and latitude comments:
The board of directors is the day-to-day operational decision-making body of the company. To avoid voting deadlock, it is advisable to have an odd number of board seats.
In the early stage of fundraising, the directors appointed by the founders constitute the majority of the board of directors. Early investors, investors who can bring resources to the company, and investors with the largest shareholding can appoint directors. In very few projects, if the founder cannot appoint a sufficient number of directors, in order to ensure the voting weight of the founder, it can be agreed that one founder director has multiple voting rights.
Pre-emptive subscription / right to buy
Among the 217 projects in the statistics, nearly 94% of the projects agreed that investors have the right of first refusal in subsequent rounds of financing. Among the projects for which investors have pre-emptive rights, investors have pre-emptive rights according to their shareholding ratio (pro rata), accounting for about 77%, and investors can pre-emptively subscribe for all subsequent rounds of new shares (super pro rata), accounting for about 22%. In both cases, investors can subscribe for new shares that other existing shareholders have waived.
For more than 90% of the projects, it is agreed that if the founder transfers the shares, the investor has the right of first refusal. More than 50% of the projects stipulate that if the founders convert shares, investors can purchase all the shares to be converted first, and the investors will be allocated shares according to their respective shareholding ratios. Nearly 50% of the projects stipulate that investors can only purchase shares to be converted according to their shareholding ratio in the company.
Longitude and latitude comments:
The investor's pre-emptive right/pre-emptive right means that when the company increases capital or shareholders convert shares, the investor has the right to subscribe to the company's capital increase or to purchase other shareholders' shares to be converted under the same conditions, and the subscription ratio can be pro rata or super pro rata (see photo above for the difference).
When investors continue to be optimistic about the company, they usually choose to exercise the right of first refusal/preemption to keep their investment share from shrinking. Some investors who hold a small proportion of the company's shares may have a strong desire to increase their holdings in the company's subsequent rounds of financing. The company can appropriately consider the needs of such investors and give them the over-subscription right to subscribe for new shares in excess of their shareholding ratio in subsequent rounds of financing.
repo
Among the 217 projects in the statistics, nearly 46% of the projects agreed that the founders would be jointly and severally liable; about 37% of the projects agreed that only the company should undertake the repurchase obligation; about 11% of the projects agreed that the company should repurchase first, and the founders would assume supplementary responsibilities.
Statistics show that investors prefer to set the repurchase price according to a certain annualized interest rate. More than 77% of the projects are based on 6%-20% annual simple interest or compound interest to calculate the repurchase price. Only about 15% of the projects agreed to be repurchased at a fixed multiple of the investment amount.
Longitude and latitude comments:
Repurchase means that when the agreed repurchase event occurs, the investor has the right to require the company and the founder to purchase the investor's equity at a certain repurchase price (see the above figure for statistics on the repurchase price), and the investor withdraws from the company. trade.
The repurchase clause affects the company's equity distribution and founders' equity. Therefore, it should be limited to major events that affect investors - generally including the company's failure to complete a qualified listing before the scheduled time, the founder's major integrity problems, etc.
In the early stage of financing, investors generally require the company and the founder to jointly undertake the joint repurchase obligation. As the company grows, the company will increasingly assume the responsibility for buybacks. In practice, due to the strict restrictions on company repurchase in China's company law, the repurchase of RMB-structured projects is generally completed by the founder.
Liquidation/Merger Distribution Clause
Of the 217 projects counted, 198 have set a liquidation priority. Among them, more than 90% of the projects agreed that the investors first obtain the liquidation preference, and then participate in the distribution of the remaining assets according to the shareholding ratio.
Among the projects with agreed liquidation priority, about 64% are those with a priority liquidation amount of 1 times the investment amount; about 33% are those with 1.1 to 1.5 times the investment amount; and about 3% are those with other multiples.
Longitude and latitude comments:
Liquidation priority means that when the company is liquidated or an event equivalent to liquidation (such as a change in control of the company or a merger), the investor has the right to obtain the liquidation priority in preference to the founder (see the figure above for the statistics of the liquidation priority) . If there are remaining funds after the liquidation preference is allocated to the investor, the investor has the right to continue to participate in the distribution of the remaining property.
In the current financing of startups in China, it is very rare for financial investors to have no liquidation preference. Founders need to pay attention to the liquidation preference multiple of investors. Usually, for financing after the C round, it is more common to have a liquidation priority of 1 times; because the investment in the later rounds is higher and is often paid first, the liquidation preference multiples given to investors in the later rounds should be lower than those given to early investors.
Anti-dilution
Among the 217 projects counted, 198 projects have agreed on anti-dilution clauses. Among them, 65% of the projects using the weighted average calculation; 35% of the projects using the full ratchet calculation. It can be seen that the weighted average is more mainstream.
Longitude and latitude comments:
Anti-dilution adjustment means that if the company's financing valuation in subsequent rounds is lower than that in the previous round, investors with high valuations in the previous round have the right to request an increase in their shareholding ratio. The adjustment method is usually to require the company to increase capital at par or Founders convert shares at zero cost. Therefore, if investors exercise their anti-dilution rights, the founder's share will be reduced accordingly.
For the two anti-dilution mechanisms reflected in the above figure, the weighted average is more beneficial to founders. In the early stage of financing, companies do not need to struggle with anti-dilution clauses, and anti-dilution is more likely to be triggered when the subsequent financing valuation is higher. Founders need to pay attention that no matter what price adjustment mechanism is adopted, they should try to avoid causing the founders to lose their actual controller status.
drag sale / lead sale
Among the 217 projects in the statistics, 153 projects have agreed on the right to sell. Among them, projects based on time accounted for about 17%; projects based on valuation accounted for about 31%; projects based on time + valuation accounted for 30.07%.
Longitude and latitude comments:
Imagine a situation where some investors find a suitable acquirer through their own market development capabilities, and the founder approves the valuation and plan of the M&A transaction, but other minority shareholders do not, then the acquirer is likely to withdraw from the transaction and get into a deadlock .
The drag sale clause is set up to solve similar problems. The significance of the drag sale clause is that when a majority of the company's shareholders decide to sell the company, they can ask other shareholders to sell together. Of course, the founders may also disagree with the valuation and plan of the M&A transaction, so in order to have a certain say in the sale, the founders can require that the sale be held only when the majority of the founders agree. Therefore, if certain conditions are set for the time and valuation of the drag sale, the voting requirements of shareholders can be appropriately relaxed.
On gambling
Among the 217 projects in the statistics, 198 projects do not have gambling arrangements, accounting for 91.24%; only 19 projects have gambling arrangements, accounting for 8.76%.
Longitude and latitude comments:
Gambling is also known as the valuation adjustment mechanism, that is, the investor requires the company to achieve certain performance, complete the agreed goal or obtain some important qualification within a specific period, otherwise the investor has the right to request a lower valuation at the time of investment, and the difference is part of the difference. Investors are compensated by founders in cash or equity.
Gambling is not a customary investment term. We advise entrepreneurs to be cautious about gambling terms. On the one hand, the mentality of entrepreneurs is easily changed due to performance commitments, making short-sighted decisions; on the other hand, uncontrollable policy factors also increase the risk of fulfilling commitments.
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