VC has turned into "loan sharks".

The Chinese term "Valuation Adjustment Agreement" corresponds to "VAM" (Valuation Adjustment Mechanism) in English. In English explanations, it is often accompanied by the phrase "bet - on agreement".

Zhang Wei, an associate professor at the School of Law of Singapore Management University, conducted a study. He searched VC investment agreements in Silicon Valley, the United States, over the past decade and reached a surprising conclusion: there is almost no "Valuation Adjustment" in Silicon Valley.

Even the most similar redemption clause is used in less than 5% of Silicon Valley VC agreements, and the term is usually 5 - 7 years. In China, more than 90% of VC investments include "Valuation Adjustment" clauses, and the term is often only 3 years.

What's even more thought - provoking is that the term "Valuation Adjustment Agreement" itself is a product unique to China. VAM is a neutral financial term, but when it entered China around 2004, it was translated into "Valuation Adjustment Agreement", which has a strong casino connotation, and then was re - introduced into the English - speaking world. This translation is not a technical issue but a metaphor: it accurately captures the essence of the Chinese venture capital ecosystem - it is not the "valuation adjustment" of Silicon Valley style, but a high - stakes gamble with clear winners and losers between entrepreneurs and investors.

Behind this huge difference are two completely different sets of game rules. In 2025, "Valuation Adjustment Agreement" once again became the focus of public opinion: the repurchase dispute between Luo Yonghao and investor Zheng Gang is still simmering, and Luo's words "Investment is not a loan" have stung countless entrepreneurs; Wang Jianlin's failure in the "Valuation Adjustment" of Wanda Commercial back then was reflected in his haggard appearance.

Why can Silicon Valley VCs do without "Valuation Adjustment" in venture capital, while Chinese investors regard it as a standard? What exactly happened behind this translation from "valuation adjustment mechanism" to "Valuation Adjustment Agreement"?

From Protection to Strangulation

In January 2024, Wang Ziru was enforced by the People's Court of Nanshan District, Shenzhen for 33.83 million yuan, and was restricted from high - end consumption in August. This once - top digital reviewer got into a debt quagmire because ZEALER failed to meet the "Valuation Adjustment" performance targets.

The initial repurchase amount was 33.83 million yuan, but as time passed, the annualized 12% interest made the debt snowball to about 100 million yuan. In 2024, the case entered the final execution procedure, which means that the court has used all available enforcement measures, but the debtor really has no property available for execution.

Wang Ziru's dilemma exposes a core problem of Chinese - style "Valuation Adjustment": when the investment fails, the founder has to use personal assets to cover the losses. But in Silicon Valley, the situation is completely different.

Professor Zhang Wei's research shows that Silicon Valley VCs rarely use "Valuation Adjustment" or redemption clauses, with a usage rate of less than 5%. So what do they use to protect their investments? The answer is the preferred stock system - a more sophisticated and balanced risk - allocation mechanism.

Silicon Valley investors get preferred stocks, which come with special rights such as liquidation preference and anti - dilution clauses. Liquidation preference means that when the company is sold or liquidated, preferred stockholders can get returns before common stockholders.

But the more fundamental difference lies not in the clause design but in the exit ecosystem.

Silicon Valley VCs don't need "Valuation Adjustment" because they have too many exit options. IPOs only account for 20% of exit cases, and more are acquisitions - tech giants like Google, Meta, and Apple acquire dozens of startups every year. In 2023, there were more than 1000 merger and acquisition transactions among US tech companies, and a significant portion of them were strategic acquisitions of small startups.

The advantage of exiting through mergers and acquisitions is that there is no need to wait for the company to mature enough for an IPO. As long as the technology or team is valuable, a buyer can be found. When Instagram was acquired by Facebook for $1 billion, the team only had 13 people and there was no business model. YouTube was only one and a half years old when it was acquired by Google.

The situation in China is completely the opposite. In 2024, in 65% of merger and acquisition transactions, the acquired companies had no prior public financing records. This means that although the merger and acquisition market exists, it is almost a different world from VC - invested projects. Tech giants like Tencent, Alibaba, and ByteDance are more accustomed to incubating their own businesses rather than acquiring technology through acquisitions.

The IPO channels also show a huge difference. In 2024, both the number and the fundraising scale of A - share IPOs hit a new low in the past decade, with a total fundraising of 67.353 billion yuan, breaking below the 100 - billion - yuan mark for the first time since 2015. On the other hand, even in 2024, a relatively slow year, more than 200 companies went public on the US NASDAQ.

When there is no way to exit, the money gets stuck in the projects. Currently, about 2.6 trillion yuan of venture capital funds are in the exit cycle, and it is estimated that there will be an additional demand for about 400 billion yuan to exit in the next two years. How can this money be withdrawn? The IPO channels are tightening, the merger and acquisition market is sluggish, and selling to S - funds means getting a 50% discount or even lower.

