Chinese venture capitalists have forced failed founders into the creditor blacklist.

Chinese venture capitalists are evicting failed founders, chasing private assets and adding to the national debtor’s record when they can’t pay.

The difficult strategies of venture capital providers are facilitated by clauses known as redemption rights, which are included in all financing agreements entered into. ChinaBoom times.

“My investors promised me verbally that they had never forced me before. It was true in 17 and 18 dollars after the chain of care of her child was disrupted during the epidemic,” said Wang Ronghui, the founder of Neurolearning, who now owes investors millions.

Although they are relatively rare in the US Venture investingShanghai law firm Lifeng Partners estimates that more than 80 percent of venture and private equity deals in China contain redemption provisions.

They typically require companies and their founders, as well as investors, to return shares and interest if certain targets, such as initial public offering timelines, valuation goals or revenue metrics, are not met.

“It’s doing a lot of damage to the venture ecosystem because if a startup fails, the founder is basically facing asset forfeiture and spending restrictions,” said a Hangzhou lawyer representing several indebted entrepreneurs who requested anonymity. “You can never recover.”

Lifeng, in its recent release of redemption rights, says it has turned entrepreneurship into an “unlimited liability game.” In 90 percent of investor lawsuits, founders are named as defendants along with companies, and 10 percent of individuals are ultimately blacklisted from Chinese debt.

Once banned from the register it is almost impossible for individuals to start another business. Economic activities such as flights or high-speed trains, staying in hotels or leaving China are banned. The country has no personal bankruptcy law, making it extremely difficult for many to escape debt.

As Chinese funds and VC firms struggle to return capital to their foreign investors, more and more funds are turning to redemption clauses to get as much cash as possible. Lifeng estimates that 20 percent of all investor exits in 2021 and 2022 will come from companies buying back their investors’ shares, and that more than 10,000 VC or private equity-backed Chinese groups will face redemption problems.

The situation is encouraging VCs to chase portfolio companies that are doing well but don’t have a fast path to a sale or IPO, said a startup adviser who spoke on condition of anonymity.

“VCs are putting pressure on startups that can pay,” he said. “This is not a venture – it is a debt.”

The number of entrepreneurs caught in legal actions continues to grow. They include Wang Xirou, who gained attention as a daring young founder a decade ago and raised tens of millions of renminbi for his tech media and reviews platform Zealer.

In the year In 2021, Wang stepped down as an executive at home appliance giant Green as traffic slowed. Then on August 9 last year, a Shenzhen court hit the 36-year-old with spending limits for failing to pay Rmb34mn ($4.7mn) to Zeller investor, an amount frozen with interest on the VC’s original Rmb19mn equity investment. For the lawyer in the case. Wang lost his job a few days later.

The founder is contesting the verdict, saying that he did not disclose the charges on social media and that the redemption clause of the agreement was not raised.

Luo Yonggao, one of China’s most famous entrepreneurs, has turned his struggle to pay off the debt of his smartphone startup Smartsa into a spectacle, eventually scraping enough iPhones and office chairs through online video live streams to pay suppliers and clear his name from the debtor. Blacklist in 2020.

Some Smartisan investors then demanded that Luo pay hundreds of millions more in renminbi to get their shares back.

“Investment is not a loan,” Luo wrote on social media Weibo in August last year. “When a venture capital deal fails, it has to accept the consequences. They are, without a doubt, unscrupulous capitalists who swindle against entrepreneurs because they can’t bear the consequences.”

The cases have flooded Chinese courts. Records show that Xu Mingqi lost the company and all of its other identifiable assets to investors after his materials group, Yegud, failed to meet the three-year window for an IPO.

The Supreme Court of China In 2021, his wife, Zheng Shaoyi, was working in Yagud, so he ruled that an investor could take over the joint property, including the apartment held in her name.

Wang, 47, the founder of a childcare chain, had money held in her health insurance account by investors. Her problems They started in 2021 when their fund, linked to state-backed investor Guangdong Cultural Investment Management, asked to buy Rmb16mn worth of shares because the start-up couldn’t get a Rmb500mn valuation.

Their lawsuits undermined the funding needed to offset pandemic-related closings of the group’s 36 day care centers, she said. Wang now owes Rmb30mn in GCM-related funds, Rmb11mn to banks and possibly other investors whose redemption clauses have yet to be triggered.

GCIM did not respond to a request for comment.

“I have built my company into an industry leader – I have the skills and I have the drive – but every road I try to travel is a dead end,” Wang said. “The unexpected event left me permanently and completely trapped.”