10 billion, a bet to kill a unicorn
Another unicorn valued at tens of billions during its peak period has fallen before its IPO.
The e-commerce unicorn, My Everything Collection, has collapsed: its Shanghai headquarters is empty, the founder is out of contact, and it owes more than 400 million yuan in payments to suppliers. The tragedy began with a failed gambling agreement.
Such stories are not an exception in the investment circle. The gambling agreements signed during the frenzy of the primary market a decade ago are now facing a concentrated explosion period: the Pre-IPO logic has failed, the A-share review has tightened, the liquidity in the Hong Kong stock market has shrunk, and the US stock market has cooled towards Chinese concept stocks. A large number of repurchase clauses that were once considered a "formality" have now become a sword hanging over the heads of founders and investors. From billion-dollar unicorns to a large number of startup projects, an industry dilemma caused by gambling agreements is fully unfolding...
Won the bet, but the money didn't come back
At nine o'clock on Monday morning, Zhang Lin (a pseudonym), a consumer investor, had just sat down and opened her email when the sky seemed to fall.
The email was from a project she had been following for six years. It was a consumer brand that had reached Series C financing, backed by several leading institutions. In the hottest year of that track, this project was almost the most outstanding case in her career. When signing the agreement back then, when they turned to the page with the gambling clause, the founder took a quick look and signed without much hesitation. The agreement stated that if the company failed to go public within the agreed time, a repurchase would be triggered with an annualized interest rate of 8%. At that moment, both of them thought it was just a formality. They believed that going public was just a matter of time, and this clause would probably never be used.
The email only had one sentence: The company is facing a cash flow shortage and is temporarily unable to fulfill its obligations. It hopes to sit down and have a talk.
Zhang Lin did a simple calculation: the repurchase principal plus the accumulated interest at 8% over the years had reached an amount that the founder simply couldn't afford. The cash in the company's account was for paying salaries and maintaining operations and couldn't be touched. The founder had already mortgaged all of his personal assets into the company, so there was nothing left. What could they achieve by sitting down to talk? The best outcome would probably be just a promise of "wait a little longer." She stared at the screen, not knowing what to reply.
For Wang Lei (a pseudonym), it was a different kind of suffocating situation.
He is the founder of a technology company that has gone through seven years of financing from the angel round to Series C. There was a gambling agreement in each round, and the terms were piling up - the listing time node, the repurchase interest rate, and the joint liability. When signing back then, he didn't have many choices. If he wanted the money, he had to sign; otherwise, the investors would just walk away. He told himself that as long as the company went public, these clauses would automatically be lifted, and it wouldn't be a problem.
But the listing didn't happen on time.
The review tightened, the materials were repeatedly questioned, and the intermediary institutions were changed. Time just slipped by. When the gambling node arrived, Wang Lei's first reaction was to send a message to each investor, saying that the project was still in progress and asking for an extension. Some investors replied, saying that they could talk; some didn't reply and just left it hanging. Every morning when he opened his eyes, the first thing he did was to check his phone. He was not afraid of the business data but worried that an investor might suddenly change their attitude.
There was still money in the company's account, but it was for employees' salaries and suppliers' payments, and he didn't dare to touch a single cent. According to the repurchase amount calculated from the multiple rounds of gambling agreements, even if he sold the company, it wouldn't be enough to pay back. He privately told a friend, "When I signed those agreements back then, I thought I was borrowing a ladder. Now I realize that I signed a rope."
Wang Lei and Zhang Lin are at two ends of the same dilemma.
This dilemma is currently intensively playing out in China's primary market. From 2018 to 2021 were the most exuberant years in the primary market. The Pre-IPO logic was prevalent. There was a lot of money but few projects. Investors were scrambling to get in, and founders had the confidence to pick. Gambling agreements almost became a standard for each round of financing in those years - investors used them to get a concession on valuation, and founders used them to get a higher financing amount. Both sides defaulted that going public was just a matter of time, and no one seriously thought about what would happen if the exit window closed entirely and these clauses were triggered simultaneously.
Now, that situation has arrived.
A large number of the listing nodes agreed in those agreements are concentrated around 2023 and 2024. Coincidentally, in these two years, the A-share review has tightened, the liquidity in the Hong Kong stock market is limited, and the US stock market is unfriendly to Chinese concept stocks. The exit channels have been comprehensively narrowed. Investors are receiving "unable to fulfill obligations" notifications more and more frequently. In some projects, the founders inform them actively; in some, they only say it after being asked; and in some, the founders simply disappear, not answering the phone or replying to messages. No matter which situation it is, the outcome points to the same situation: the gambling agreement is triggered, the money can't be retrieved, and the project is left hanging in the air for two or three years.
