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Published online by Cambridge University Press: 07 December 2020
The rise of China's tech companies in the global economy raises an urgent need to understand how China incubates its tech startups. China's tech startup ecosystem presents two puzzling legal arrangements for human capital in light of Silicon Valley's experience, the co-existence of enforceable non-compete agreements and the high-velocity labour market, and the common use of stock options with a buyback norm. This article delves into the peculiarities of China's legal and political institutions to resolve these legal puzzles. This article also speaks to a global policy debate about the replicability of Silicon Valley and the necessity of such replication. The Chinese experience offers opposite examples showing the replication complexity: replication yet with deformed practices, and non-replication yet with similar outcomes. The findings suggest that there is unlikely to be a one-size-fits-all model for creating an innovation economy.
Assistant Professor, Peter A Allard School of Law, The University of British Columbia. The author is grateful to Camden Hutchison and Curtis Milhaupt for comments on an earlier draft, and to numerous interviewees for sharing their insights. Interviews were conducted on an anonymous basis. The author also thanks Vicki Xu for helpful research assistance.
1. TechCrunch's unicorn list, as of 31 October 2019, showed that 178 of the 516 unicorns worldwide were in China. <https://techcrunch.com/unicorn-leaderboard/> accessed 2 Nov 2019.
2. Richard Florida & Ian Hathaway, ‘Rise of Global Startup City: The New Map for Entrepreneurship and Venture Capital’ (Center for American Entrepreneurship, Oct 2018) <https://startupsusa.org/global-startup-cities/report.pdf> accessed 19 Aug 2020.
3. Mary Meeker, ‘Internet Trends 2019 Report’ (TechCrunch, 12 Jun 2019) <https://techcrunch.com/2019/06/11/internet-trends-report-2019/> accessed 19 Aug 2020.
4. Paul Mozur, ‘China, Not Silicon Valley, Is Cutting Edge in Mobile Tech’ New York Times (2 Aug 2016) <https://www.nytimes.com/2016/08/03/technology/china-mobile-tech-innovation-silicon-valley.html> accessed 19 Aug 2020; The Economist, ‘China's Tech Industry Is Catching Up With Silicon Valley’ The Economist (16 Feb 2019) <https://www.economist.com/graphic-detail/2018/02/16/chinas-tech-industry-is-catching-up-with-silicon-valley> accessed 13 Aug 2020.
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6. Chander, Anupam, ‘How Law Made Silicon Valley’ (2014) 63 Emory Law Journal 639Google Scholar; Anand, Aarthi, ‘“Less is More”: New Property Paradigm in the Information Age’ (2012) 11 Duke Law & Technology Review 65Google Scholar.
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8. See discussion in Parts II and III.
9. Michael Moe, The Global Silicon Valley Handbook (Grand Central Publishing 2017) 18.
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13. Torch High Technology Industry Development of the Ministry of Science and Technology Center of China (Torch of MOST), China Torch Statistical Yearbook (China Statistics Press 2018) Table 1–3.
14. ibid.
15. Zhou, Yu, The Inside Story of China's High-Tech Industry: Making Silicon Valley in Beijing (Rowan & Littlefield 2008)Google Scholar.
16. TechCrunch (n 1).
17. ibid.
18. Evergrande Research Institute, ‘Zhongguo dujiaoshou baogao [China Unicorn Report] 2019’ <https://xueqiu.com/4286133092/130159306> accessed 25 Aug 2020.
19. Meeker (n 3).
20. Torch of MOST (n 13).
21. ‘Venture Capital in China’ (Pitchbook, 15 Mar 2019) <https://pitchbook.com/news/reports/1q-2019-pitchbook-analyst-note-venture-capital-in-china> accessed 19 Aug 2019; Covestro, ‘China's Start-up Landscape (And How to Engage with It)’ <www.yeita.com.cn/Covestro/20181012_Start_up_study_excerpt.pdf> accessed 13 Aug 2020.
22. Chinese Academy of Science and Technology for Development (CASTED), Venture Capital Development in China 2002 (Economy and Management Publishing 2002) 9; CASTED, Venture Capital Development in China 2017 (Economy and Management Publishing 2017) 2.
23. Covestro (n 21).
24. Aoping Zhang, ‘2019 nian zhongguo guquan touzi shichang xianzhuang ji zhanwang [The Present and Prospect of China's Equity Investment Market in 2019]’, Forbes China (3 May 2019) <http://www.forbeschina.com/entrepreneur/476> accessed 19 August 2020.
