Contingent contracts between entrepreneurial companies and venture capital investors: the case of new third board firms in China

Yi Jiang and Bin Ke

Chapter 14 in Research Handbook on Corporate Governance in China, 2025, pp 283-301 from Edward Elgar Publishing

Abstract: This study conducts a descriptive analysis of contingent contracts for entrepreneurial firms listed on China's New Third Board (NTB) between 2013 and 2017. A contingent contract refers to an agreement between an entrepreneur (or their company) and an outside investor that confers certain pre-specified benefits to either contractual party based on the fulfillment or non-fulfillment of certain predetermined conditions. The chapter outlines the institutional framework of NTB firms, presents detailed statistics on the occurrence of such contracts, and delves into their distinctive features. Key findings reveal that 71.6 percent of NTB firms engage at least one external investor, with 23 percent of these firms securing venture capital (VC) backing. Interestingly, contingent contracts are notably more common in VC-funded firms (41 percent) compared to those without VC funding (4.7 percent). These contracts primarily serve to safeguard investor interests, with IPO listings and performance targets being the most frequent conditions. Failure to meet these stipulations typically results in cash or equity compensation, or share repurchase by the entrepreneur or their company. The study highlights significant variances in the nature of contingent contracts between VC investors and non-VC investors. These descriptive findings offer a rich avenue for future research, particularly in understanding how contractual agreements differ across varying investment landscapes. The chapter underscores the uniqueness of the Chinese entrepreneurial ecosystem as a fertile ground for further academic exploration, especially in the context of contingent contracting practices among emerging companies.

Keywords: VC; Contingent contracts; New Third Board; China (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035312603
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