On Investor Protection Mechanism In The Venture Capital Investment

The venture capital is a new way of investment and financing. The risk that the venture capital funds (venture investors) face is much greater than the risk that the investors in general business investment have. So the investor protection measures of general business investment are not sufficient to effectively protect venture investors. It is necessary to construct a specialized investor protection mechanism for venture investors. In the case that legislations can not provide pertinent protection for venture investors, a type of peculiar venture-investor-protection mechanism, which is built up with relational contracts, has come into being in the venture capital practice of developed countries.In this thesis, peculiar venture-investor-protection mechanism is to be object of study. The thesis demonstrates the specific relational contract designs and the way how they protect the venture investors. And it analyses the possibility and conditions that peculiar venture-investor-protection mechanism were applied under the legal background of P.R.C. The purpose of this thesis is to provide theoretical support for implanting peculiar venture-investor-protection mechanism in order to improve and perfect the investor protection mechanism in venture capital of our country. In addition to the introduction and conclusion, the main body of thesis is divided into four chapters.Chapter One is"Protection Demand of Venture Capital". To start with the definition of venture capital, Section One gives a brief description of the origins and development of venture capital. After that, it analyses the particularity of venture capital as a new way of investment and financing and demonstrates the legal relations of venture capital. Section Two discusses the necessity to protect venture investors. Further, it demonstrates that legislations can not provide pertinent protection for venture investors and introduces the peculiar venture-investor-protection mechanism into venture capital. It expounds on the possibilities to construct a type of peculiar venture-investor-protection mechanism with relational contracts in the perspective of basis of principle of law and source of validity. Section Three presents the American experience of the venture investor protection, focusing on analysis of the relational contracts designs in the NVCA Model Legal Documents for Venture Capital Investments.Chapter Two is"Venture-investor-protection Mechanism I: Equity Arrangements in Entrepreneurial Enterprises". Section One demonstrates the choice of investment vehicles is the core content of equity arrangements. Then it discusses that the compound convertible preferred stock is the best investment vehicle which can take the initiative to prevent and control the investment risk in venture capital. Section Two analyses the main rights of the venture investors as convertible preferred stock holders and it expounds on the specific arrangements and main functions of dividends preference right, liquidation preference right, optional conversion right, redemption right, preemptive right, first right of refusal. Section Three discusses the possibility that above-mentioned equity arrangements were applied under the current legal framework of our country. On this basis, it gives proposals to improve the relevant legal system of P.R.C.Chapter Three is"Venture-investor-protection Mechanism II: Anti-dilution Arrangements". By analyzing the concept and the reasons of"diluting", Section One explains the dilution risks faced by venture investors. After that, Section Two demonstrates structural anti-dilution measures and conversion price protection which is used to prevent economic dilution to the initial investment value. And it gives examples to explain how the anti-dilution arrangements woks. Section Three mainly analyses the applicability of anti-dilution arrangements under the legal background of P.R.C. At last, it gives suggestions on how to refer to the anti-dilution protection mechanism.Chapter Four is"Venture-investor-protection Mechanism III: Control Rights Arrangements in Entrepreneurial Enterprises". Section One discusses the relationship between corporate control rights arrangements and investor protection. Further, it demonstrates the special needs of control rights arrangements in venture capital. Section Two expounds on the specific arrangements and main functions of binary board, protective provisions and special information rights. Section Three discusses the possibility and conditions that control rights arrangements protection mechanism were applied under the current legal framework of our country. On this basis, it gives proposals for implanting these control rights arrangements into the venture capital in our country and improving the relevant legal system of P.R.C.In the conclusion, the thesis summarizes the above-mentioned venture investor protection mechanisms and their application in China. On this basis, it points out that although the contents and functions of those mechanisms are different, those mechanisms supplement each other and connect closely. At last, the thesis outlooks the prospects that above-mentioned venture investor protection mechanisms would be applied in China's venture capital investment in the future.