25. In 2018, foreign VC funds participated in 30.6% of venture investments in Chinese startups. See ‘Venture Capital in China’ (n 21). Foreign VC used to be the major source until recently, having accounted for 80% of VC investment, at least until 2010. See Fortune Venture Capital, ‘Wang Shu: Fengtou yushang nande de hao shihou [Wang Shu: Venture Capital Meets Rare Good Times]’ <http://www.fortunevc.com/news_view.asp?news_id=491> accessed 2 Nov 2019.
26. CASTED, Venture Capital Development in China 2017 (Economy and Management Publishing 2017) 100.
27. Hyde, Alan, Working in Silicon Valley: Economic and Legal Analysis of a High-Velocity Labour Market (ME Sharpe 2003)Google Scholar.
28. Saxenian, AnneLee, Regional Advantage: Culture and Competition in Silicon Valley and Route 128 (Harvard University Press 1994) 34–35Google Scholar; Kaylee Fagan, ‘Silicon Valley Techies Get Free Food And Dazzling Offices, But They're Not Very Loyal – Here's How Long The Average Employee Stays At The Biggest Tech Companies’ (Business Insider, 16 Apr 2018) <https://www.businessinsider.com/average-employee-tenure-retention-at-top-tech-companies-2018-4> accessed 19 Aug 2020.
29. Saxenian (n 28) 128.
30. Gilson, Ronald J, ‘The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants Not to Compete’ (1999) 74 New York University Law Review 575Google Scholar.
31. Jonathan M Barnett & Ted Sichelman, ‘Revisiting Labour Mobility in Innovation Markets’ (USC Law Legal Studies Paper No 16-15, 26 May 2016) <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2758854> accessed 19 Aug 2020.
32. For an overview of the enforceability of CNCs in the 50 US states, see White House, ‘Non-Compete Agreements: Analysis of the Usage Potential Issues, and State Responses’ (May 2016) <https://obamawhitehouse.archives.gov/sites/default/files/non-competes_report_final2.pdf> accessed 19 Aug 2020.
33. Fan bu zhengdang jingzheng fa [Anti-Unfair Competition Law] 1993 (People's Republic of China), s 10.
34. Laodong fa [Labour Law] 1994 (People's Republic of China), ss 22, 102.
35. Zhongguancun keji yuanqu tiaoli [Zhongguancun Science Park Regulations] 2000; Shenzhen jingji tequ qiye jishu mimi baohu tiaoli [Shenzhen Special Economic Zone Enterprise Technology Secrets Protection Regulations] 1995; Jiangsu sheng ruanjian chanye cujin tiaoli [Jiangsu Province Software Industry Promotion Regulations] 2007.
36. Zhongguancun keji yuanqu tiaoli [Zhongguancun Science Park Regulations] 2000, s 43.
37. Laodong hetong fa [Labour Contract Law] 2008 (People's Republic of China).
38. ibid ss 23, 24, 25.
39. Zuigao renmin fayuan guanyu shenli laodong zhengyi anjian shiyong falu ruogan wenti de jieshi [The Supreme People's Court's Interpretation on Several Issues Concerning the Application of Law in the Trial of Labour Dispute Cases] (IV) <http://www.court.gov.cn/zixun-xiangqing-5064.html> accessed 25 Aug 2020.
40. ibid.
41. LinkedIn, ‘Zhongguo zhichang renshi tiaocao baogao [The Report on Job Changes of Chinese Professionals] (2014)’ (HR-MarketWatch, 21 Oct 2014) <http://marketwatch.hroot.com/company/Detail-13081-cn.cis> accessed 19 Aug 2020 (comparing employee turnovers in China and the US and showing that in both countries the tech sector is among the sectors with the highest turnover rates).
42. Mercer, ‘Zaoqi qiye xinchou diaoyan baogao [Research Report on Startup Compensation] 2016’ <http://www.chinagrowthcapital.com/Index/article/id/972> accessed 25 Aug 2020; Mercer, ‘Zaoqi qiye xinchou diaoyan baogao [Research Report on Startup Compensation] 2017’ <https://www.sohu.com/a/207297870_355043> accessed 25 Aug 2020; Mercer, ‘Zaoqi qiye xinchou diaoyan baogao [Research Report on Startup Compensation] 2018’ <https://www.chinaventure.com.cn/cmsmodel/news/detail/342841.html> accessed 25 Aug 2020.
