On May 11, 2023, AAIA Youth hosted a deep dive Webinar for startup founders and co-founders. In an insightful discussion, Xiaoxiao Liu, a respected partner at IncepVision Law Firm, shared valuable information about the complex world of start-up financing and shareholder rights. She covered a wide range of topics like financing terms, anti-dilution clauses, liquidation preferences, and share repurchase rights, offering crucial knowledge for both new and experienced entrepreneurs and investors.

1. Decoding Fair Market Value and Actual Financing Price

Liu started the discussion by explaining the difference between fair market value (FMV) and the actual financing price in start-up financing. She emphasized that FMV is a theoretical concept, based on perfect market conditions, while the actual financing price is influenced by many factors like negotiation skills, understanding of the market, and even emotions. She warned entrepreneurs about the risk of reducing their share control by raising too much money too early, which could unintentionally lead to them losing control of their companies.

2. Protecting Investors: Anti-Dilution Provisions

Next, Liu explained the anti-dilution provisions. She described these provisions as a safety net for investors, promising that if a company sells shares at a lower price in future funding rounds, the price for the initial investors would be adjusted downwards. This helps protect the value of their first investment from being reduced.

3. Prioritizing Shareholders: Liquidation Preferences and Deemed Liquidation Events

Liu also explained liquidation preferences, which give certain shareholders the right to get the money from the company’s liquidation before others. She clearly defined a ‘Deemed Liquidation Event’, which could be many situations such as mergers, reorganizations, or large asset sales. Importantly, Liu mentioned that preferred shareholders usually have the option not to consider certain transactions as liquidation events.

4. Advice on Share Repurchase Rights

When it came to sharing repurchase rights or redemption rights, Liu strongly recommended start-ups to avoid these terms if they can. However, she recognized that negotiation can be tough and offered strategies for handling these rights, like delaying the redemption trigger period, suggesting repurchases in parts to ease cash flow issues, and negotiating the repurchase price to be the initial investment or a fair increase.


5. Understanding the Stress of Venture Capitalists and the Start-Up Environment

In addition to the technical parts of financing, Liu also pointed out the stress that venture capitalists (VCs) feel from their Limited Partners (LPs). She explained how these stresses can affect the entrepreneurs, leading to a high-stress environment that is often linked to the start-up world.

6. The Importance of Honesty, Transparency, and Communication in Venture Capital

Liu’s discussion went beyond just finance and law, stressing the need for honesty, transparency, and clear communication in the venture capital space. She highlighted that these values help create mutual understanding and align expectations between entrepreneurs and investors, leading to a better and more successful entrepreneurial environment.

7. Interactive Session Takeaways

During the interactive session, Liu provided a deep understanding of the complex world of venture capital discussions, the changing power balance during funding rounds, and the often different goals of entrepreneurs and investors. She encouraged entrepreneurs to keep as much control as possible during each funding round and warned against relying on too simple or misleading solutions. Liu also emphasized the importance of understanding the pressures faced by investors, which are often driven by the demands for returns from their own backers.

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