[Startup Must-Know Laws] Even Without the Term "Joint Surety," the Result Is the Same as Joint Surety

Heecheol An’s Essential Startup Law

There was a case in which approximately 9 billion won in investment received by a company became a personal debt of over 12 billion won for its founder. OZQ, a creator content platform operator, received investment on the condition that it would acquire Getty Images Korea. However, when the acquisition fell through, the investors demanded a return of their investment not from the company but from CEO Shin Cheolho personally. The court recognized Shin's responsibility, and the Supreme Court’s dismissal of his appeal finalized the ruling.

It is not legally accurate to describe this case as recognition of the founder’s 'joint surety responsibility.' The investment contract did not contain any provision stating that the founder would guarantee the company’s debt as a joint surety. Nor was it a typical put option case where investors demand that the founder repurchase their shares. The problematic contract contained a clause stating that the company and related parties would use the investment funds for the acquisition of Getty Images Korea, and if the acquisition did not take place, the investment funds had to be repaid. CEO Shin’s responsibility was not a guarantee ancillary to the company’s debt, but rather a direct contractual obligation under the investment agreement. However, in terms of economic outcome, it is hardly different from a joint surety, since the founder became personally liable for the investment funds and delay damages owed by the company.

This case demonstrates that simply removing the wording 'joint responsibility' or 'joint surety' from an investment agreement does not resolve the issue of founder’s personal liability. Instead of joint liability for company debts, if the founder is given an independent repayment obligation, a stock repurchase obligation, or responsibility for penalties or damages, the legal form may differ, but the practical effect can be identical to that of a joint surety. The recently amended Venture Investment Act restricted the practice of indiscriminately imposing a company’s obligations jointly on founders and other third parties. However, it did not broadly prohibit founders from assuming independent repayment or stock repurchase obligations directly with investors.

It is not unreasonable in itself to require founders to be parties to investment agreements. If regulation of the founder’s stock disposal, exercise of voting rights, non-compete obligations, or cooperation in the sale of the company is needed, it is necessary for the founder to be a contracting party. However, related parties should not ultimately be made responsible for all of the company’s failures. If the founder deceived investors, misappropriated investment funds, or intentionally breached the contract, it is reasonable for them to bear personal liability. But demanding that founders indemnify with their personal assets for market changes, M&A failures, unsuccessful follow-on investments, or even reasonable business judgment failures makes equity investment virtually no different from a loan with a personal guarantee attached.

Heecheol An, Managing Partner at DLG

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