Research On Risk And Response Strategy Of Valuation Adjustment Mechanism Applied In The Financing Process Of Start-up Firm

With the development of China’s investment and financial market,"gamble agreement" is the word gradually been familiar. Although this approach is named for gambling, but it is not actual gambling, the actual meaning should be "valuation adjustment mechanism (VAM)". The VAM is designed to deal with the uncertainty problem of company’s future profitability, and purpose of this agreement is to achieve as reasonable and fair as possible in investment transactions, improve fund usage efficiency. VAM, not only can effectively protect the interests of investors, but also encourage the finance party at the same time.However, as an investment valuation tools, the role of VAM is not always positive. From the aspect of "benefit", the VAM can solve the financial problems for the company, to obtain the necessary funds as quickly as possible, and achieve great development. On the other hand, there are "disadvantages" to apply these agreements. The VAM often bring huge performance pressure for the management team, which sometimes led the company to take non-rational business decision, and because the company suffer financial difficulties, even have to be in the situation of bankruptcy and liquidation.This article try to explore the VAM’s role in the development of start-up companies. Both theory and cases study are involved in the discussion. The two specific cases quoted here are "Mengniu Dairy VS Morgan Stanley" and "Harbour Networks VS Warburg Pincus". If applied properly, the VAM can effectively protect the interests of investors, and also play the role of incentives and constraints to the corporate management, and then achieved the "win-win" result. If applied improperly, it can cause tremendous pressure on the financing party. The management team of the financing party may take irrational strategy when operating the company, ignoring the long-term business strategy, which may eventually lead to the "lose-lose" result. When discussing the VAM, the two parties should take the industrial condition, as well as their overall business strategy into account, avoiding blind pursuit of unrealistic results. When negotiating the specific items of VAM, it is better to introduce multiple games, which can protect the two parties properly.