AWB Chapter 264 Capital Games
Chapter 264 Capital Games
At 1:20 p.m., the three set off for Palo Alto Club.
The club is located in a historic building with red brick walls and white window frames. There's no sign at the entrance, only a small brass plaque engraved with the initials "PAC". The interior is decorated in a traditional style: dark wood paneling, leather sofas, and a real fire burning in the fireplace—although the February weather in California doesn't require heating.
The private meeting room is on the second floor, with windows facing the courtyard. The courtyard is planted with olive trees and lavender, which, although not yet in bloom, are neatly trimmed.
The Morgan Stanley men had arrived. Three men, all dressed in bespoke suits, but with a more understated style than those from Goldman Sachs. The leader, Winston, appeared to be around fifty years old, well-maintained, with silver hair and gold-rimmed glasses. His smile was gentle, but his eyes were sharp.
"Mr. Ling, it's a pleasure to meet you." Winston shook hands with just the right amount of pressure and timing. "I've heard many stories about you and Star Technology. It's an honor to meet you in person."
"Mr. Winston, thank you for taking the time," Ling Yun said.
Everyone was seated, and a waiter came in to ask if anyone would like drinks. Winston ordered black tea, and his two assistants ordered coffee. Lingyun ordered water.
"I like the environment here." Winston looked around the room. "It's not as cold and impersonal as an office building. Business isn't just about numbers; it's about relationships between people, don't you think?"
"I agree," Ling Yun said.
"Then let's build a good relationship." Winston took a leather folder from his assistant but didn't open it. "First, I want to express Morgan Stanley's interest in StarTalk. We believe instant messaging is a key infrastructure for the internet age, and you are currently the most visionary and technologically advanced team on the market."
The opening was gentle, but Lingyun knew it was just the prelude.
"Thank you for your recognition," he said.
“We’ve studied your data and business model,” Winston continued. “The valuation of $8.5 million is reasonable in the current market environment. Morgan Stanley is willing to participate in this round of financing, with an investment of between $3000 million and $5000 million, depending on the specific terms.”
Morgan accepted the valuation directly, which made Lingyun wary.
"However," Winston changed the subject, "we have some ideas about the investment structure. Morgan Stanley not only provides capital, but also a full range of financial services—IPO coaching, M&A advisory, debt financing, equity incentive design, and so on. We hope to become Xingyu's long-term financial partner."
"That's exactly what we need," Ling Yun said.
"Then, I suggest we design a phased cooperation framework." Winston finally opened the folder and took out a three-page summary document. "Phase one: this round of financing. Morgan Stanley will invest $4000 million, representing 4.71% post-financing. Phase two: IPO preparation. We are willing to start IPO preparation work ahead of schedule, including financial standardization, corporate governance optimization, and investor relations building. These services are usually expensive, but we can offer them on preferential terms as part of our strategic cooperation."
"What about the third stage?" Ling Yun asked.
"The third stage is the IPO underwriting," Winston smiled. "When Xingyu was preparing for its IPO, Morgan Stanley wanted to be the lead underwriter. In consideration, we could commit to a highly competitive underwriting fee rate and provide ongoing research coverage and liquidity support after the IPO."
This is a comprehensive plan that sounds great, but the devil is in the details.
Fiona then spoke, her voice calm and professional: "Mr. Winston, regarding the IPO coaching, you mentioned 'preferential terms.' What exactly do you mean by that? What is the fee structure? Is the scope of services clearly defined?"
“Excellent question.” Winston looked at Fiona. “We have prepared a draft service agreement. Simply put, we will charge a nominal fee for the initial consultation and preparation work. After the formal launch of the listing process, the fee will be calculated according to the industry standard rate, but with a 20% discount. The scope of services covers the entire process from auditing and legal work to roadshows and pricing.”
"What is the symbolic fee?" Fiona pressed.
“One million dollars, upfront,” Winston said. “But this money can be deducted from our $4000 million investment, so it doesn’t actually tie up the company’s cash flow.”
Lingyun and Carly exchanged a glance. Using investment funds to pay service fees effectively reduced the actual investment amount.
"What's the timeline for the IPO?" Ling Yun asked. "When do you expect Xingyu to be able to go public?"
"It depends on many factors." Winston leaned forward slightly. "But given the growth rate of Xingyu, I think it's possible to start in the second half of 1999 and complete it in the first half of 2000."
In the first half of 2000, Ling Yun's heart sank. He knew that the NASDAQ had peaked in March 2000 and then begun to collapse. If Xingyu had gone public in early 2000, it would likely have been caught in a bear market right after its listing.
"This timing might be a bit optimistic," Ling Yun said. "We hope to solidify our product foundation and clarify our revenue model before considering going public."
"I understand," Winston nodded. "But the capital markets won't be enthusiastic forever. The internet sector is currently at a historical high valuation, and the earlier it goes public, the better the fundraising results may be. Of course, this is just a suggestion; the final decision is yours."
The negotiations entered a delicate phase. Winston's suggestion, ostensibly for Starry Sky's own good, implied that failing to go public now might mean missing the window of opportunity.
"Let's get back to this round of financing," Lingyun changed the subject. "Besides the investment amount and valuation, what specific requirements did Morgan Stanley have for the terms?"
Winston's assistant handed him a more detailed document.
"The standard terms are the main focus," Winston said. "But there are a few things we want to be particularly clear about. First, the right to information. We want to receive monthly operating reports and a management meeting every quarter."
"Can."
"Secondly, the board observer seat. Although not a formal director, I hope to attend meetings and stay informed about company developments."
"We'll only give you two observer seats at most," Fiona interjected, "and you'll need to sign a confidentiality agreement."
"That makes sense." Winston nodded. "Third, the pre-emptive right. Morgan Stanley has the right to subscribe pro rata in subsequent rounds of financing."
"These are standard terms and conditions, and they are acceptable."
"Fourth," Winston paused, "co-sale right. If the founders sell their shares, we would like the right to participate in the sale on the same terms."
Fiona jotted a note down in her notebook. "Co-sale rights usually have thresholds, such as only triggering when the founders sell more than a certain percentage. What percentage would you recommend?"
"5%," Winston said.
"10%," Ling Yun said. "The founder's occasional sale of a small number of shares for personal financial planning should not trigger a joint sale."
Winston considered for a few seconds. "Okay, 10%. But there have to be equal conditions—the price and terms have to be exactly the same."
"agree."
"Fifth," Winston turned to the next page, "if the company offers more favorable terms to other investors in the future, those terms will automatically apply to Morgan Stanley."
Here it comes. One of the trap clauses Fiona mentioned.
"This clause might be problematic," Fiona said directly. "Most-favored-nation status would put the company in a very passive position during subsequent financing negotiations, because any concessions would automatically be attributed to previous investors. Many high-quality companies in the market reject this clause."
"But this is also a necessary measure to protect early investors," Winston's assistant, a woman in her thirties, said calmly. "It would be unfair to early investors if subsequent investors got better terms."
"The risks of early-stage investment differ from those of later-stage investment, so the terms will naturally be different," Fiona stated firmly. "This is industry consensus."
The two stared at each other for a few seconds.
"We can change the wording," Winston broke the deadlock, "to 'most-favored-nation treatment for major provisions,' limited to core provisions such as liquidation preference and anti-dilution, excluding conventional rights such as the right to information and observer status."
Fiona looked at Ling Yun, who nodded slightly.
"It's acceptable, but 'significant terms' need to be clearly defined," Fiona said.
"certainly."
The negotiations progressed step by step. Every clause, every percentage, every definition. Winston's style was indeed different from Richardson's—more moderate, more willing to listen, but equally firm on key terms.