The rules of the game of investing

Now there is a consensus among investors that the idea of brain-taking is gradually being replaced by more rigorous investigations and agreements. >> Liao Li: Vice dean of Tsinghua University, Department of Finance and economics professor when enterprises grow up, whether they encounter Angel investment or venture capital, they will issue an agreement. Those investment agreements and key terms form the most basic rules of the game for Angel Investment and venture capital.　　Anti-dilution terms, options pool, gambling provisions are all if we accept venture capital and Angel investment to contact. Enterprises in the financing of the time there are several main ways, the most common is common and ordinary debt. But in the western relatively mature standard angel investment Market, these two investment tools are relatively rare.　　They are called convertible preferred shares. Preferred stock is the first share, but it has some characteristics of the debt, such as its annual dividend equivalent to the debt. If the operation is not good this year, dividends are owed, and must be given in the future. It has the characteristic of the stock right, also has the characteristic of the creditor's rights, but the preference stock has the disadvantage in the important enterprise decision, does not have the vote. So there is the convertible preferred stock. When the enterprise is not good, it can be liquidated in advance, liquidation right in front of the shareholders, if the business is good, you can enjoy the results of good operation, in the market, the convertible preferred shares into common stock.　　This is the most common use of financial instruments in angel investment and venture capital. Multiple rounds of financing in an enterprise are very common. Assuming that the first round of financing in the enterprise 1 yuan per share of money, enterprises continue to develop in the normal years, enterprises are getting better and more expensive, the second round of financing may be sold to 2 or 10 yuan. But if you encounter a whole industry situation is not good, encounter a bubble, others are more than the first round of the price is unwilling to vote. This is the case: the cheaper it gets. So the first round of investor risk is very big. Anti-dilution provisions, if the first round of investment is 1 Yuan 1 shares, the second round is 0.5 yuan in, this time the first round of investment must also be converted to 0.5 Yuan 1 shares.　　Anti-dilution clause there are some other provisions, such as preemptive rights, in the first round of investment in some of the shares, the second and third round after the investment in the first round of the shares are diluted, it is necessary to sign a preemptive clause, to ensure the right to priority subscription. When investors invest in a business, they will require a portion of the equity to be used as an option reserve, before and after the investment.　　The option pool is very important, when the money is introduced, it is suggested that the shares of the enterprise, whether before or after the investment, remain part of the option pool, which will be used as a reserve for the executive, backbone staff and even the most basic employees to hold the core personnel through the stock cashing and options pool. We see too much on the terms of the bet and often see which companies have been dragged down by the reports on the betting terms. What are the terms of the bet? The proportion of investment capital depends on the valuation of the enterprise, many of which are valued on a P/E ratio. Suppose 10 times times the price-earnings ratio, the annual profit of 100,000 Yuan, equity is 1 million, if investors invest 1 million yuan accounted for 50%. That Enterprise said no, my business growth is particularly good, with what you cast 1 million accounted for 50%, I this enterprise next year net profit will be able to 1 million, and then multiplied by 10, that is 10 million equity, your 1 million accounted for 10%. At this time, investors are not willing to say that the enterprise you why the year's profit is 1 million, so we signed a value equality clause, investors now admit that the net income of enterprises next year can to 1 million, recognition accounted for 10%, but if next year less than 1 million, that value will be adjusted, The shares to be invested must be adjusted accordingly. There are other ways to adjust prices, as well as punitive measures, which must be compensated or reimbursed to investors. This is a bad bet.　　This article on the one hand requires enterprises to provide an accurate future earnings forecasts, on the other hand, motivate employees, motivate enterprises to make good performance. Many entrepreneurs are too close to the investors to be defensive, to investors in the company to arrange board seats there is a certain resistance. This is completely unnecessary.　　Investors traveled all the miles and enterprises to talk about cooperation, to the enterprise money, is sure to hope that the enterprise good, hope that both the interests of the bigger. (Note: Does not represent The Economist's view)