Making capital from the early investments

By Benjamin Qiu (China Daily) Updated: 2014-07-14 07:02

For example, an investor often insists that in addition to the company itself, the company's founder(s) be personally liable for any lack of disclosure to the investor or breach of the financing agreement once the deal is signed.

Investors also tend to list more conditions which they, or the board director appointed by them, can veto.

The almost universal use of variable interest entities by US-listed Chinese technology startup companies consists of offshore plus onshore entities, including one or more local units that are not directly or indirectly owned by the ultimate parent company, which have heightened the risks related to China deals.

Making capital from the early investments

The big gamble that paid off

Click profit

To mitigate those risks, VCs have often asked for co-signatory rights over the company's bank accounts, and the appointment of additional board directors on any subsidiaries of the company.

Meanwhile, whereas some exits may mark happy success stories for investors - with a public listing of the company, or an IPO marking a significant milestone in a company's story - this minefield of listing compliance can prove too much for some technology companies.

In many cases, the costs of maintaining a public company such as compliance with increasingly complex public market regulations, and the risks of securities litigation filed by minority shareholders which are commonplace in the US, have caused companies to remove themselves from the market.

In going private, the company, an affiliate of the company, or one or more private equity firms acquire all of the outstanding shares and in effect "cash out" all or almost all of the publicly traded shares.

As a result, the company is de-listed from the stock exchange and if it was previously listed in the US, de-registered with the Securities Exchange Commission.

Going private can be a good choice for some.

The company may realize a higher value in a depressed market, and with fewer shareholders to answer to, its management can then focus on long-term objectives rather than the short-sighted management of stock market expectations.

The author is senior attorney at Cooley LLP. The views do not necessarily reflect those of China Daily.