RetailEye: Term Sheet Negotiations in China Custom Case Solution & Analysis

Part 1: Evidence Brief — Case Researcher

1. Financial Metrics

Pre-money Valuation: Fund A (Venture China) proposes 20 million USD. Fund B (Growth Partners) proposes 15 million USD (Source: Exhibit 1).
Investment Amount: Both funds propose a 5 million USD Series A injection (Source: Exhibit 1).
Liquidation Preference: Fund A requires a 2x participating preference. Fund B requires a 1x non-participating preference (Source: Paragraph 12).
Option Pool: Fund A demands a 15 percent post-money ESOP (Employee Stock Option Pool) created from the founder share base. Fund B accepts a 10 percent pool (Source: Exhibit 1).
Burn Rate: Current monthly burn is 250,000 USD with 4 months of runway remaining (Source: Paragraph 8).

2. Operational Facts

Headcount: 45 employees, primarily software engineers based in Shenzhen (Source: Paragraph 4).
Product: AI-driven computer vision for offline retail inventory tracking and heat-mapping (Source: Paragraph 2).
Geography: Headquartered in Beijing; R and D in Shenzhen; target clients are Tier 1 and Tier 2 city shopping malls (Source: Paragraph 5).
Current Traction: 3 pilot programs active; 1 signed contract with a national supermarket chain (Source: Paragraph 7).

3. Stakeholder Positions

David Zhang (CEO): Prioritizes valuation to minimize dilution; believes the technology warrants a premium (Source: Paragraph 14).
Sarah Wang (CTO): Concerned about the ESOP size; wants to ensure enough equity remains to attract senior AI talent from competitors (Source: Paragraph 15).
Venture China (Fund A): Positioned as a Tier 1 local fund; emphasizes their ability to open doors to state-owned retail enterprises (Source: Paragraph 18).
Growth Partners (Fund B): International fund; emphasizes governance, exit experience in US markets, and cleaner terms (Source: Paragraph 20).

4. Information Gaps

Revenue Projections: The case does not provide detailed 3-year revenue forecasts or CAC/LTV (Customer Acquisition Cost / Lifetime Value) metrics.
Exit Environment: Current IPO window status for tech companies in the HKEX or STAR market is not specified.
Founder Vesting: The specific vesting schedule for David and Sarah is omitted.

Part 2: Strategic Analysis — Market Strategy Consultant

1. Core Strategic Question

Should RetailEye prioritize a higher headline valuation with restrictive liquidation and governance terms, or a lower valuation with founder-friendly protections and international exit expertise?

2. Structural Analysis

Using a Resource-Based View and Negotiation Analysis:

Resource Gap: RetailEye has the technical capability (AI) but lacks the institutional access to navigate the complex Chinese retail landscape. Fund A offers this access as a core resource.
Governance Risk: The 2x participating liquidation preference from Fund A creates a significant hurdle for founder returns in a mid-range exit. This creates a misalignment of incentives between the board and the management team.
Bargaining Power: With only 4 months of runway, the founders possess low BATNA (Best Alternative to a Negotiated Agreement). They cannot afford a protracted multi-month negotiation.

3. Strategic Options

4. Preliminary Recommendation

RetailEye should accept the offer from Fund B. While the valuation is 25 percent lower, the 1x non-participating liquidation preference is the only structure that preserves founder incentives. In the volatile Chinese retail tech sector, a 2x participating preference functions as a debt-like burden that will make future funding rounds (Series B) extremely difficult to price without further punishing the founders.

Part 3: Implementation Roadmap — Operations Specialist

1. Critical Path

Days 1-7: Formal rejection of Fund A and signing of Term Sheet with Fund B. Secure a bridge loan or advance if possible to extend runway beyond 90 days.
Days 8-45: Financial and Legal Due Diligence. Focus on verifying the AI IP ownership and Shenzhen employment contracts.
Days 46-60: Finalize VIE (Variable Interest Entity) structure if required for international capital flow.
Days 61-90: Close funds. Execute the 10 percent ESOP expansion.

2. Key Constraints

Cash Runway: The 4-month limit is the primary constraint. Any delay in due diligence past Day 45 threatens payroll.
Talent Retention: The CTO must communicate the new ESOP structure immediately to the engineering lead to prevent poaching during the transition.

3. Risk-Adjusted Implementation Strategy

The strategy assumes a 20 percent delay factor in Chinese regulatory filings. To mitigate this, the legal team must run the corporate restructuring in parallel with the financial audit rather than sequentially. If the closing extends past month 4, David Zhang must have a pre-negotiated personal loan or internal bridge from existing angels ready to deploy within 48 hours.

Part 4: Executive Review and BLUF — Senior Partner

1. BLUF

Sign with Fund B immediately. The 25 million USD valuation offered by Fund A is an optical illusion. The 2x participating liquidation preference creates a structural misalignment that will likely zero out founder equity in any exit below 60 million USD. Fund B provides a cleaner cap table and better alignment for long-term scaling. Speed is now the priority as the 4-month runway leaves no room for further shopping of the deal.

2. Dangerous Assumption

The analysis assumes that Fund A’s promised access to state-owned enterprises will actually materialize into revenue. In the Chinese market, these promises often fail to convert into signed contracts, leaving the startup with punitive terms and no actual growth benefit.

3. Unaddressed Risks

Regulatory Risk: Changes in Chinese data privacy laws regarding computer vision and facial recognition could invalidate the core product within 12 months. Probability: High. Consequence: Fatal.
Currency Risk: If the investment is in USD but operations are in RMB, the recent volatility in the exchange rate could effectively shrink the 5 million USD injection by 5 to 10 percent before it is even spent.

4. Unconsidered Alternative

The team failed to consider a split-round approach. RetailEye could have invited Fund B to lead with 3 million USD while allowing a smaller, local strategic investor to take 2 million USD. This would provide the clean governance of an international fund while maintaining a local partner to assist with the Shenzhen/Beijing retail relationships.

5. Verdict

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Option	Rationale	Trade-offs	Requirements
Accept Fund A (Aggressive Growth)	Maximizes capital prestige and local market access.	High risk of founder wipe-out in a modest exit; 2x preference is punitive.	Requires 300 percent growth to clear preference hurdles.
Accept Fund B (Governance Focus)	Protects founder equity and aligns for international exit.	Lower valuation leads to higher immediate dilution; less local political capital.	Requires independent business development without VC help.
Counter-offer Fund A (Hybrid)	Bridge the gap by trading valuation for 1x preference.	Risk of Fund A walking away given the short runway.	Must be executed within 10 business days.