43. Mercer, ‘2006 nian Zhongguo hulianwang hangye xinchou diaoyan baoga [The 2006 Research Report on Compensation in China's Internet Sector]’. A summary of the report is available at Zhou Kai, ‘Diaocha cheng hulianwang hangye yuangong lizhilu gaoda 15.9% [A Survey Reports Employee Turnover Rate in the Internet Sector as High as 15.9%]’, Sina (5 Apr 2007) <http://tech.sina.com.cn/i/2007-04-05/07511449738.shtml> accessed 3 Nov 2019.
44. LinkedIn (n 41).
45. BOSS Zhipin, ‘2017 hulianwang rencai qushi baipishu [2017 Internet Talent Trends White Paper]’ <https://z.zhipin.com/H5/html/pdf/white_paper.pdf> accessed 19 Aug 2020.
46. ibid.
47. LinkedIn, ‘2018 Zhongguo zhichang ren tiaocao qushi dongcha [2018 Trends and Insights of Chinese Professionals’ Job Changes]’ (HR-MarketWatch, 16 Mar 2018) <http://marketwatch.hroot.com/company/Detail-15309-cn.cis> accessed 25 Aug 2020.
48. Mercer (n 42) (all reports cited therein); Mercer (n 43); BOSS Zhipin (n 45).
49. See eg. Fanggong Yiliu, ‘Quanwang tongji qian yuangong de hulianwang da gongsi [Large Internet Companies Want Their Former Employees]’ (Caijing Magazine, 11 Jul 2019) <http://news.caijingmobile.com/article/detail/399828?source_id=40> accessed 19 Aug 2020; HRSaaS, ‘Hulianwang gongsi jingye xieyi “changtaihua”, ni qian haishi bu qian? [Non-compete Agreements as the Norm, Do You Sign or Not?]’ (Zhihu, 26 Jul 2019) <https://zhuanlan.zhihu.com/p/75327767> accessed 19 Aug 2020.
50. Benjamin L Liebman et al, ‘Mass Digitization of Chinese Court Decisions: How to Use Text as Data in the Field of Chinese Law’ (Columbia Public Law Research Paper No 14–551, Oct 2019) <https://ssrn.com/abstract=2985861> accessed 19 Aug 2020.
51. Ma, Chao et al. , ‘Da shuju fenxi: zhongguo sifa caipan wenshu shangwang gongkai baogao [Big Data Analysis: A Report on China Judgments Online]’ (2016) 12 China Law Review 195Google Scholar.
52. Yumeng Bao, ‘Baidu xiang qian yuangong Lichenggang suopei baiwan yuan: weifan jingye xieyi, ruzhi jinri toutiao [Baidu Launches a Million-Yuan Damages Claim Against Its Former Employee Li Chenggang Who Allegedly In Violation of the Noncompete Agreement Joins Toutiao Today]’, Sina (20 Jun 2018) <http://finance.sina.com.cn/roll/2018-06-20/doc-ihefphqk5183529.shtml> accessed 25 Aug 2020 (reporting a survey showing that CNCs are most common in the financial industry, followed by the information technology sector).
53. The sample includes 224 cases, after removing duplicative cases and irrelevant cases (cases where CNC was not an issue in dispute) from the raw sample of 264.
54. For the list of China's unicorns, see Zero2IPO Research Center, ‘2018 nian zhongguo dujiaoshou qiye yanjiu baogao [China's Unicorn Report 2018]’ (Zero2IPO, 9 Oct 2018) <https://report.pedata.cn/1539075142031003.html> accessed 19 Aug 2020.
55. A trial judgement and its appeal are counted as one case.
56. Beijing Haidian qu Renmin Fayuan [Beijing Haidian People's District Court], Haidian qu laodong zhengyi qingkuang baipishu (zong shu ban) [Haidian District Labour Disputes White Paper (Review Edition)] 2018.
57. The calculation is as follows: 26*5=130; 26*8=208. The numbers are further multiplied by 2, given that China Judgments Online covers about 50% of all court cases.
