Selection Of Financing Tools Of Venture Firms

Corporate governance has become the hot spots of theoretical circles and business communities to discuss, since Third Plenary of 14th Session of Communist Party of China held in 1993 when the reform of state-owned enterprises targeted at the establishment of modern enterprise system. Like corporate governance mechanisms, venture capital contract is also a complete system of governance, including governance of financing stage, of phased investment and exit mode three areas of governance. The main means of governance arrangements includes residual claim, reputation mechanisms, stages of investment, and the allocation of control rights. As the gradual maturity of the market economy and acceleration of globalization process, academic papers regard to venture capital contract governance attract more and more attention, from different perspectives many scholars analyzed how to implement effective incentive and restraint on managers and to protect investor's benefits, resulting in a lot of valuable research findings.Under the above background, the paper launched a study about the choice of financing tools of start-ups. Relevant literatures indicate that the pursuit of private benefits of entrepreneur has led to the conflicts to VCs, in the process of venture capital. After VCs investing in start-ups, but before investment combining with the human capital of entrepreneur, entrepreneur has all the bargin ability. Thus, entrepreneur may use the right of renegotiation to change the prior commitment of return on investment to the VCs. VCs are held-up, if such situation occurs. Expecting this, venture capitalists'effective investment to start-ups may not be realized. Thus, it is necessary to design a mechanism to persuade VCs to believe that entrepreneur will not renegotiate over the return. Appropriate financing instruments and reasonable control rights arrangement can eliminate the conflict between entrepreneurs and VCs in a certain extent. Departing from this conflict, we introduce the "phased investment and bankruptcy liquidation" assumption based on the the predecessor's model in the framework of incomplete contract, by the derivation of theoretical model, we obtained that under certain conditions, financing contracts are renegotiation-proof contracts.The results concluded that the introduction of "phased investment and bankruptcy liquidation" assumption is effective.