Whether to pursue the money or not is inappropriate.
If investors force the company to repurchase, once the repayment pressure comes down, the company's financing will be blocked, and the team will be in a state of unrest. A company with the ability to generate cash flow may quickly deteriorate. Once the company collapses, as equity holders, investors are ranked behind all creditors in the liquidation order. They often can only get a fraction of their investment back, and sometimes nothing at all. Everyone knows the consequences of a lose-lose situation. But if they choose to put it on hold and wait, GPs can't explain it to LPs either - the DPI is there, and the gambling agreement is in black and white. If it ends up unresolved, these messy accounts will be scrutinized item by item during the next round of fundraising.
What's trapping everyone is not just an agreement but a collective misjudgment of the exit cycle in that era.
Why were they brave enough to sign back then?
Let's rewind the time to 2019, which was the smoothest year for Zhang Lin since she entered the industry.
The consumer track was extremely hot. The valuation of new brands doubled overnight. LPs rushed in crazily, and institutions had plenty of funds. That year, she looked at more than 200 projects and invested in seven. Every project was in high demand. For some projects, once the term sheet was sent out, it was snatched up by other institutions within two days. That was the rhythm of the market. If you were a step slower, you'd miss it.
Gambling agreements were a standard move in that rhythm.
Investors used gambling agreements to get better terms. If they couldn't negotiate the valuation down, they would add a clause in the agreement: go public within the agreed time, or else repurchase. This seemed like an equal exchange in terms of numbers. Investors accepted a higher valuation, and founders took on the exit risk if the listing didn't happen. At the negotiation table, the lethality of this clause seemed low: in those years, the exit logic in the primary market was smooth, the IPO channels were not as congested as they are now, and the listing fulfillment rate of Pre-IPO projects was quite high. Signing a gambling agreement was not really a bet but more like stamping an insurance contract that probably wouldn't be triggered.
For founders, the logic was equally clear: if you want the money, you have to sign.
In the financing market, investors had the money, and founders didn't have much room to bargain on how the terms were written. More importantly, in those years, entrepreneurs generally believed that they could go public. Going public was the end goal, and the gambling agreement was just a roadblock on the way. As long as they ran fast enough, they wouldn't hit it. Some founders even voluntarily proposed to add gambling clauses to get a higher valuation or a faster decision-making process. The two sides hit it off, signed the agreement, and were all happy.
This logic was indeed self-consistent in a market with smooth exit channels.
From 2015 to 2021 were the golden years for China's primary market. The Science and Technology Innovation Board was launched, the registration system was advanced, and the Hong Kong stock market's Rule 18A was implemented... The number of IPOs increased year by year. Star projects reached a valuation of over tens of billions upon listing. Investors in the Pre-IPO round often had substantial paper profits, the DPI was good, LPs were satisfied, and GPs had an easy time raising the next round of funds. Gambling agreements were a well-functioning gear in that system, fitting tightly without any problems.
No one expected when the frenzy would subside.
Since the second half of 2021, signals of tightened supervision have been released one after another. The IPOs of star projects in multiple tracks such as the Internet, education, and healthcare have been put on hold, and the market sentiment has cooled down rapidly. In 2022, the pace of A-share IPO reviews slowed down significantly, the number of rounds of inquiries increased, the review cycle lengthened, and a large number of queuing companies voluntarily withdrew their materials. In 2023, the full implementation of the registration system took place, but at the same time, the regulatory requirements for profit thresholds and information disclosure were also raised. Many projects that thought they were "almost there" found that they still had a long way to go. In the Hong Kong stock market, the liquidity continued to shrink, and it became normal for new stocks with small and medium market capitalizations to break their issue prices. After doing the math, investors found that it was better not to go public.
The exit window has closed in almost all directions at the same time.
Another structural hidden danger of gambling clauses is the snowball effect of interest rate superposition. An annualized interest rate of 8% may not seem high, but once a project enters a long waiting period, the interest accumulates year after year. After three years, it's 24%; after five years, it's 40%. Adding the principal, this amount will soon exceed the company's actual ability to bear. What's more troublesome is that for a project that has gone through multiple rounds of financing, there is usually a gambling agreement in each round, and the interest rates, nodes, and joint liability clauses in each round are different. After they are superimposed, no lawyer can figure out who owes what to whom in a short time, let alone execute it.
An experienced investor said when reviewing a batch of agreements he had signed, "Those clauses were designed when the market was at its best. Each clause seemed reasonable on its own, but no one thought about what would happen if these clauses were superimposed when the market changed as a whole. Looking back now, when we signed the agreements back then, we weren't really managing risks; we were just pushing the risks back."
