Lose a VAM Agreement and Owe $100 Million? The Risk Management Guide Every Founder Must Read!

On the road to fundraising, an investor smiles and hands you a valuation adjustment agreement: "Sign now, and the funds will be deposited immediately." But when you fail to meet your performance targets, that smile disappears.

1. What is a valuation adjustment mechanism (VAM) agreement?

A valuation adjustment mechanism (VAM), commonly known as a "bet-on agreement," is an arrangement between investors and the company regarding uncertain future events. If the target company meets agreed-upon performance targets, the investor provides a reward; if targets are missed, the company must compensate the investor through methods such as cash payments or share repurchases.

II. Legal Effect: Not Always Invalid

Per the Supreme People's Court's "Ninth Civil Minutes," v agreements with shareholders or actual controllers are generally enforceable. Agreements with the target company may also be upheld, provided they do not violate the capital maintenance principle. In short, once a valuation adjustment mechanism (VAM) agreement is signed, it is highly likely to be enforced.

III. Common Risk Points

1. Unrealistic performance targets: Overpromising to secure funding, only to fall short.

2. Harsh buyback terms: Annualized return as high as 10%-15%, resulting in a staggering amount with compound interest.

3. Joint and Several Liability Trap: Founders assume joint and several guarantee liability with their personal assets.

4. Loss of Control: Triggering the equity adjustment clause results in loss of company control.

IV. Risk Management Recommendations for Entrepreneurs

1. Set realistic performance targets with a sufficient safety margin.

2. Aim to establish a performance buffer zone and a grace period.

3. Limit the scope and cap of personal joint and several liability;

4. Hire a professional attorney to participate in negotiations; don't focus solely on price without reviewing the terms.

5. Make sound financial projections and risk assessments; proceed within your means.

Valuation adjustments are neither a disaster nor a free lunch. Please consult a qualified attorney before signing. Fujian Ciji Law Firm provides investment and financing legal services to entrepreneurs, helping you avoid funding pitfalls.