58. Data from Table 1 and n 53 above.
59. Jingtian & Gongcheng Legal LLP, ‘Jingye xianzhi jiufen: bianhua buzhi zai xiwei zhijian – fang jingtian gongcheng Yu Xin, Hu Ke lushi [Covenants Not to Compete – Interviews with Yu Xin, Esq and Hu Ke, Esq]’ <https://www.jingtian.com/Content/2018/08-06/0931125327.html> accessed 19 Aug 2020. The recent high-profile case between Baidu and one of its former employees who joined Toutiao (a unicorn) provides a good example of the use of the avoidance strategies. Baidu sought to enforce a CNC clause against the employee who was barred from working for Toutiao or its affiliates during the non-compete period. The employee joined an outsourcing firm. The Beijing Municipal Labour Dispute Arbitration Commission ruled that the employee was formally employed and paid by the outsourcing firm, not an affiliate of Toutiao; therefore, the employee did not violate the CNC obligation. Baidu appealed to the courts. The trial court and the appeal court found that one of the major shareholders of the outsourcing firm was a senior manager of a company invested in by Toutiao, and the senior manager's social security was actually covered by Toutiao. As a result, the outsourcing firm was an affiliate of Toutiao and the employee had breached the CNC obligation. See Li Chenggang v. Baidu Online Network Technology (Beijing) Co Ltd., Labour Dispute Second Civil Judgment, Beijing First Intermediate People's Court (13 Mar 2019).
60. For instance, if an employer suspected that a former employee worked for a competitor company, the employer would send a deceitful package via courier service to the competitor's location with the former employee as the addressee. If the package was received with the former employee's signature, the employer could then use this as evidence.
61. For an example in which the court rejected such evidence, see Wuhu Easy Play Network Technology Co Ltd. Guangdong Branch v Li Li, ‘Non-compete Restrictions Dispute Retrial Review and Trial Supervision Civil Ruling’, Guangdong Higher People's Court (10 Oct 2018).
62. Zuigao renmin fayuan guanyu shiyong <zhonghua renmin gongheguo hetongfa> ruogan wenti de jieshi (II) [The Supreme People's Court's Interpretation on Several Issues Concerning the Application of the Contract Law of the People's Republic of China (II)]; Zuigao renmin fayuan bangongting guanyu yinfa <quanguo minshi shenpan gongzuo huiyi jiyao> de tongzhi [Notice of the General Office of the Supreme People's Court on the Minutes of the National Civil Trial Work Conference] (2011).
63. Shanghai First Intermediate People's Court, Shanghai yi zhong yuan jingye xianzhi anjian baipishu [White Paper on Shanghai First Intermediate People's Court Competition Restriction Cases] (6 Jul 2018) <http://www.laodongfa.com/wap/index/show/catid/5/id/68300.html> accessed 3 Nov 2019.
64. The data is right-skewed with outliers; as a result, the mean is greater than the median.
65. Beijing Haidian qu Renmin Fayuan [Beijing Haidian District People's Court], ‘Haidian qu laodong zhengyi qingkuang baipishu [White Paper on Haidian District Labour Disputes] 2017’ <https://www.chinacourt.org/chat/chat/2017/04/id/47184.shtml> accessed 19 Aug 2020.
66. Leipin, ‘2019 Zhongguo dujiaoshou qiye rencai xuqiu yu xinchou baogao [2019 Report on Talent Demand and Compensation of China's Unicorns]’ <https://tinyurl.com/y4p4yuzm> accessed 19 Aug 2020.
67. Interview with a senior lawyer specializing in Chinese labour law. The interview was conducted on an anonymous basis.
68. Booth, Richard A, ‘Give Me Equity or Give Me Death – The Role of Competition and Compensation in Silicon Valley’ (2006) 1 Entrepreneurial Business Law Journal 265Google Scholar, 271.
69. See eg Greg Miller, ‘Pretenders to Silicon Valley's Throne’ Los Angeles Times (8 Mar 1998) <https://www.latimes.com/archives/la-xpm-1998-mar-08-mn-26781-story.html> accessed 19 Aug 2020; Index Ventures, ‘Rewarding Talent: A Guide to Stock Options for European Entrepreneurs’ <https://www.indexventures.com/rewardingtalent/the-index-ventures-experience> accessed 19 Aug 2020.
70. Hyde (n 27) 187.
71. Jason Nazar, ‘The Complete Guide to Understanding Equity Compensation at Tech Companies’ Fortune (27 Sep 2016) <https://fortune.com/2016/09/27/the-complete-guide-to-understanding-equity-compensation-at-tech-companies/> accessed 19 Aug 2020.
72. Between 1994 and 1999, more than 100,000 high-tech employees below the level of vice president became ‘stock option millionaires’ in the United States (mainly in Silicon Valley). For more details, see Carol E Curtis, Pay Me in Stock Options: Manage the Options You Have, Win the Options You Want (Wiley 2001) 4.
73. Rohit R Kulkarni, ‘The Rise of Unicorn Funds – Examining the Supply of Private Growth Capital’ (2017) 6 Alternative Investment Analyst Review 25 <https://caia.org/aiar/access/article-1157> accessed 19 Aug 2020.
