US Corporate Law 20 Episodes (14)

VAM Agreement - Waterloo in South Beauty | Investors' death-free gold medal, entrepreneurs' deeds of sale | Term Sheet Term Sheet Term Sheet Investment Intent Letter of Reading Clauses | Equity VAM, Cash Compensation, Equity Repurchase| Bet on performance, bet on listing | The target company must be listed on the Science and Technology Innovation Edition in 2025

In the last issue, we introduced a common concept in the financing process of startups - the board of directors. In this issue, we will introduce a mysterious concept in the Term Sheet term list - the gambling clause, and the gambling agreement generated by it.

Why is it called the concept of mystery, because this concept is very common in China's venture capital circle, and it is almost standard. Many people will also take this for granted in the United States. In fact, the concept does not exist in the United States at all.

First, let's take a look at the types of gambling agreements. Generally there are three types.

The first is the equity betting type. If the target company cannot fulfill a certain condition, then the investor can get more shares for free.

The second is the cash compensation type. If the target company cannot fulfill a certain condition, then the target company will compensate the investor how much cash.

The third type is the share repurchase type. If the target company cannot fulfill a certain condition, the investor can ask the target company to redeem the investor's stock. At the same time, investors can also get back the money they have invested.

There may be more detailed classifications for some statements, but from a practical point of view, these three are the most important, and you can just remember these three.

So what is the general content of these gambling clauses? Either bet on listing or bet on performance.

What does it mean to bet on the market? For example, the target company must be listed on the Science and Technology Innovation Board in 2025.

There are many sayings about gambling performance, some are gambling turnover, some are gambling net profit, and some are gambling growth rate. All in all, it's a gamble.

Even people who have never studied law, seeing such clauses, will feel like the Nanjing Treaty, something is wrong. From a legal point of view, such an investor's death-free gold medal and the founder's sales contract are even more suspicious. In real life, there is no shortage of cases in which the bet is lost and goes to court. Let's take a look at how the courts around the world decide.

The Haifu case decided by the Supreme Court in 2012 determined that the gambling between investors and the company was invalid, but the gambling between investors and original shareholders was valid.

In 2014, the Supreme Court ruled the Blue Bridge Fisheries case, which also ruled that the gambling between investors and original shareholders was valid.

In 2013, the Beijing No. 1 Intermediate People's Court determined that the bet between the investor and the original shareholder was valid.

In 2013, the High Court of Jiangsu Province ruled that the gambling between the investor and the original shareholder was invalid.

In 2014, the High Court of Jiangsu Province ruled that the bet between the investor and the company was invalid, but the bet with the original shareholder was valid.

The "Huagong Case" in 2019 clearly identified the validity of the gambling agreement between the investor and the target company.

In addition to going to the court, there are also those who go to arbitration. Compared with courts, arbitration institutions have a more flexible and open attitude towards gambling between investors and companies. As long as both parties are equal and voluntary, arbitration institutions will generally consider them valid.

After ten years of conflicting opinions, what is the effect of the gambling agreement? In 2019, a "Minutes of the Nine Peoples" issued by the Supreme Court completely settled on the gambling agreement. In the next issue, we will talk about the "Minutes of the Nine Peoples" and the effectiveness of the VAM agreement in the United States.

Thank you for watching today's 20 lectures on US corporate law, focusing on essential legal knowledge for startups. If today's show was helpful to you, give me a like. If you have any questions, please leave a message in the comment section below.