FWF Chapter 33 Clauses
Chapter 33 Clauses
Three days after the due diligence was completed, Shen Yumeng sent an investment intention letter – known in the industry as a TS, or Term Sheet.
Su Chen sat in his office, looking at the four-page PDF file on the screen, reading each line very slowly.
Mingyuan Capital's offer is very clear:
The pre-investment valuation was 30 million, the investment amount was 10 million, and the equity stake was 25%.
Su Chen quickly did some mental calculations.
The initial investment of 30 million yuan means that Mingyuan Capital believes Hongyuan Intelligent is currently worth 30 million yuan. With the addition of the 10 million yuan investment, the post-investment valuation is 40 million yuan.
Su Chen's shareholding was diluted from 100% to 75%.
75 percent.
This number made Su Chen's eyes narrow slightly.
It's not because it's low—it's because of the system.
The activation condition for the industry benefit halo is holding no less than 67% of the shares. If you give up 25% now, you will still have 75%, which is just above the red line.
But what if there's another round of financing in the future?
Even if the second round of dilution is only a few percentage points, the shareholding will drop below 70%—approaching the 67% threshold.
If a company raises funds in three or more rounds, its shareholding is likely to fall below the two-thirds threshold.
At that point, the system gain will fail.
All employees will suddenly "deteriorate" without anyone noticing—the yield rate will drop, efficiency will decrease, and collaboration will become more difficult—without any apparent reason.
This is something that absolutely cannot happen.
Su Chen picked up a pen and wrote down a few numbers on the white paper next to TS:
Current shareholding: 100%
Post-Series A: 75% (if Mingyuan's terms are accepted)
Assuming a 10% dilution in Series B funding: 67.5%
Assuming an 8% dilution in Series C funding: 62.1%
It will fall below the red line when it reaches Series C funding.
This means that if they accept Mingyuan's 25% terms now, they can only raise one more round of funding at most in the future. Starting with a third round would be very risky.
Of course, if the company grows fast enough, it might be able to become self-sustaining without needing three rounds of financing. But Su Chen cannot gamble his fate on "maybe".
He needs to minimize the dilution ratio during the Series A funding round.
Su Chen picked up the phone and dialed Shen Yumeng's number.
"Mr. Shen, I've finished reading the TS report. There are a few points I'd like to discuss with you."
"explain."
"I can accept the valuation. But I'd like to reduce the dilution ratio—the initial investment of 30 million remains the same, but the total investment amount is reduced from 10 million to 8 million, and the shareholding is reduced from 25% to about 20%."
There was a two-second silence on the other end of the phone.
"Mr. Su, to be honest, ten million is the minimum investment we consider. Anything less than that wouldn't offer enough room for a good return on investment."
"I understand," Su Chen said. "Then let's change the plan—raise the pre-investment valuation to 35 million, keep the investment amount at 10 million, and retain approximately 22.2% of the shares."
This time, Shen Yumeng remained silent for even longer.
"Mr. Su, I need to discuss this with the team. The pre-investment valuation of 35 million is significantly higher than our model."
"I understand. But I want you to know one thing—after the exhibition, besides Mingyuan, another organization contacted us."
"Which one?" Shen Yumeng's tone changed—not from nervousness, but from a professional alertness.
"Honyi Venture Capital. Focusing on the TMT and hard technology sectors, its management scale is an order of magnitude larger than Mingyuan. They approached us after seeing the report on Yuchen.com."
This is the truth. Five days after Yuchen.com released the video, a person claiming to be the vice president of Hony Capital called Su Chen and expressed preliminary investment intentions.
Su Chen did not take the initiative to contact them—Hong Yi came to him on his own.
There was a three-second silence on the other end of the phone.
"Mr. Su, please give me two days. I will get back to you the day after tomorrow afternoon."
"no problem."
After hanging up the phone, Su Chen leaned back in his chair.
He didn't really want Hongyi to invest.
Hony Capital is larger and can offer more money, but the terms of large funds are usually more stringent—board seats, veto power, anti-dilution clauses, and performance-based agreements. Once these terms are signed, Su Chen's control over the company will be severely weakened.
Mingyuan is an early-stage fund with relatively mild terms, and Shen Yumeng's resources and connections in the field of smart hardware are of substantial help to Hongyuan.
What Su Chen really wanted wasn't the most money, but the most suitable partner.
But Hongyi's existence is a useful card—it can help Su Chen negotiate better terms with Mingyuan.
The fundamental principle of negotiation: Never have only one option.
Two days later, Shen Yumeng called back.
"Mr. Su, we can accept a pre-investment valuation of 33 million, investing 10 million for approximately 23.3% of the shares."
Su Chen quickly calculated that the post-investment shareholding would be approximately 76.7%.
This retains nearly two percentage points more than the initial 25% plan. Even if the Series B round dilutes the portfolio by 10%, it can still maintain around 69%—safely above the system's red line.
Even if there is a Series C funding round in the future, as long as the dilution rate is controlled, the bottom line can be maintained.
"Deal," Su Chen said.
A rare soft laugh came from the other end of the phone from Shen Yumeng.
"I'm very pleased. I've had my lawyer draft the formal agreement as soon as possible, and it's expected to be signed within two weeks."
"good."
Su Chen hung up the phone and then dialed Fang Xu's number—the young lawyer who had helped him with his inheritance.
"Attorney Fang, I need your help to review an investment agreement."
Three months ago, Fang Xu helped him sign the equity inheritance documents.
Three months later, Fang Xu was to help him review the investment agreement.
The speed at which this company is changing is so fast that even Su Chen himself sometimes finds it unreal.