It is widely recognized that exit is always crucial to allow venture capitalists to recycle their investments before a venture capitalist’s decision to invest in an entrepreneurial firms. However , potential conflict of interest be2 tween venture capitalists and entrepreneurs may cause an inefficient exit . We show that with convertible preferred equity by allocating control rights and choosing a proper conversion option the ex-ante agreed optimal exit policy can be implemented. We also discuss the allocation and shift of control right in venture capital contracts . Our findings give an explanation for the prevalent use of convertible preferred in venture capital finance and practical implications for China’s venture capital industry.