Study On The Risks Of VAM Applied In Equity Financing In Start-ups

Start-up enterprises always have the characteristics of lacking of assets and unstable cash flow. Which make it difficult for companies to obtain funds by way of bank loans. Coupled with China’s bond market is underdeveloped, firms tend to seek funds by way of equity financing. With the rapid development of capital markets, private equity investment is prosperous during the last decades, it has become the most important financing channel for the start-ups to seek rapid development,It seems to be a potential rule to sign the so called bet agreement in private equity financing. Bet agreement, as well as VAM(Valuation Adjustment Mechanism), which can be understood as an option. The terms and conditions set in VAM can protect investors, also act as a role of incentive means, but VAM contains risks at the same time. The paper studies in the case of Shanghai Leading Metal CO., LTD to analyze all kinds of risks the financiers may face. I hope the paper can provide some suggestions for other enterprises.Through the analysis of the article, I make out that there are four aspects of risks exist in the VAM for the financer, there are strategic risk, financial risk, control risk and legal risk. Based on our analysis, I hope that corporate should considerate the following several advices when signing VAM, Confirming whether there is a need to sign VAM or not; Setting up reasonable bet standard; Being careful about the special terms; Avoiding making short-term behavior for the pursuit of standard in any time; Maintaining the independence of the control in case of losing control; Ensure the legitimacy of the terms, noting the requirements of regulatory authority.