Venture capital operates in a variety of forms and is not strictly a legal concept per se. From a legal perspective, venture capital that operates as equity investment has a salient feature: after making an investment, regardless of whether the investor participates in management or not, they must bear risks alongside enjoying potential benefits. This characteristic is precisely what distinguishes investment relationships from lending relationships, which are typically marked by “guaranteed minimum returns.” From the perspective of a venture capitalist, and without violating mandatory legal provisions, the author has summarized the following ten legal strategies to help maximize risk mitigation and ensure stable investment returns.

I. Priority Dividend Rights

The right to preferential dividends refers to the right enjoyed by preferred shareholders, which takes precedence over that of common shareholders when a company declares and distributes dividends, enabling them to receive a certain percentage of their investment amount in dividends. According to the Company Law, shareholders of a limited liability company shall distribute dividends in proportion to their actual contributions, unless all shareholders agree otherwise not to distribute dividends according to their contribution ratios or not to give priority to subscribing for new shares based on their contribution ratios. For joint-stock companies, profits are distributed in proportion to the shares held by each shareholder, unless the articles of association provide otherwise. Based on this, it can be concluded that there is no legal obstacle under China’s legal framework to arrangements stipulating preferential dividends for certain shareholders; thus, arrangements among shareholders regarding dividend distribution enjoy considerable flexibility and initiative. Venture capitalists may request to enjoy the right to preferential dividends and should clearly specify this in the investment agreement and the company’s articles of association.

　 II. Betting Agreement

A wagering agreement is a form of performance commitment that companies use when attracting investors; it can also take the form of an option. At its core, a wagering agreement focuses on whether the invested company can achieve the promised financial performance within the agreed-upon period. Since performance serves as the direct basis for valuation, if the invested company hopes to secure a high valuation, it must ensure high performance as a guarantee—typically using “net profit” as the subject of the wager. There are numerous cases where wagering agreements have been employed, both in start-up enterprises and in investment firms. A well-structured wagering agreement can reduce the uncertainty and risk faced by investors, while the performance targets themselves can motivate the invested company to strive harder to improve its operations after receiving the investment. There are generally two common methods for compensating under a wagering agreement: one is by giving up shares, and the other is by paying cash—in most cases, the latter is more prevalent. However, in this context, lawyers should distinguish clearly between judicial rulings on wagers between shareholders themselves and those involving wagers between investors and the invested company, thereby avoiding unnecessary risks for investors.

III. Restrictions on Equity Transfers

Typically, when an existing shareholder—who is also the company’s actual operator—wants to sell his or her equity stake in the company, the reasons may include a lack of confidence in the company’s future prospects or an attempt to transfer personal interests. Regardless of the underlying motive, such a move often poses risks for venture capitalists. To mitigate these risks, venture capitalists can stipulate certain conditions for the transfer of equity by the original shareholder in the investment agreement, allowing the transfer to proceed only once those conditions are met. However, it’s important to note that equity restriction clauses included in the investment agreement constitute merely contractual obligations for the party subject to the restrictions and do not have enforceable third-party effects. If the restricted party unilaterally transfers its equity despite these restrictions, it will be held liable for breach of contract but still cannot avoid the fact that the composition of shareholders in the invested company has changed. Therefore, it is advisable for venture capitalists to insist on incorporating equity restriction clauses into the company’s articles of association, thereby giving them enforceable third-party effects. In practice, there are also cases where the original shareholder’s equity transfer is restricted by pledging their equity to the investor.

IV. Anti-Dilution Rights

The purpose of a anti-dilution provision is to ensure that the venture capitalist’s equity stake or equity percentage will not be reduced due to the issuance of new shares or the entry of new investors, thereby also safeguarding the original investor’s control over the invested company from being diluted. In investment agreements, anti-dilution provisions can be categorized into two types: The first type is the structural anti-dilution clause, which aims to prevent dilution of the investor’s equity percentage. When the company issues additional new shares, it shall grant the venture capitalist corresponding equity interests—either free of charge or at a price mutually agreed upon—to maintain the investor’s equity percentage unchanged. The second type is the price-based anti-dilution clause, which seeks to prevent dilution of the equity value. If, under the time and conditions agreed upon by both parties, an event previously stipulated occurs and the original venture capitalist’s equity percentage must be reduced, then through pre-agreed supplementary conditions, the dilution of equity value shall be prevented.

