Venture Capital: Study On Contracts And Corporate Governance

Venture capital's characteristic and the venture capital cycle show its' innovative financial quality, accompanying with the function to promote the development of VC backed companies. This paper focuses on VC contracts and corporate governance of the fund and VC backed companies.Same as ordinary contracts, Venture capital contracts are incomplete. Agent cost, moral hazard and adverse selection are dominating causes of contracts' incompleteness.The business form most commonly used in VC, limited partnership, is an effective approach to knock down information asymmetry between investors and VCst. Investors depend on the function of incentive mechanism, especially reputation VCst cared about and reward based on the fund's performance.As an innovative financial form, VC shows its specific role in VC backed companies' governance. For the existence of contracts' incompleteness, convertible securities, convertible bonds and convertible preferred stocks, are frequently used, accompanying with the unique corporate governance of the VC backed companies. Considering the characteristics of VC backed companies, the key issue of the corporate governance in VC backed companies is to provide strong control and good incentive to the entrepreneurs, dynamic adjustment of the ownership and control rights should also be adopted to adapt to the high risk and information asymmetric capital.With regard to the development of venture capital in China, capital, project and human resources are all confinements to some degree. However, the main problem is low governance efficiency of VC derived from the vague agency relationship in VC fund. The appropriate allocation of residual claim rights and control rights is key approach.Highlights of this paper:1. There is a large academic literature on VC in China, however, fewer on the contract character and corporate governance. This paper dissertated the institutional structure of corporate governance in VC on the basis of agent problem, information asymmetry and incomplete covenants in VC.2. Combing theory with practice. This paper analyzed the formation of low efficiency of VC on the basis of economics of information, moreover, on the specific institutional character of macro economy and enterprises in China. Policy suggestion in this paper has referential value in advancing VC industry in China, expanding channel of financing.