74. Abraham JB Cable, ‘Equity Compensation & the Mature Startup’ (2017) 11 Virginia Law & Business Review 615; Anat Alon-Beck, ‘Unicorn Stock Options – Golden Goose or Trojan Horse?’ (2019) Columbia Business Law Review 107.
75. Zhonggong zhongyang guowuyuan guanyu jiaqiang jishu chuangxin, fazhan gaokeji, shixian chanyehua de jueding [Decision of the Central Committee of the Communist Party of China and the State Council on Strengthening Technological Innovation, Developing High Technology, and Realizing Industrialization] (Aug 1999).
76. Jie Sun & Peng Lu, ‘Gaoxin qiye jiang jinxing gupiao qiquan zhi shidian [High-Tech Enterprises Will Carry out Pilot Stock Option Plans]’ Xinhua Daily (12 Oct 2000) 2.
77. Mu Lin, ‘Wangluo gongsi xinshui youpu meipu [Is the Internet Company's Pay Reliable?]’ Business Times (20 Jun 2000) 5.
78. Mercer (n 42) (reports published jointly by the venture firms and Mercer).
79. Alibaba's IPO prospectus (2014) shows that it established multiple ESOPs respectively in 1999, 2004, 2005, 2007 and 2011. Baidu established its first ESOP in 2000.
80. Diana Hembree, ‘Startup Employee Alert: Can Your Company Take Back Your Vested Shares?’ (Forbes, 10 Jan 2018) <https://www.forbes.com/sites/dianahembree/2018/01/10/startup-employee-alert-can-your-company-take-back-your-vested-stock-options/#774b0d716e49> accessed 19 Aug 2020.
81. Skype and Zynga are the well-known unusual cases. See Felix Salmon, ‘Upgrading Skype and Silver Lake to Evil’ (Reuters, 24 Jun 2011) <http://blogs.reuters.com/felix-salmon/2011/06/24/upgrading-skype-and-silver-lake-to-evil/> accessed 19 Aug 2020; Mary Russell, ‘Skype Repurchase Rights = Vampire Capitalism’ (Stock Option Counsel, 30 Apr 2013) <http://stockoptioncounsel.com/blog/skype-repurchase-rights-vampire-capitalism/2013/8/5> accessed 19 Aug 2020; Thomas A Smith, ‘The Zynga Clawback: Shoring up the Central Pillar of Innovation’ (2013) 53 Santa Clara Law Review 577.
82. Sam Altman, ‘Employee Equity’ (19 Apr 2014) <https://blog.samaltman.com/employee-equity> accessed 19 Aug 2020.
83. Chinese online forums such as Zhihu (https://www.zhihu.com/) and 36Kr (https://36kr.com/) have many posts and discussion threads suggesting the ‘buyback norm’. Here are just a few examples of posts by ESOP consulting firms: Xuejing Liu, ‘Fenshou gai timian, chuli hao qiquan [Breaking Up Elegantly, Handling Options Nicely]’ (Zhihu, 15 Mar 2018) <https://zhuanlan.zhihu.com/p/34603456> accessed 19 Aug 2020; Kapbook.com, ‘Huigou lizhi yuangong de qiquan, jiage zenme ding? [How to Set the Repurchase Price of Departing Employees’ Stock Options?]’ (36Kr, 29 Sep 2016) <https://36kr.com/p/5053850> accessed 19 Aug 2020. News media also profiled disputes over employee stock repurchases. In a widely-reported example in 2016, the departing Chief Technology Officer of DXY.cn (Mr Feng) requested to exercise his vested options, but the startup refused and exercised the repurchase right. The departing employee disagreed with the repurchase price offered by the company. See ‘Feng dahui 6-nian qiquan nan taoxian de beihou: women do xuyao yi fen qiquan shiyong shuomingshu [Behind Feng Dahui's 6-Year Stock Options that are Hard to Cash Out: We All Need an Option Manual]’ (PE Daily, 29 Aug 2016) <https://pedaily.cn/news/402428> accessed 19 Aug 2020. This author conducted interviews with ten Chinese senior lawyers with expertise in employee equity compensation. The lawyers are affiliated with different law firms and ESOP consulting firms in China. The interviews were conducted on an anonymous basis.
