Design and Application in China of Trading Mechanism for Venture Capital

Abstract

Due to the factors of asymmetric information and inconsistent interests, venture capitalists and venture entrepreneurs have the problem of principal-agent relationship. This paper mainly explores the design arrangements of four transaction structures, namely, phased financing, choice of financial instruments, corporate governance structure and gambling agreement, and their local practices in China. The analysis results show that due to the imperfectness of our legal system, the immaturity of the capital market environment and other objective conditions, some good system designs, such as convertible equity and gambling agreements, are facing many difficulties in their implementation. Therefore, even though China's current venture capital is developing rapidly, the interests of China's venture investors have not been properly protected and venture entrepreneurs have not received sufficient incentives and supervision. If the current situation is not changed, it will be unfavorable to the development of China's venture capital industry in the long term.