[Direct answer]In the Beijing area, the essence of the betting agreement is valuation adjustment — if the performance or listing goals are not achieved, the founder or the company will compensate or repurchase the investors' equity according to the agreement. The consequences can be divided into three levels: 1. Betting against individual shareholders — effective. Cash compensation, equity repurchase, and joint and several guarantees by actual controllers will be truly imposed on individuals. 2. Betting against the company — the company undertaking compensation or repurchase obligations must comply with statutory procedures such as capital reduction. The lack of such procedures will limit their enforceability. 3. Repurchase clauses tied to the market value of listed company shares — these may be deemed invalid for disrupting securities market order. Two public cases represent the extremes of this issue: - Li * bet against the controlling shareholder of an energy company (net profit below 6 million yuan would trigger cash compensation; failure to list would result in repurchase at an annual interest rate of 8%) — the controlling shareholder's personal liability was confirmed. - Case No. (2021) Shanghai Civil Final No. 745, where the repurchase price was directly tied to the short-term market value in the secondary market and was deemed invalid for disrupting securities market order and harming public interests.

I. Problem background and typical scenarios

The "valuation adjustment mechanism" on the financing negotiation table sounds professional, but after signing it, you will find that the performance hedging, listing hedging, and repurchase clauses are interconnected. The cost of losing the bet is the founder's entire personal wealth—every word of the hedging clause is worth reviewing carefully.

II. Key points of contention

First, the hierarchical rules for the subject of the betting and its effectiveness. Second, the procedures and deadlines for exercising the repurchase right. Third, the risk of invalidation of the clauses linked to market value. Fourth, the key points of clause design before signing the agreement.

III. Professional analysis by Henglue Lawyers

The first layer is the refereeing rules of effectiveness stratification: betting against the controlling shareholders - within the scope of autonomy of will, legal and effective, with personal property liability being confirmed; betting against the target company - repurchase or monetary compensation requires fulfilling statutory procedures (share repurchase must complete the capital reduction process, and monetary compensation is subject to the rules of profit distribution). If the procedures are not completed, the investor's request for performance is limited, but the contract's effectiveness is not affected; the effectiveness red line linked to market value - the rule established in (2021) Shanghai Civil Final Judgment No. 745: if the repurchase price is directly linked to the short-term stock trading market value in the secondary market, it will disrupt the order of the securities market and harm the public interest, and the clause is invalid - a major pitfall for listed company shareholders when betting against the controlling shareholders. The clause design should avoid formulas directly linked to short-term market value.

The second layer concerns the technical details of exercising the repurchase right: the nature of the repurchase right and the timeframe for its exercise – the written exercise of the repurchase right within a certain period after the triggering event occurs if agreed upon, or within a reasonable timeframe if no timeframe is specified, as delaying may result in the loss of the repurchase right; the written form of exercise – leaving a record of the delivery of the repurchase notice (via EMS and email), and confirming the triggering conditions (obtaining the performance audit report in a timely manner); the calculation of the repurchase price – clarifying the interest base and period for an 8-percent annual interest rate repurchase (verifying the formula for input capital plus fixed returns item by item), and reserving tax costs (income tax treatment of equity repurchases) in the clause design. The third layer outlines the practical responsibilities: - For the actual controller – cash compensation often amounting to millions, with personal real estate and deposits being directly executed (as seen in the case of Li * and the energy company's five-person bet on performance, where the actual controller's compensation and repurchase obligations are typical examples); - For joint and several guarantees – the spouse's co-signed guarantee liability extends to family assets, while the spouse's assets not co-signed may face disputes; - For the company – creditor protection in the reduction of registered capital (public announcement and creditor objection period), and delay in performance due to procedural flaws still constitutes a breach of contract; - For investors – the bet-on-performance clause is not a foolproof insurance: the repurchase right is a paper right if the investee company has no assets to enforce, making pre-investment due diligence and post-investment management more crucial than contract clauses. The fourth layer highlights key design points before signing: - Matching the stakes with one's capacity – setting a cap on compensation (no more than a certain percentage of the investment amount) and arranging for phased performance; - Objectifying triggering conditions – using audited net profit as the basis for performance indicators, and clarifying the timing and filing requirements for listing-related bet-on-performance clauses (aiming to secure exemption by submitting filing materials); - Reviewing the repurchase price formula – avoiding direct linkage to secondary market valuation (as seen in Case No. 745) and adopting a closed formula of "principal plus fixed interest rate"; - Designing exit channels symmetrically – incorporating follow-on rights and priority liquidation rights for original shareholders, making bet-on-performance clauses an integral part of the investment structure rather than a gamble. A final reminder: The market environment and cash flow forecast at the time of signing the bet-on-performance agreement determine whether it will lead to "formula-based compensation" or "personal bankruptcy" three years later. The clauses reflect a cash flow stress test, not just a game of words.

