HCB Chapter 268 Financing Negotiations
Chapter 268 Financing Negotiations
Fourth, anti-dilution clauses.
Carly switches the screen: "Goldman Sachs demands a complete ratchet, while the other three parties accept a weighted average."
Winston spoke first: "Weighted average is the market standard. A complete ratchet is too harsh on founders and will affect their enthusiasm for subsequent fundraising."
"Goldman Sachs insists on a full ratchet," Richardson said. "If the company is doing well, this clause will never be triggered. It only takes effect when the valuation falls, and a falling valuation means losses for investors. Protecting investors' interests is reasonable."
"But a full ratchet would make subsequent funding virtually impossible," Fiona said. "No new investor would accept using their own money to fill the hole left by early investors."
"So we designed a conversion cap," Chen Wenhao said in his first statement. "It's a complete ratchet, but we set a conversion price floor—for example, no less than 50% of the current round's price. This protects investors without completely blocking subsequent financing."
"50% is too low," Winston shook his head. "I recommend 80%."
"70%," Richardson said.
"75%," Ling Yun said. "It's a full ratchet, but the conversion price is no less than 75% of the current round's price. Furthermore, this clause only applies if the valuation in subsequent financing rounds is lower than this round's, and it only takes effect if the investors continue to participate."
The meeting room fell silent. Everyone was considering the pros and cons of the proposed solution.
"Goldman Sachs accepts," Richardson was the first to respond.
"Morgan accepts," Winston nodded.
France accepts.
"Abu Dhabi accepts."
"Passed." Ling Yun wrote the fourth checkmark, his shirt back already soaked with sweat.
When the meeting reached the eleventh agenda item, the clock on the wall pointed to 12:37 noon.
The administration team brought lunch—sandwiches, salad, and a fruit platter. But no one left their seats; only a few continued their discussion while eating.
"Article 15, the right to information," Carly read out the clause. "Abu Dhabi requires monthly operating reports and quarterly conference calls, with the other three parties accepting the quarterly reports."
Dr. Leila spoke, her voice calm and professional: "The Abu Dhabi Investment Authority needs more frequent information flows because our headquarters are in Abu Dhabi, which is geographically distant. Monthly reports are necessary for risk management."
“Other investors can accept quarterly reports,” Winston said, “but monthly reports would increase the burden on company management.”
"We can provide monthly executive summaries," Ling Yun said, "no more than five pages, highlighting key metrics and major developments. Detailed reports are still available quarterly."
"Abu Dhabi accepts." Dr. Leila looked at the Sheikh, who nodded.
"Then it passes." Ling Yun's voice was a little hoarse. He took a sip of water, which had become neither too hot nor too cold.
At 1:40 PM, we moved on to the twenty-third topic: listing underwriting rights.
This is the last tough nut to crack.
The comparison of terms was displayed on the projection screen:
Goldman Sachs: Requires a sole lead underwriter commitment
Morgan Stanley: Required joint lead underwriters to provide guarantees and undertake IPO guidance.
- France/Abu Dhabi: Requires underwriting fees to not harm the company's interests and mandates a bidding process.
"Going public is still a long way off," Ling Yun said. "It's too early to make any concrete commitments now."
"But we need certainty," Richardson said. "Goldman Sachs has invested resources to help Xingyu grow, and it deserves future underwriting business."
"Morgan Stanley is willing to invest in the IPO coaching team upfront," Winston said. "This also requires certainty in return."
In the video, Durand says, "The French National Investment Bank recommends a bidding mechanism—when a company decides to go public, multiple investment banks are invited to bid, and the lowest bidder wins. This is the fairest thing for the company and all shareholders."
"But that would be a waste of time and resources," Winston shook his head. "The listing window is very short, and waiting until the bidding is over might mean missing the best opportunity."
"Therefore, we need a balanced solution." Ling Yun placed his hands on the table. "I propose that Morgan Stanley undertake the IPO guidance work, signing an 18-month guidance agreement. Goldman Sachs and Morgan Stanley will jointly obtain joint lead underwriter priority. When the company decides to go public, Goldman Sachs and Morgan Stanley will each submit their underwriting proposals, and the board of directors will select based on factors such as fees, service commitments, and research coverage. If the two proposals are comparable, they will jointly serve as joint lead underwriters. If one is significantly better than the other, the superior firm will serve as the lead underwriter, and the other as the co-underwriter."
He paused and looked at Richardson and Winston.
"At the same time, we need to set a cap on underwriting fees—no more than 90% of the market average. If any investment bank's offer exceeds the cap, it will automatically be disqualified."
The meeting room was silent for a full minute.
Richardson and Winston exchanged a glance, then almost simultaneously turned to their respective teams to whisper among themselves.
"Goldman Sachs accepts this framework," Richardson finally said, "but it needs to be added: if the terms of Goldman Sachs and Morgan Stanley's proposals are comparable, Goldman Sachs requests to serve as the left lead and Morgan Stanley as the right lead."
In underwriter rankings, the left co-chair is usually considered the dominant party.
"Morgan demands fair competition and does not pre-determine rankings," Winston immediately said.
"Then the board of directors will vote to decide," Ling Yun said. "If the proposals are comparable, the board will vote to elect a joint chairperson. Each director will have one vote, and the founding team will recuse themselves."
This plan leaves the decision-making power to the board of directors, which has only three seats for investors and four seats for the founders and management team—in reality, the founding team still has decisive influence.
Richardson and Winston both understood this, but they also knew that this was the best they could negotiate.
Goldman Sachs accepted.
Morgan accepted.
France agrees.
"Abu Dhabi agrees."
"Passed." Ling Yun wrote the last checkmark.
He looked at the whiteboard: all twenty-seven items passed.
The clock on the wall pointed to 3:18 p.m., and the meeting had lasted for six hours.
"So, all the core terms of Xingyu's latest round of financing have been agreed upon." Ling Yun's voice was exceptionally clear in the quiet conference room. "Pre-investment valuation of $8.5 million, financing of $1.7 million, and the sale of 20% equity. The specific allocation and terms are as just discussed."
He paused and looked around the room.
"Congratulations, everyone. We have just completed a deal that could potentially reshape the industry."
Richardson was the first to stand up and extend his hand: "It's a pleasure doing business with you, Mr. Ling."
"It's a pleasure working with you."
Then there's Winston, Khalid, Sheikh, and Durand in the video.
The administration team brought champagne. The clinking of glasses was crisp and pleasant.
"For the future of Star Language." Khalid raised his glass.
"For the future," everyone agreed.
The champagne bubbles rose and burst in the glass.