Tech Planet (WeChat ID: tech618)
writing | Zhai Yuanyuan
At the beginning of 2023, due to the fierce confrontation between Zheng Gang and Luo Yonghao, the venture capital circle made the secret "buy back" come into public view for the first time and become a hot topic.
Zheng Gang, the founder of Zihui Venture Capital, a well-known investor, publicly "castigated" Luo Yonghao in the circle of friends, saying that Luo Yonghao "has one set inside and one set outside, and does not know how to be grateful". "The new company has a valuation of 190 million dollars, and only takes 3.5% to compensate investors who have invested 1.5 billion yuan before, and requires investors to give up billions of buybacks". Zheng Gang said that he would cooperate with dozens of investors to launch a repurchase request to Luo Yonghao.
The belligerent Luo Yonghao responded to the bombardment one by one on the same day, saying that he had provided the old shareholders who had invested in Hammer Technology with 5% of the shares before and 3.72% of the shares after the investment. The shareholders voluntarily chose to sign or not to sign the relevant conditions and agreements. He also said, "Investment is not borrowing, and the invested enterprise fails or fails."
The two sides have shown completely opposite positions on the repurchase.
Starting from the buyback dispute between Zheng Gang and Luo Yonghao, the buyback litigation tide in venture capital circles began. The former Bole and Qianlima have now become the plaintiff and defendant, the debt collector and the "Laolai". And in 2024, one year later, it will become more and more intense. A number of insiders of investment institutions told Tech Planet that the number of requests for buybacks increased this year. Many investment institutions have strengthened the post investment, focusing on exit, and prosecuting repurchase is one of the means.
Lawyers' perception is more obvious. Zhang Jiachang, a lawyer involved in several lawsuits, said that he had handled several repurchase cases since last year
However, unfortunately, it is difficult to exit the investment, so it may become the industry norm to take entrepreneurs to court.
Repeated litigation and repurchase disputes
Bai Wei, one of the main tasks in the investment institution at present is to take the invested company to court, sue the entrepreneur and ask for buy back. According to Bai Wei, every investment institution has dozens of companies on the repurchase list. Communicating with entrepreneurs to buy back is an important task for many institutions at present, but whether to follow legal procedures depends on the specific communication.
The so-called repurchase means that when an investor invests in a project, Metropolitan will sign an equity repurchase agreement with the entrepreneur to guarantee the interests of the investor. It is also a kind of restriction for the entrepreneur. If any risk occurs to the investee company or the founder himself, the buyback clause is triggered, and the investment institution has the right to require the entrepreneur to buy back the equity held by the investor at the price agreed in advance.
Repurchases are different from gambling. There are many situations that trigger repurchases. For example, the founders are not listed within the agreed time, and the founders are subject to criminal penalties, crimes, and serious breaches of contract. The specific conditions of repurchases depend on how investors and entrepreneurs negotiate agreements. Once the repurchase is triggered, the repurchase price is generally 8% - 10% of the investment principal plus a certain proportion of interest.
Previously, repurchase agreements may only be a "procedural justice". In the normal process, few institutions require the invested company to perform repurchase obligations after investment failure. Zheng Gang said when he pursued Luo Yonghao earlier that he had invested in more than 100 mobile Internet projects, and 80% of them failed. So far, none of them has initiated a repurchase request. But now, repo has become an important means for institutions to protect their own interests. Prosecution of repo is the last step to recover losses after the failure of negotiations between institutions and entrepreneurs.
The relationship between investment institutions and entrepreneurs has changed. In the past, the era of mutual achievements and countless wealth myths has ended. Therefore, many voices believe that the nature of risk institutions has changed from high risk and high return to high risk and high return. Many entrepreneurs complain that investment has become lending.
However, from the standpoint of investment institutions, they believe that prosecuting repurchase is just exercising their legitimate rights. Bai Wei said to Tech Planet that it is the most respectable thing to start the buy back, because this is the agreement signed in black and white at the beginning, and the default will pay a price. Usually, the investment institution will first communicate with the entrepreneur about the repurchase, and if the communication fails, it will go to the stage of prosecution.
"The prosecution of repurchase is also an explanation to LP (the limited partner of the investment fund, that is, the investor of the investment fund), which proves that the fund manager is conscientiously and responsibly performing the obligation of fund management", said Bai Wei.