Five, Preemptive right to purchase

The first meaning refers to the right of venture capitalists, as existing shareholders, to subscribe for new shares or convertible bonds issued by the target company at a certain proportion of their original equity holdings, ahead of other investors. In the investment agreement, this can be stated as follows: “When the portfolio company plans to raise additional capital through an equity issuance, under identical conditions, the investor shall have the priority right to subscribe for such additional capital.”

The second meaning refers to the fact that, when other shareholders of the target company sell their equity interests to external parties, the venture capitalist as an existing shareholder has the right of first refusal under the same conditions. This right is a statutory right and can be further emphasized in the investment agreement.

Six, the right of veto

Venture capitalists may request a veto right on specific resolutions at the company’s shareholders’ meeting or board of directors. Article [number] of the Company Law. 43 Article: “ At the shareholders’ meeting of a limited liability company, shareholders exercise their voting rights in proportion to their capital contributions, unless otherwise provided in the company’s articles of association. ” As for joint-stock companies, each share held by a shareholder carries one voting right—that is, “ Equal rights for equal shares ” Therefore, the right to a single vote can only be established in limited liability companies. When venture capitalists hold minority shareholder positions, they may stipulate a veto right over the following key matters in the investment agreement and the company’s articles of association: corporate mergers, spin-offs, acquisitions, dissolution, liquidation, or changes in the company’s legal form; mergers and acquisitions involving the company; disposal of major assets; and external investments and financing.

7. Joint Sale Option

A co-sale right refers to an agreement stipulated in the investment agreement as follows: When the company’s existing shareholders sell their equity interests to a third party, the venture investor shall, under identical terms and in proportion to its equity stake relative to the original shareholders, sell its own equity interest to the same third party. Otherwise, the original shareholders shall not be permitted to sell their equity interests to that third party. The co-sale right effectively aligns the interests of both investors and entrepreneurs. Based on its own judgment, if the venture investor believes that the entrepreneur’s transfer of equity will have an adverse impact on the company’s management and competitive advantages, or could even lead to the company’s liquidation or bankruptcy, the venture investor has the right to decide jointly with the entrepreneur to sell the shares, thereby gaining control over the entrepreneur’s equity-transfer activities.

Since venture capitalists generally do not participate in the day-to-day operations of a company, entrepreneurs have a much deeper understanding of the company than venture capitalists do. When a company performs poorly, entrepreneurs may choose to exit midway by transferring their equity holdings to cash out—a move that often leaves venture capitalists in a passive position. The establishment of co-sale rights helps encourage entrepreneurs to take greater responsibility toward both the company and the investors, while also protecting investors from losses caused by information asymmetry.

8. Right of Repurchase

The investment agreement may stipulate that, should the invested company encounter specific circumstances—such as failing to go public within the agreed-upon timeframe or experiencing significant operational problems—the original shareholders of the company shall be obligated to repurchase all or part of the equity held by the venture capitalist at a pre-agreed price, thereby enabling the venture capitalist to exit the invested company smoothly. In practice, some venture capital agreements provide for the target company itself to repurchase the venture capitalist’s equity. However, given the legal restrictions on corporate share buybacks, such provisions may be deemed invalid on the grounds that they infringe upon the interests of the company or its creditors.

9. Right of Forced Sale

The investment agreement may stipulate that, in the event the invested company fails to go public within the agreed-upon timeframe, the venture capitalist shall have the right to compulsorily require the company’s existing shareholders (primarily the founding shareholders and management shareholders) to transfer their equity interests together with the venture capitalist to a third party. The existing shareholders shall sell their equity interests at the transfer price and under the transaction terms agreed upon between the venture capitalist and the third party.

X. Priority Liquidation Rights

The right of priority liquidation refers to the right that venture capitalists have, upon the liquidation or termination of a target company, to receive their distribution ahead of other common shareholders. The investment agreement may stipulate as follows: All parties unanimously agree that, in the event of the company’s liquidation, dissolution, termination, or a change in actual control, the company shall prioritize repaying the venture capitalist’s invested amount. After fully settling the venture capitalist’s claims, any remaining distributable funds and assets will be distributed among all shareholders in proportion to their respective equity interests.

The above are several commonly used methods in venture capital agreements designed to protect investors’ interests and ensure the company’s stable operation. However, no matter how sophisticated the legal text may be, it cannot entirely eliminate the operational risks—such as market risk and technological risk—that a portfolio company or project might face. Therefore, investors must still exercise prudent judgment from all angles when evaluating potential investment projects and avoid becoming overly fixated on the legal and technical mechanisms for risk management.