TITLE:
Design and Application in China of Trading Mechanism for Venture Capital
AUTHORS:
Luhao Huang, Mengjun Ge
KEYWORDS:
Venture Capital, Trading System Design, Phased Financing, Convertible Preferred Stock, Gambling Agreement
JOURNAL NAME:
Modern Economy,
Vol.10 No.9,
September
24,
2019
ABSTRACT: Due to the factors of asymmetric information and
inconsistent interests, venture capitalists and venture entrepreneurs have the
problem of principal-agent relationship.
This paper mainly explores the design arrangements of four transaction
structures, namely, phased financing, choice of financial instruments,
corporate governance structure and gambling agreement, and their local practices in China. The analysis results
show that due to the imperfectness of our legal system, the immaturity of the
capital market environment and other objective conditions, some good system
designs, such as convertible equity and gambling agreements, are facing many
difficulties in their implementation. Therefore, even though China’s current
venture capital is developing rapidly, the interests of China’s venture
investors have not been properly protected and venture entrepreneurs have not
received sufficient incentives and supervision. If the current situation is not
changed, it will be unfavorable to the development of China’s venture capital
industry in the long term.