In Silicon Valley, investors can wait patiently because there is always a way out. In China, investors have to force entrepreneurs to repurchase because it is the only visible exit channel.

For equity investments, the preferred stock system in Silicon Valley implies: "We share risks, but I have priority protection." The Chinese - style "Valuation Adjustment" agreement implies: "You must ensure that I don't lose money." The former follows the equity logic, while the latter follows the debt logic. In an environment where the primary market is weakening and VCs are more focused on self - protection, VCs are gradually becoming like alternative banks.

A Trapped Game

In 2024, there were a total of 1741 repurchase events involving investment institutions, a year - on - year increase of 8.5%, involving 1687 project companies and 978 investment institutions. Behind this number lies a harsher reality: in repurchase lawsuits that enter the judicial process, less than 5% can actually recover the principal.

The case of Shenzhen Capital Group is quite illustrative. From January 2023 to July 2024, this established institution had 38 litigation - related tenders, and 97% of them were caused by disputes over investment project exits. The 22 cases from January to July 2024 increased by 69% compared with the 13 cases in the whole year of 2023. This is not because Shenzhen Capital Group suddenly became more aggressive, but because the funds are due, and they have to give an account to the LPs.

Why has repurchase become the "only option"? Because other roads are blocked. In 2024, both the number and the fundraising scale of A - share IPOs hit a new low in the past decade, with a total fundraising of 67.353 billion yuan, breaking below the 100 - billion - yuan mark for the first time since 2015. The merger and acquisition market is also sluggish - in 2024, in 65% of merger and acquisition transactions, the acquired companies had no prior public financing records, which means that most mergers and acquisitions do not match the exit needs of VC/PE at all.

An investor admitted, "In the past few years, few investment institutions forced project parties to repurchase through litigation. Even if they won the lawsuit after spending a lot of time, energy, and money, they couldn't actually recover much money." But now, they have no other choice.

Where does the problem lie? A VC partner who preferred to remain anonymous gave the answer: "It's not that we want 'Valuation Adjustment', it's that our LPs want to see 'Valuation Adjustment'. Without 'Valuation Adjustment' clauses, the fundraising reports won't pass."

More than 70% of the funds of Chinese VC funds come from government - guided funds and state - owned capital. These funds have their own assessment cycles - usually a 3 - year investment period plus a 2 - year exit period. If there is no clear exit path for a project within 5 years, the person in charge will be held responsible. How is this pressure transmitted? When fund managers get the money from LPs, they take on the hard - and - fast exit targets. When making investments, they have to consider whether the project can go public or be acquired in 3 years. If neither is possible, they can only ask entrepreneurs to promise to repurchase.

But 3 years is simply not enough for most innovative enterprises. OpenAI was founded in 2015 and was still a private company in 2025, having undergone multiple business model adjustments during this period. This is especially true in the hard - tech field - it takes 5 to 7 years for a chip company to go from R & D to mass production and then to gain market share, even under favorable circumstances.

What's even more ironic is that before 2018, the overall return rate of projects exiting through repurchase was basically negative; but after 2018, it has been positive, and has stabilized above 30% since 2020. What does this data indicate? "Valuation Adjustment" is no longer a "protection mechanism" but has become a "fixed - income product" - in fact, investors are making debt investments, just wearing the mask of equity.

The dilemmas faced by entrepreneurs are also real. In 2015, Zhang Lan, the founder of South Beauty, lost control of the company due to the failure of "Valuation Adjustment". The "Valuation Adjustment" of Wanda Commercial back then ultimately forced Wang Jianlin to sell assets at a low price to raise cash. The story of Luo Yonghao and Smartisan Technology is even more illustrative. Investor Zheng Gang later asked Luo to repurchase the shares with personal assets on the grounds that the company failed to go public. Luo countered, "Investment is not a loan." These words point out the essential dilemma of Chinese - style "Valuation Adjustment".

A report from Shanghai Lifeng Law Firm shows that in the IPO projects accepted by the Shanghai and Shenzhen Stock Exchanges in 2023, about 65% of the enterprises set up repurchase - right clauses in the agreements. The law firm believes that tens of thousands of entrepreneurs may face the risk of repurchasing shares worth hundreds of millions of yuan. To some extent, entrepreneurship has become a game of "unlimited liability".

There is no such dilemma in Silicon Valley because LPs there can afford to wait, the exit channels are diverse enough, and entrepreneurs can start over after failure. In China, every link is tightening: the money can't wait, the roads are blocked, and people can't afford to lose. The prevalence of "Valuation Adjustment" agreements is not due to the greed of one party, but the result of the simultaneous failure of the entire system in terms of funds, exits, and laws.

