A Study On The Contract Mechanism Of Venture Capital

Because of bounded rationality and transaction cost, the venture capital contract is an incomplete financial contract. In the dual principal-agent relationship of venture capital, there are information asymmetries between investors & venture capitalists and venture capitalists & entrepreneurs. The behavior of each parties in order to realize maximizing their utilities may result in negative effects on the synthetic profit goal of venture capital. Therefore, it requires an effective and rational contract mechanism to encourage and restrict the behavior of each parties, and to definite each status of risk and return from the dynamic point of view.The paper begins with various literature reviews on venture capital. In the main body, it firstly presents the main clue about the venture capital contract theory in terms of the contract theory of the modern economics, in order to establish a theory base for the contract mechanism of venture capital. Next, it analyzes the contract arrangements between investors & venture capitalists and venture capitalists & entrepreneurs in a parallel way. Limited partnership suits the characteristics of incomplete contract of the venture capital transaction. Its governance structure solves the problems of agency costs, incentive and restriction between investors and venture capitalists. In the relationship between venture capitalists and entrepreneurs, venture capitalists adopt some contracts such as multi-stage investment, security design and contingent governance to avoid the risk and protect the benefit of their own. After theory analyzing, the paper makes empirical analysis. Finally, the paper draws some abbreviated conclusions, and proposes suggestive strategies to promote the development of venture capital in China.The creativity of this paper shows in two aspects: research scope and research methodology .In the research scope, the paper explains various arrangements in the governance structure of venture capital. In the research methodology, the paper applies the logic syllogism and the empirical analyzing method. The logic syllogism mainly applies to form a theory framework of the contract mechanism of venture capital. Itintroduces models to deduct the representative contract designs of venture capital. In the empirical analysis, it compares the empirical literature of foreign research and the theory on the one hand, studies a case to demonstrate a series of contract arrangements of venture capital on the other hand.