Eventually, we couldn't push them back anymore.
What to do next?
Wang Lei (a pseudonym) has been doing something recently: calling investors one by one.
It's not to ask for money but to negotiate. His strategy is simple. Before the company completely collapses, he takes the initiative to sit at the negotiation table and tries to negotiate everything he can. Some investors are willing to extend the repayment period, pushing the repurchase node back by two years, on the condition that the interest rate is increased; some are willing to settle at a discount, settling the matter at 70% or 80% of the original investment principal, and both sides can call it quits; another investor directly proposed to convert the debt into equity, betting that the company still has a chance to exit in the future. Each investor has different demands and different bottom lines. Wang Lei negotiates with each one, one by one.
He privately said that this is more tiring than raising funds back then. Raising funds is asking for money; negotiating is asking to be let go. Both require humility, but the latter is more difficult because the people sitting across from him are already starting to regret.
Zhang Lin is not the only investor who regrets.
In the past two years, more and more institutions have begun to realize that the gambling agreement tool is systematically failing in the current market environment. Forcing a repurchase won't work; waiting and watching puts more and more pressure on the DPI; settling at a discount requires explaining the book loss to LPs. There is no easy way out, and every option comes at a cost. So, more and more investors are starting to shift their focus from "how to get the money back" to "how to still exit." This is a subtle but important change - admitting that pursuing repayment is a dead end and instead looking for another way out.
Extending the repayment period is the most common first step at the moment.
The two sides negotiate to push the repurchase trigger node back, giving the company more time to rush for listing or look for merger and acquisition opportunities. The logic of this plan is simple: use time to gain space and bet that the company still has a chance. But an extension is not free. Investors usually require an increase in the interest rate or additional conditions, such as the founder providing additional personal guarantees or giving priority to the exit rights of old shareholders when introducing new investors. For the founder, an extension means the pressure is postponed but the total amount is increasing; for the investor, an extension means the DPI will continue to look bad, but at least there is still a possibility of exit.
Settling at a discount is another path that more and more institutions are accepting.
Settle at a certain percentage of the principal, no longer pursue the interest, and both sides sign to call it quits. This plan results in a book loss, but for GPs, it's better to have something in hand than to have it hanging in the air. More importantly, after settling at a discount, this project disappears from the fund's list of projects to be disposed of. GPs can free up their energy and resources to deal with other projects and can also give a clear explanation to LPs. A partner of an institution privately said that settling at a discount is like a warrior cutting off his own wrist. It hurts, but once it's done, it's better than having that arm rot there.
Converting debt into equity is an option in a few cases.
Investors convert the repurchase debt into a new round of equity in the company, betting on future exit returns against the current losses. This plan requires the company to still have a growth logic, and investors also need to have enough risk tolerance and patience. Not many projects can go down this path, but for those companies with a solid foundation that just missed the right timing for listing, this may be the solution with the least cost - the debt disappears, the equity remains, and both sides stand on the same side again.
However, all the above solutions have a common prerequisite: the company is still alive, and the founder is still willing to negotiate.
In reality, a considerable number of projects don't even meet this prerequisite. For projects where the founder is out of contact, the company is insolvent, or the core team has already dispersed, the investors of these projects can't even sit at the negotiation table. For them, the gambling agreement is no longer a tool that can be enforced but a historical document recording the whereabouts of this money.
This round of concentrated triggering of gambling agreements is forcing the industry to re-examine the design logic of this clause itself.
Some institutions have begun to make adjustments in newly signed agreements: setting an upper limit on the repurchase interest rate to prevent it from rolling infinitely; adding exemption clauses related to the market environment in the triggering conditions, such as "if the listing fails to be achieved due to the overall closure of the IPO market, the node will be automatically postponed"; narrowing the scope of joint liability for the repurchase obligation and no longer requiring the founder to guarantee with all of their personal assets. These adjustments are essentially rewriting a contract that was originally designed only to protect investors into an agreement that allows both sides to survive.
LPs are also starting to look at gambling agreements with a new perspective.
In the past, LPs evaluated GPs' abilities based on their vision to invest in good projects. Now, LPs are also starting to pay attention to how GPs handle projects when they encounter problems - whether they force a repurchase or negotiate flexibly after the gambling agreement is triggered, the decision-making speed for settling at a discount, and the ability to stop losses for zombie projects. A GP who can handle the situation properly after the gambling agreement is triggered and steadily recover the DPI is as valuable in the eyes of LPs as a GP who bets on a unicorn. Exit management is becoming an increasingly important part of GPs' ability system.