An Analysis Of The Application Value Of Convertible Securities In Venture Capital

This paper starts from the analysis of the US experience in the field of venture capital for decades, and emphatically points out the applicability of the convertible securities as the most widely used financial instruments in the VC industry. The theoretical analysis taken by both domestic and foreign scholars on convertible financial instruments and the application of certain instruments in countries with more sophisticated experience of VC investment show a positive proof of the effectiveness of convertible securities.Starting from the various risk and return characteristics of venture capital in different stages, this paper compares convertible securities with other instruments which are adaptable with each stage, leading to the effectiveness of convertible securities in the expansion stage of the venture capital investment. In addition, this paper also explores the VC portfolio theory, which can be elaborated as the portfolio of different stages, financial instruments, industries and regions.Moreover, this paper analyses the effectiveness of convertible securities in two aspects. By setting a theoretical model with three states of nature, i.e. low, medium and high cash flow states, the model compares debt, equity and convertible securities in preventing agent costs and risks. In the case of return, the model verifies the possibility of achieving an optimal exit in the both IPO and MA by convertible securities. On the basis of the theoretical model, this paper demonstrates two instances of convertible securities:an overseas company which issues a Series B convertible preferred stock and Series A Convertible Preferred Stock issued by LDK Solar. By analyzing the clauses of the contracts of these two corporations, the validity of convertible securities can be shown.Finally, this paper tries to propose some policy suggestions according to the status quo of Chinese venture capital industry. For instance, by improving the Company and Security Law which eliminates the blind spot with the issue of convertible preferred stocks and meanwhile softening the terms which concerns convertible bond so that it indeed be applied to venture capital firms. In addition, the training of VC specialists and the development of VC intermediaries also ensure the promising future of Chinese VC industry.