Prosecution of repurchase is a long process, and the prosecution process is at least half a year. Bai Wei said that the collection of data in the early stage was particularly time-consuming and labor-intensive. There were prosecution costs after the formal prosecution. In the exit period, the agency had no management fees, but also had to bear the prosecution costs. The cost was particularly high, and the lawyer's fee for a case was almost one hundred and two hundred thousand yuan. For the subject matter of 50 million yuan, the arbitration fee is also several hundred thousand yuan.
Even if it costs hundreds of thousands of dollars to sue, it may not be possible to get the money back in the end. Because, usually, if the startup project reaches the stage of being sued for buyback, it shows that the startup company is not developing well and has no ability to buy back.
As an investment institution seems to have a greater say, Bai Wei said that "it is a vulnerable group instead, because entrepreneurs will compete with institutions for wisdom and courage" in terms of buyback. For example, she said that some people chose technical divorce in order to transfer assets, which she had seen many times; Some people simply refused to communicate, and the organization could not contact people at all.
A US dollar VC (venture capital) institutional investor said that a case heard two days ago was that the entrepreneur refused to buy back, and then the partner of the investment institution went to the entrepreneur's office to put pressure on him for two days, and he would not leave without buying back. Finally, entrepreneurs "surrendered" to buy back.
"Capital boosts you, and you have to return it"
Last year, there was also a heated debate in the venture capital circle due to the buyback dispute. It was the voice of Wang Ronghui, the founder of Nuovo Education: "Entrepreneurs, should they die?" The article was widely circulated and discussed in the industry.
In 2022, Wang Ronghui revealed for the first time that after 12 years of entrepreneurship, he sold 4 suites, and now he is 100 million in debt and homeless. He claimed to be "a failed entrepreneur, a heavily indebted Loser, and a liar who was scolded for running away with money". By 2023, her entrepreneurial situation will be even more difficult. Due to the failure of her entrepreneurship, she was burdened with tens of millions of buyback debts, and was restricted by investors. She could not take high-speed trains or planes, and her bank cards, Alipay, WeChat change, and even medical insurance cards were frozen.
Wang Ronghui is not alone. Due to the performance loss and market influence, Blue City Brothers, the "first global gay social stock", triggered the wager clause, and the founder Geng Le was required by the investment institution to buy back the equity at the pre agreed price. Geng Le chose to sell and pledge the company's shares in order to raise money and repay money, and finally he resigned as chairman and CEO of the company. The player was eliminated due to gambling and buyback.
"Capital boosts you, and you have to pay back". The real price Wang Ronghui and Geng Le paid for their entrepreneurship may be the common destiny of every entrepreneur who took financing but failed to start a business and broke with the capital relationship in the future.
One case that lawyer Zhang Jiachang was impressed with was the share buyback of a liquor company. He initiated a repurchase action on behalf of the investor, requiring the actual controller and the company to perform the repurchase obligation at the price of the investment principal+8% annual simple interest.
The founder of the liquor company took out all his savings to start his own business. The investors invested millions of yuan based on their trust in the founder. The agreed trigger condition for buyback is to be listed before December 31, 2022. However, the black swan event such as the epidemic situation made the listing plan of the company fall through, and the company's revenue could not even achieve balance of payments.
When the buyback was triggered, the investors entrusted lawyers to communicate with the founders for many times, and also signed a clear agreement on the buyback matters, and agreed on the schedule for the payment of the buyback price. The founder signed the agreement quickly, but later did not pay the money as promised. The lawyer had to start the lawsuit and seal up the founder's house property. Now the case is still in the process of second instance, but the wife of the other party has no idea of the husband's lawsuit, let alone that the house property they live in has been sealed up by the court.
One venture led to a double loss. The investors lost all their money. The entrepreneurs were burdened with huge debts, and even their families were forced to move away from their houses for many years.
Now, both investors and entrepreneurs have changed their attitudes towards repo. After numerous rounds of education on repurchase disputes, entrepreneurs generally reached a consensus that repurchase agreements can be signed, but individuals with unlimited liability can not sign in any case.
Li Qi, the entrepreneur, said to Tech Planet that if you want to get financing, you need to get endorsement from investment institutions, and buy back must be signed. Entrepreneurs are the weak party in terms of voice power. There are not many ways to do so. Hot money becomes less, money is not so easy to get, and it can not be spent casually after taking it. They must work hard to create value.
The investment agreement cannot be signed with all terms. The repurchase agreement was drawn up by the investment institution. Li Qi said that he had found a lawyer to carefully review and modify it. One of the buyback terms proposed by the organization's lawyer is that the founder signed a joint and several liability buyback, but Li Qi refused. Finally, the repurchase agreement he signed was limited to the company. The condition for triggering the repurchase is that when the company cannot continue to operate or the company and the founder violate some terms, the interests of the investment institution (selling the company) should be guaranteed first. If there is no money to pay back, the company's equity should be used as the offset.