84. Interviews with lawyers (n 83). In addition, publicly available information shared by other lawyers provides the same observation: IDG Capital, ‘Renao kanwan le, guanyu “qiquan” zhejianshi zhuanye lushi zenme kan? [When the Scene is Over, What Do Professional Lawyers Think About “Options”?]’ (IDG Capital, 30 Aug 2016) <https://tinyurl.com/y5ta6bnk> accessed 9 Nov 2019; China Private Equity Secondary Market Research Center & Mailaogu.com, Zhongguo guquan zhuanrang lanpishu [China Equity Transfer Blue Book] (2016) 50.
85. The first approach is unfavourable for employees at internet startups, which are typically light in assets and have low net asset value. The second approach takes a discount for a number of reasons: the price per share in the last round is for preferred shares but not for common shares; the valuation does not necessarily reflect the real value of the privately-held firm; it would add pressure on the startup's cash flow if repurchased at no discount; and it discourages employees from leaving the firm. As for the third approach, the strike price at the early stage is usually very low. A multiple of between one and three remains a low price.
86. However, if it is a dismissal with cause (eg for violating codes of conduct), the repurchase price would be lower or it could even be a forfeiture without any compensation.
87. Fortune Capital (n 25).
88. Lin Lin, ‘Venture Capital Exits and the Structure of Stock Markets in China’ (2017) 12 Asian Journal of Comparative Law 1.
89. In a ‘super voting’ structure, ordinary shareholders receive shares with one vote per share while founders receive ‘super voting shares’ with multiple votes, typically ten votes per share.
90. Startups go through a series of funding rounds from venture capital firms, beginning with a seed round and continuing with A, B, and then C funding rounds. Startups that make it to Series C funding rounds are considered relatively successful.
91. Lin William Cong & Sabrina T Howell, ‘IPO Intervention and Innovation: Evidence from China’ (NBER Working Paper No 24657, May 2018) <https://www.nber.org/papers/w24657> accessed 19 Aug 2020 (reporting nine major IPO suspensions between 1994 and 2016).
92. Waishang touzi zhunru tebie guanli cuoshi [Special Administrative Measures for the Access of Foreign Investment] (2020) <https://www.ndrc.gov.cn/xxgk/zcfb/fzggwl/202006/P020200624549035288187.pdf> accessed 26 Aug 2020.
93. ibid.
94. The China Securities Regulatory Commission has the so-called ‘four, five, six’ requirements for overseas listings: net assets of not less than 400 million yuan, after-tax profits not less than 60 million yuan in the past year, and fund-raising amount of not less than 50 million US dollars.
95. Li Guo, ‘Chinese Style VIEs: Continuing to Sneak under Smog?’ (2014) 47 Cornell International Law Journal 569. China passed a new foreign investment law in 2019 and the new law keeps the VIE structure in the grey area. Mark Schaub, David Hong & Atticus Zhao, ‘China: VIEs Alive and Well’ (King & Wood Mallesons, 4 Mar 2019) <https://www.chinalawinsight.com/2019/03/articles/investment-management/china-vies-alive-and-well/> accessed 8 Nov 2019.
96. Guojia waihui guanliju guanyu jingnei jumin tongguo teshu mude gongsi jingwai tourongzi ji fancheng touzi waihui guanli youguan wenti de tongzhi [SAFE's Notice on Domestic Residents' Overseas Investment and Round-trip Investment through Special Purpose Companies] (2014), often referred to as the ‘No 37’ notice.
97. Interviews with lawyers (n 83). Publicly available information shared by other lawyers also provides the same observation. For example, Weidong Nie & Hanyu Zhang, ‘Waiguan 37 hao wen dengji de mendao yu sixue [The Knacks and Achilles’ Heel of Foreign Exchange Registration No 37]’ (King & Wood Mallesons, 18 Apr 2018) <https://www.lexology.com/library/detail.aspx?g=f412e8f2-f8b1-4ea4-94d2-fd10be7015bd> accessed 19 Aug 2020; Shihui Partners, ‘The Foreign Exchange Problem of Overseas ESOP under the VIE Structure [VIE jiegou zhong jingwai ESOP de waihui wenti]’ (Shihui Partners, 12 Sep 2018) <https://mp.weixin.qq.com/s/PHujlNUSCFzSnmrjUZbVjg> accessed 26 Aug 2020.
