Chinese venture capitalists are aggressively pursuing failed founders, seizing personal assets, and adding them to a national debtor blacklist if they fail to repay their debts, causing turmoil in the country’s start-up funding ecosystem.
These tough tactics by risk capital providers have been made possible by redemption rights clauses, which are included in almost all financing deals made during China’s rapid growth period.
Neuroo Education founder Wang Ronghui, who now owes investors millions of dollars after her childcare chain stumbled during the pandemic, shared that her investors initially promised not to enforce these clauses, but they changed their stance when the company failed to meet certain milestones.
While redemption provisions are relatively uncommon in US venture investing, in China, over 80% of venture and private equity deals contain these clauses, according to Shanghai-based law firm Lifeng Partners.
These clauses usually require companies, and sometimes their founders, to repurchase investors’ shares with interest if specific targets, such as IPO timelines or revenue goals, are not achieved.
This situation has created significant challenges for founders facing asset seizures and financial restrictions if their start-up fails, hindering their ability to recover.
The implementation of redemption rights has transformed entrepreneurship in China into a high-stakes game with unlimited liability, resulting in founders being named as defendants in lawsuits alongside their companies, with some individuals ending up on the national debtor blacklist.
Furthermore, the lack of personal bankruptcy laws in China makes it extremely difficult for individuals to escape their debts, leading to severe consequences.
As Chinese VC firms struggle to deliver returns to their investors, many are resorting to redemption clauses to recoup their investments, impacting over 10,000 VC-backed companies facing redemption issues.
A start-up adviser highlighted that VCs are pressuring successful start-ups that can pay, turning the investment into debt rather than venture capital.
The number of entrepreneurs facing legal actions due to redemption clauses continues to rise, with high-profile cases like Wang Ziru, who faced spending restrictions for failing to repay investors from his tech media platform.