Without signing repurchase agreements or taking financing at will, almost all entrepreneurs have a sense of consciousness.
On the investment institution side, Wen Jing, the investment manager, said that many funds of institutions that took LP's money would have to be liquidated, especially those that took state-owned assets. If they could not exit through negotiation, they would start the prosecution process, which could at least explain the past. Wen Jing said that the terms of the repurchase agreement is a routine operation of "preventing gentlemen from villains", which belongs to the normal terms. Each company is just not strict about the agreed trigger conditions of the repurchase, and it may not be able to complete the repurchase after signing. The investment institution itself should guarantee its own rights and interests to the greatest extent, otherwise the risk control internal audit could not pass.
Investment institutions are guaranteed to exit and stop loss to the maximum extent
Repurchase aggravates the financial pressure of entrepreneurs, making the original difficult entrepreneurship worse, and may even cause entrepreneurs to lose control of the company.
But without repurchase, risks and losses are transferred to investment institutions. Bo Hao, the investment manager, disclosed to Tech Planet that in order to avoid the buyback obligation, many entrepreneurs choose technical divorce, or relatives and friends start companies, transfer money to relatives and friends' companies, and transfer assets. Generally speaking, this kind of situation can not be found by the organization, or it was found later. So repo is a means of restriction. Without such restriction, the founding team would have many moral risks. "Repurchase is just a means of hedging, and there are also hedging in the secondary market."
Prosecution of repurchase is not a panacea. People from the Investment Department said that they also know that prosecuting may not solve the problem. If the contract agreement is clear, the lawsuit can be won, but it is just all kinds of frozen property and high consumption restrictions. If a startup company really has nothing and no assets to implement, it will never come back.
Such repurchase disputes and games between investment institutions and entrepreneurs may only be more in the future. Zhang Hua, an investor, said that investment funds that have been invested for more than eight to nine years may face exit problems. Investment institutions and entrepreneurs are hard to protect themselves.
Pressure is transmitted from top to bottom from LP to entrepreneurs. Bai Wei said that sometimes the investment fund sued entrepreneurs, which was an order from LP. After all, 10 times and 100 times return on investment is a thing of the past.
The golden age of high-yield investment has ended. 36 Krypton's 10 previous investment legends show that the overall return of Gao Rong's gamble and Pinduoduo is conservatively estimated to exceed $7 billion, Wuyuan's investment in Xiaomi has made $10 billion, Sequoia's bet on Zhongmei Group, and Haina Asia's Wang Qiong's investment in Zhang Yiming.
But now, hot money is leaving. The game of the brave has become a conservative game. Institutions have become cautious in investing abroad. A small institution investment manager told Tech Planet that since 2024, a quarter has passed, and their institutions have not launched any projects.
High income has become a beautiful vision, which seems to be out of reach. Keep exit and stop loss to the greatest extent, and become the priority in reality.
In order to ensure exit, investment institutions began to strengthen post investment work. Guan Ling, the investment manager, introduced that the main exit modes of the institution are as follows: IPO of the invested enterprise, merger and acquisition of the invested enterprise, repurchase according to the shareholder agreement, and sue for repurchase (it is not necessarily possible to get back the money, but it is usually only a necessary action required by the investor's compliance requirements).
In order to exit, some institutions turn their left hand to their right. Invest in China reported on similar practices last year. A hard science and technology fund returned well, 400 million yuan, but half of them were received by new funds raised by themselves. The risk of this exit is that LP will become the last buyer when others give generously.
Of course, not all investors agree to sue for repurchase. After all, investment and lending belong to two different business models. "It is common for entrepreneurs to sign repurchase agreements. After all, GP (investment fund manager) is also responsible for LP, but it is really unfriendly to entrepreneurs. Therefore, it is not appropriate to take money at this time. If you can be responsible for your own profits and losses, it is best not to introduce foreign capital", said an industry insider.
Lawyer Zhang Jiachang said that behind the buyback dispute, there are a series of deep-seated issues such as the sharing of commercial risks. Professor Zhang Wei of the Law School of Singapore Management University said that "there is no buyback in Silicon Valley", but there are one unicorn company after another in Silicon Valley, which may stimulate the issuing industry to think about how to create a good entrepreneurial environment for entrepreneurs.
(Note: All the names in the text are pseudonyms.)
(Statement: This article only represents the author's view, not Sina.com's position.)
