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Want another reason to never start a business in China?

We’ll give you one in today’s piece.

Investors in China are tired of waiting for distributions, and they are taking aggressive measures to protect themselves at the risk of those they have invested in.

China’s redemption rights epidemic has shifted the rules of the game from “risk capital” to “high-stakes debt.”

Unlike in Silicon Valley, where these clauses are rare, 80%+ of Chinese VC deals include provisions requiring founders to repurchase investor shares - often with interest - if predefined targets aren’t hit.

Why it matters: The odds are stacked against you in startup land, but if you don’t make it with these types of clauses against you, there are real consequences as a founder.

Founders face asset seizures, travel bans, and even debtor blacklisting. In a system lacking personal bankruptcy protections, these debts are nearly inescapable, creating a chilling effect on entrepreneurship.

The fallout has extended beyond individual founders, destabilizing the venture ecosystem as a whole. Investors, desperate for returns amid shrinking exits, are chasing solvent startups and founders, weaponizing these clauses to extract capital. This isn’t risk-sharing; it’s a game of unlimited liability.

What happens next: We won’t beat around the bush - these types of investor provisions will kill any type of entrepreneurial ecosystem.

Why would somebody ever start a business in China if these provisions are the standard?

Blacklisting is a huge hurdle for future company formation, while the lack of second chances discourages risk-taking. Over 10,000 VC-backed startups in China are already stuck in the middle in redemption disputes (there goes your chance to back a second-time founder).

For the rest of the world, this should be a good reminder of what not to do as an investor.

It should also give just another reason that any risk capital going to work is best used in the US instead of anywhere else.

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Thanks for reading this far and giving us a little bit of your attention this week.

Feel free to unsubscribe whenever this stops becoming valuable to you.

- Clay

Here are the results from our poll question in yesterday’s piece:

How much do VC predictions like these actually matter to you?

🟨⬜️⬜️⬜️⬜️⬜️ A ton - I use these to think more clearly about the future (2) 🟩🟩🟩🟩🟩🟩 Some - I still think for myself but these are helpful to know (6) 🟨🟨🟨⬜️⬜️⬜️ ZERO - what do these people know? (3) 11 Votes