What's Exactly “Ventures' Betting on Performance”, the Couterpart of Equity Ratchet in China
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The “Ventures' Betting on Performance” has been applied in China's private equity and venture capital investment circle for more than a decade. However, people do not have clear understandings on its unique attributes which can distinguish it from other venture capital contracts; they cannot identify contracts types that belong to “ventures' betting on performance”. This paper reviews three types of contracts allegedly referred to “ventures' betting on performance”, namely “Valuation Adjustment Agreement”, “Performance Commitment or Compensation” and “Equity Ratchet” Agreements, and compares ventures' betting with traditional venture capital investment contracts based on convertible preferred stocks, showing that the distinct characteristics of “ventures' betting on performance” lie in the high-level risk exposure and high incentive intensity for both investors and investees. The comparison of “ventures' betting on performance” with “Earn-out” demonstrates that venture capital contracts are in a continuum; they usually have subtle differences in their boundaries. This article can provide reference for academic researchers and industry practitioners in identifying and selecting venture capital contracts.
Business venture, Ventures' betting on performance, Equity ratchet, Distinct characteristics