98. Interviews with lawyers (n 83).
99. ibid. Some ESOP consulting firms also publicly share the same observation. For instance, Linkkap.com, ‘Dang guquan jili yudao waihui dengji [When Stock Incentives Registration Meets Foreign Exchange Registration]’ (Zhihu, 19 Sep 2019) <https://zhuanlan.zhihu.com/p/83298043> accessed 19 Aug 2020; Junwei Wang, ‘Feng Dahui yu Dingxiangyuan de qiquan zhi zheng da jieju, shui ying shui shu? Yiyou ali, soufang qianli [The Finale of the Option Battle between Feng Dahui and DXY.com, Who Wins and Who Loses? Alibaba, Fang Holdings as Precedents]’ (Huxiu, 3 Sep 2016) <https://www.huxiu.com/article/162592.html> accessed 19 Aug 2020.
100. In September 2019, the Beijing First Intermediate Court broke away from the tradition and ruled that employee stock option disputes belong to labour disputes. This decision has practical importance because it was made by a court that has jurisdiction over China's leading tech hub, Zhongguancun: Meituan gongsi (Meituan Corporation) yu Liu Jihan deng laodong zhengyi minshi caidingshu [Meituan Corporation v Liu Jihan et al, Labour Dispute Civil Rulings], Beijing First Intermediate People's Court, 24 Sep 2019.
101. Interviews with lawyers (n 83).
102. Under China's tax law, the employee should pay employment income tax with a marginal tax rate of up to 45% when exercising options with a strike price below the market price. The employee should also pay personal income tax (20%) when selling the shares. In 2016, the Ministry of Finance and the State Administration of Taxation issued the Notice on Improving the Income Tax Policies for Equity Incentives and Technology Shares [Guanyu wanshan guquan jili he jishu rugu youguan suodeshui zhengce de tongzhi] to exempt the exercise of options from this tax. In practice, most tech employees cannot benefit from it because the Notice provides that eligible employees must be the company's key tech professionals or senior executives, and the equity compensation must be the company's stock. However, as explained, the startup employee typically holds options of the employer's offshore affiliates or shareholding platforms instead.
103. Fangtianxia konggu youxian gongsi deng hetong jiufen er shen minshi panjueshu [Fang Holdings Limited et al, A Contract Dispute Second Instance Civil Judgment] (Beijing Second Intermediate People's Court, 28 Dec 2017); Sun Danli yu Huicongwang youxian gongsi hetong jiufen er shen minshi panjueshu [Sun Danli v HC International Inc, A Contract Dispute Second Instance Civil Judgment] (Beijing First Intermediate People's Court, 22 Nov 2016); Meituan (n 100).
104. Interviews with lawyers (n 83).
105. Company Law of the People's Republic of China 2018, ss 24, 25, 29.
106. ibid s 37.
107. Margaret Woo & Yaxin Wang, ‘Civil Justice in China: An Empirical Study of Courts in Three Provinces’ (2005) 53 The American Journal of Comparative Law 911.
108. Partnership Law 2006 (People's Republic of China), s 61.
109. Securities Law 2019 (People's Republic of China), s 9.
110. Fei shangshi gongzhong gongsi jianguan zhiyin di 4 hao [Unlisted Public Company Regulatory Guide No 4] 2013. According to publicly available information as of July 2017, the CSRC approved 20 companies, with only one being a listed company and the rest firms with shares traded in the over-the-counter market. See ‘Solutions to the Problem of More Than 200 Shareholders’ (BirdBrokers, 23 Jul 2017) <https://birdbrokers.com/2017/07/over-200-shareholders.html> accessed 9 Nov 2019.
111. Interviews with lawyers (n 83).
112. Shouci gongkai faxing gupiao bing shangshi guanli banfa [Initial Public Offering and Listing Management Measures], s 13.
113. ibid.
114. Based on data collected manually by the author, the average length of time from establishment to IPO for China's ten largest internet public companies is 7.8 years. A corresponding sample of 124 US-listed tech companies (including Chinese firms such as Alibaba) shows an average of 9.3 years, though the average varies by sector. See Sammy Abdullah, ‘How Long Does It Take a Startup to Exit?’ (Crunchbase, 25 Nov 2018) <https://about.crunchbase.com/blog/startup-exit/> accessed 19 Aug 2020.
115. Henry Etzkowitz, ‘Is Silicon Valley a Global Model or Unique Anomaly?’ (2019) 33 Industry and Higher Education 83; Edward Jung, ‘Can Silicon Valley be Replicated?’ (World Economic Forum, 31 Jul 2013) <https://www.weforum.org/agenda/2013/07/can-silicon-valley-be-replicated/> accessed 19 Aug 2020; Chris Baraniuk, ‘Why We Shouldn't Try to Replicate Silicon Valley’ (BBC News, 8 Feb 2018) <https://www.bbc.com/worklife/article/20180208-why-we-shouldnt-replicate-silicon-valley-evolution> accessed 19 Aug 2020.