Market Exploration and Self - Rescue

In 2024, there were a total of 1741 repurchase events involving investment institutions, a year - on - year increase of 8.5%, involving 1687 project companies and 978 investment institutions. Repurchase, which was originally the "last resort" for exit, is becoming the mainstream.

What's going on behind this? A VC institution in South China has come up with a new solution: if the enterprise can find a third party to take over the shares at a price of "principal + an annualized interest rate of 8% - 10%", the investor will waive the enterprise's repurchase obligation.

The keyword of this solution is "third party". Instead of the founder using personal funds to repurchase, the enterprise is helped to find a new buyer. This "buyer" could be industrial capital, a local government - guided fund, or an S - fund specialized in secondary share transactions.

S - funds are just starting out in China. They specialize in buying old shares that VC/PEs can't exit from - usually at a discount, but at least the original investors can get back some of their money instead of losing everything.

Although the number of S - funds established in 2024 is not large, the trading activity is increasing. Several leading institutions have started to set up specialized S - fund products, aiming to acquire those "stuck" projects. The pricing method is usually to acquire at 60% - 80% of the original investment cost or to give a 50% - 70% discount on the latest round of valuation.

Why would someone be willing to do this business? It's about trading time for space. The original investors can't wait any longer because the funds are about to expire and they have to exit. But the money of S - funds may have a 10 - year term, so they can wait patiently for the enterprise to go public or be acquired. Moreover, buying at a low - valuation point means there is more room for future returns.

Actual cases have emerged. In 2024, after a biopharmaceutical enterprise failed to go public as scheduled after its Series C financing, the fund of the Series A investor expired. An S - fund took over at 70% of the original investment cost. Two years later, the enterprise successfully listed on the Science and Technology Innovation Board, and the S - fund got a 3 - fold return. Although the original investor took a discount, at least they got back 70% of the principal, which is better than going to court.

Local governments are also trying new models. The government - guided funds in Shenzhen, Hangzhou and other places are starting to play the role of "buyers of last resort" - acquiring projects that are difficult to exit at a low discount, on the condition that the enterprise must relocate its registered address to the local area and promise a certain amount of tax payment in the next few years. This is equivalent to using fiscal funds to support the venture capital market.

The "Regulations on Scientific and Technological Innovation" in Guangdong Province go a step further, clearly encouraging state - owned capital to act as "patient capital" and allowing the investment period of government - guided funds to be extended to 7 - 10 years without setting a hard 3 - year "Valuation Adjustment" target. This gives some hard - tech projects some breathing space.

Chen Wei, the chairman of Oriental Fortune Capital, revealed another idea: the terms in the main investment agreement are more friendly, but requirements are put forward to the enterprise in the value - added service agreement. Instead of "Valuation Adjustment" on performance, more requirements are set in terms of management.

This is to turn "hard - line 'Valuation Adjustment'" into "soft constraints". Instead of looking at the final result, the focus is on the cooperation during the process - whether you provide financial statements on time, whether you recruit people for key positions as recommended, and whether you report truthfully at quarterly board meetings. If all these are done, even if the performance fails to meet the target, investors are more willing to extend the term or reduce the repurchase price.

The Beijing Stock Exchange and the New Third Board are also playing new roles. Although the trading volume is still small, they have become new options for specialized and sophisticated enterprises with unique technologies. In 2024, several enterprises that had signed agreements stating "repurchase if not listed in 3 years" finally listed on the Beijing Stock Exchange in the 4th year, and the investors voluntarily waived the repurchase right.

Convertible bonds are also becoming popular. Li Auto used this tool in its Series D financing - if the company goes public successfully, investors can convert the bonds into equity to share the profits; if not, they can at least get back the principal plus interest. This is much more gentle than traditional "Valuation Adjustment".

But the biggest institutional breakthrough is still in the making. At the Two Sessions in 2025, Tian Xuan, the dean of the National Institute of Financial Research at Tsinghua University and a deputy to the National People's Congress, proposed that the legislative process of the personal bankruptcy law should be accelerated to provide necessary legal protection for failed entrepreneurs and reduce their personal debt burden.

If the personal bankruptcy law can be promoted nationwide, entrepreneurs will at least have a "restart button". In a case like Wang Ziru's, if it were in the United States, he could apply for Chapter 11 bankruptcy protection, retain basic living assets, and start over after a few years. Instead of being restricted from high - end consumption and unable to use his medical insurance card normally as he is now.

There are also new discussions at the tax level. Tian Xuan suggested that special clauses on "Valuation Adjustment" agreements should be added to tax laws, clearly defining the conditions and procedures for entrepreneurs to apply for personal income tax refunds after the failure of "Valuation Adjustment". This can solve the problem of the double blow of "paying taxes based on high valuations and being unable to get the taxes back after the failure of 'Valuation Adjustment'".

What can these explorations change? At least they show that the market is self - correcting. When everyone realizes that "hard - line 'Valuation Adjustment'" is a dead