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Study On Contracts Of Venture Capital In China

Posted on:2005-01-04Degree:DoctorType:Dissertation
Country:ChinaCandidate:Y C M OuFull Text:PDF
GTID:1116360122488966Subject:Agricultural Economics and Management
Abstract/Summary:PDF Full Text Request
The contract theory of venture capital is an incomplete contract theory. Those issues discussed in contract economics such as agency cost, incentive problems, moral hazard, adverse selection and free-rider problem, etc., all appear in the process of venture capital investment. In another word, venture capital investment is the best experiment to explain the basic principles of contract economics. In the process of venture capital investment, venture investors (Vis) give their money to venture capitalists (VCs), and then VCs hand over the funds to venture entrepreneurs (VEs). Such two-period contract causes two agency problems, so we need three kinds of encouraging mechanism: to encourage Vis to join venture capital funds; to encourage VCs to invest enterprises properly, and to encourage VEs to try their best in operating business. Accordingly, we also need three kinds of controlling mechanism: how VIs control VCs, how VCs control VEs, and how VEs control their employees. All of these encouragement and controls should be taken into consideration when designing venture capital contracts. From this point, contract arrangement is of critical importance in venture capital investment process, and this is the main issue discussed in this paper.In China the default phenomenon is widespread in venture capital contract. This is mainly caused by improper venture capital contract arrangement, which is distorted seriously by imperfect market and laws, incomplete state-owned property rights and excessive government's interferes, etc. In order to alleviate this situation, we should draw lessons from international experience to improve venture capital contract design in China. This is why we start this research. Main content of this paper is as follows:In chapter 1 we point out shortages of current relative researches, set up target and put forward the whole frames of this paper. In chapter 2 we analyze the three parties concerned in venture capital contract in China, namely VIs, VCs and VEs. From chapter 3 to chapter 5 we focus on fundraising stage of venture capital investment in China and discuss contract choosing, contract signing and contract implementing. From chapter 6 to chapter 8 we focus on investing stage of venture capital investment in China and discuss contract choosing, contract signing, and contract implementing. In chapter 9 we summarize the whole paper, and explain the shortages of this paper and problems to further study. Main conclusions of this paper are as follows:The first, state-owned funds have always been predominant in venture capital sources in China, and this caused the "government-operated model" which leads to excessive government's interferes and distorted venture capital contracts;The second, limited partnership contract is better than incorporated company contract, because the former has obvious advantages in not only encouragement and controls, but also in investors' profits. However, this paper insists, incorporated company contracts will still be very popular in the near future because limited partnership still be illegal in most provinces of China;The third, venture capitalists' share of profits in compensation clause of fundraising contracts isinfluenced by investors' attitude towards difficulties and obstacles of future investment. By drawing essence from limited partnership contract, we can reconstruct and improve incorporated company contract in China;The fourth, when compared with debt contract or common stock contract, convertible preferred stock contract is the best choice for our investing stage contract, because it is better to alleviate asymmetric information and lower agency cost effectively in the process of venture capital investment. But it is very possible that common stock contract would still be used widely in a certain long time because convertible preferred stock contract suffers law restriction and many other limitations in China;The fifth, staged investment, combinative investment and united investment are recommended strongly in this paper...
Keywords/Search Tags:venture capital, asymmetric information, contract design
PDF Full Text Request
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