116. See eg Samila, Sampa & Sorenson, Olav, ‘Non-Compete Covenants: Incentives to Innovate or Impediments to Growth’ (2010) 57 Management Science 425Google Scholar; Moffat, Viva, ‘Making Non-Competes Unenforceable’ (2012) 50 Arizona Law Review 939Google Scholar; Lobel, Orly, Talent Wants to be Free: Why We Should Learn to Love Leaks, Raids and Free Riding (Yale University Press 2013)Google Scholar.
117. For an overview of the empirical studies, see Barnett & Sichelman (n 31).
118. ibid.
119. ibid.
120. ibid.
121. Gomulkiewicz, Robert W, ‘Leaky Covenants-Not-to-Compete as the Legal Infrastructure for Innovation’ (2015) 49 UC Davis Law Review 251Google Scholar.
122. Gilson (n 30) 629.
123. Barnett & Sichelman (n 31).
124. See eg Henrekson, Magnus & Sanandaji, Tino, ‘Stock Option Taxation: A Missing Piece in European Innovation Policy?’ (2018) 51 Small Business Economics 411CrossRefGoogle Scholar; Jinyan Li, ‘International Mobility of Highly Skilled Workers in the Canadian Context: Tax Barriers and Reform Options’ (Government of Canada Skills Research Initiative – Working Paper Series 2006 D-21) <http://publications.gc.ca/collections/collection_2011/ic/Iu182-2-2006-D-21-eng.pdf> accessed 19 Aug 2020 (comparing employee stock option taxation in the US, Canada, and China).
125. For specific particulars, see Shanghai Stock Exchange Star Market, ‘Rules of the SSE Star Market’ <http://star.sse.com.cn/lawandrules/lawandrules/marketrules/> accessed 27 Aug 2020.
126. Mike Bird, ‘China's STAR Market Is Falling to Earth’ Wall Street Journal (22 Oct 2019) <https://www.wsj.com/articles/chinas-star-market-is-falling-to-earth-11571732956> accessed 19 Aug 2020; Hudson Lockett, ‘Shanghai's Star Market Fades after Initial Success’ Financial Times (30 Sep 2019) <https://www.ft.com/content/f5285292-e112-11e9-9743-db5a370481bc> accessed 19 Aug 2020.
127. Interview with a lawyer who participated in Xiaomi's ESOP design.
128. Many posts in the online discussion forums explicitly use the term ‘traps’ (keng or xianjing) to refer to the terms of stock options. Some tech founders have observed that more and more tech workers avoid startups and prefer cash compensation because they feel unfairly treated in terms of equity compensation. See eg Hong Jiang, ‘Shuoshuo lizhi yuangong de qiquan [Talking about Departing Employees’ Stock Options]’ (Zhihu, 15 Jun 2016) <https://zhuanlan.zhihu.com/p/21356315> accessed 9 Nov 2019; Loading, ‘Chuangshiren bie name koumen, hehuoren duo liu xinyan [Founders Don't Be Stinky, Partners Be Careful]’ (Android China, 24 Feb 2017) <http://www.androidchina.net/6541.html> accessed 9 Nov 2019. Legal commentators have also noted the recent rise of stock options disputes and suggested that it would be a serious problem if more tech workers realized their rights: Fushuai Zhao, ‘Guquan qiquan pinfa duixian nan, dalu “shuang chuang” kong yuzu [Stock Options Often Hard to Cash In, Mainland's “Two-Innovation Policy” Likely to Have Stumbled]’ (Phoenix Weekly, 25 Jul 2016) <www.ifengweekly.com/detil.php?id=2888> accessed 9 Aug 2020.
129. Tsai, Terence & Cheng, Borshiuan, The Silicon Dragon: High-tech Industry in Taiwan (Edward Elgar 2006)CrossRefGoogle Scholar; Senor, Dan & Singer, Saul, Start-up Nation: The Story of Israel's Economic Miracle (Twelve 2011)Google Scholar; AnnaLee Saxenian, ‘Bangalore: The Silicon Valley of Asia?’ (Stanford Centre for International Development Working Paper No 91, Feb 2001) <https://kingcenter.stanford.edu/sites/default/files/publications/91wp.pdf> accessed 19 Aug 2020. None of these works discuss any legal arrangements for promoting human capital in the tech ecosystem.