IV. Practical suggestions and legal basis

The first step is to identify the counterparties of the betting agreement and set a cap on the personal betting obligations of shareholders based on their tolerance. The second step is to avoid using a market value-linked formula in the repurchase clause and instead adopt a closed-end calculation based on the principal plus a fixed interest rate. The third step is to ensure that the triggering conditions and the exercise of the repurchase right are fully documented throughout the process, with strict time management. The fourth step is to design in advance the procedures for reducing capital and distributing profits in the event of a betting agreement with the company. Main legal basis: - Provisions on share repurchases, capital reduction, and profit distribution in the Company Law of the People's Republic of China; - The effectiveness rules for betting clauses in the "Memorandum on Civil and Commercial Judicial Work of the National Courts" (Nine Civil Memorandum); - The invalidation rule for market value-linked clauses established in Case No. 745 of 2021 Shanghai Civil Court of Final Instance; - Specific applications shall be subject to the currently effective regulations.

5. Henglu Law Firm's Reminder

Three key points about hedging agreements: 1. The party subject to the hedging agreement bears the responsibility for potential losses, and personal hedging agreements may lead to personal bankruptcy risks. 2. Repurchase prices linked to market value may be ineffective overall, while closed-formulas are more secure. 3. The triggering of traceability and term management determines the success or failure of the repurchase right, and the clauses must be accompanied by procedural contingency plans. For questions regarding the design of hedging agreements, you can consult the relevant experts.Business and contract disputes in enterprisesThe service provides a comprehensive solution, and for those involving equity investment and financing, we can provide corresponding support.Intellectual property protection and corporate lawFor plates involving guarantee responsibilities, you can refer to the following for more information.Special servicesFor any questions regarding difficult situations, you can consult the column for assistanceSpecial services and other casesColumn.

VI. Frequently Asked Questions

Q1: If I bet against the company, will I not be able to achieve my personal goals?

When a company engages in a bet against itself, it is liable for the company's assets, but its performance is subject to restrictions (such as capital reduction and profit distribution procedures). If the actual controller provides a separate guarantee, the individual's personal assets will still be pursued for repayment.

Q2: Can the repurchase right still be exercised after being delayed for three years?

It depends on the agreement and a reasonable timeframe for judgment. If the exercise period specified in the agreement has passed, the right to exercise will be lost. If there is no specified exercise period, the exercise of the right will be subject to a reasonable timeframe and a preclusive period. Once the triggering event occurs, the right should be exercised in writing as soon as possible.

Q3: Is the compensation from the betting agreement subject to taxation?

The tax treatment of cash compensation and the difference in repurchase prices shall be determined based on the nature of the income. The income from equity transfer may trigger income tax, so it is necessary to reserve tax burden space when designing the clauses.

Q4: If my spouse doesn't sign the agreement, do I still have to share the liability for the speculative debt?

The spouse who did not sign the agreement has room for defense, but the compensation money used for the family's common life may still be regarded as a joint debt, so whether to sign the agreement or not makes a significant difference.

Q5: Is it considered a losing bet even if the performance is just a little bit below the target?

According to the terms of the agreement, the indicators are fixed; it would be more practical to negotiate to set up a buffer zone (for example, granting a proportional reduction or exemption if the compliance rate exceeds 90%).

The above content is based on the judicial practice in the Beijing area. The facts of individual cases and the jurisdiction of the court may affect the conclusions. Welcome to consult Henglue Lawyers about specific situations.

VII. Relevant public cases (for reference only, not handled by our firm)

The following cases are all sourced from the official websites of courts at all levels, judicial organs, and authoritative media, and are not related to the cases handled by our firm. They are provided solely for reference in understanding relevant adjudication rules and do not constitute opinions on specific cases.

[Case No.](2021) Shanghai Municipal Higher People's Court Case No. 745
[Trial Court]Shanghai Municipal Higher People's Court (Second Instance)
[Judicial Summary]The investor and the listed company's shareholders agreed on a share repurchase clause linked to the stock market value. The court held that the repurchase price was directly linked to the short-term stock trading market value in the secondary market, which undermined the order of the securities market, damaged the public interest, and violated public order and good customs. The clause was deemed invalid, and all the investor's litigation requests were rejected. The case was selected as a typical commercial case released by the Supreme People's Court.
[Source]The official website of the Liaoning Provincial Court system reposted (Dalian Railway Transport Court) (2024-02)

[Case No.]The case number has not been made public.
[Trial Court]A certain court (according to public reports)
[Judicial Summary]Investor Li * and the actual controller of the energy company, Zhang *, and four others entered into a betting agreement, stipulating that if the average net profit was less than 6 million yuan, the actual controller would compensate in cash; if the company was not listed, the actual controller would repurchase the shares at an annual interest rate of 8%. The court, in accordance with the Nine Civil Cases Notes, determined that the betting agreement with the shareholders and the actual controller was valid, and ruled that the five individuals should pay cash compensation of 2.3 million yuan and interest at the LPR rate, and repurchase the shares at a price of 8.79 million yuan. However, since the compensation obligation lies with the actual controller rather than the target company, the court dismissed the claim against the company.
[Source]Toutiao (the official account of the court), 2025 (2025)

If you are facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with evidence materials, to avoid missing the statutory time limit. →Corporate commercial legal services·Beijing Henglu Law Firm

Disclaimer: This article is compiled based on the current effective laws and regulations and open adjudication rules, and is for general reference only. It does not constitute a formal legal opinion on specific cases. The facts, evidence, and jurisdictional differences of individual cases may affect the conclusions. In case of disputes, please consult a practicing lawyer in time.