[Startup Must-Know Laws] The Significance and Practical Considerations of the Revised Standard Venture Investment Agreement

Column by Attorney Heecheol Ahn of DLJ Law Firm

A venture investment agreement is a document that sets out how a company must use funds after investment, whose consent is required for major decisions, what responsibilities founders and key shareholders bear, and how investors can protect their rights and recover their investment. The revision of the standard venture investment agreement this year can be seen as an effort to improve this contractual culture.

The most significant change is the separation of the investment agreement and the shareholders’ agreement. The investment agreement covers matters related to the 'stock subscription itself,' such as issuance and acquisition of new shares, conditions precedent, representations and warranties, and closing of the transaction. The shareholders’ agreement contains provisions for 'post-investment operations and rights among shareholders,' including the use of investment funds, consent rights over management matters, reporting obligations, restrictions on share transfers, preemptive rights, tag-along rights, indemnification, and liabilities of interested parties.

The refinement of the prior consent right is another important change. The prior consent right is a clause that requires investors’ approval for key management matters, such as amendments to the articles of incorporation, increases or decreases in capital, issuance of convertible bonds, granting of stock options, mergers and splits, transfers of business, and transactions with related parties. The new standard agreement offering decision-making by majority among each investment round or investor group is understood as an attempt to balance investor protection with swift corporate decision-making.

Provisions regarding redemption rights and repricing (refixing) have also been revised. In Korea, redeemable convertible preferred shares have been widely used in venture investment. However, under the Commercial Act, redemption is only possible when the company has distributable profits. Therefore, the redemption right is not a mandatory provision, and should be treated as an optional mechanism individually reviewed for necessity and scope according to the company’s circumstances and investment structure. The same applies to repricing, the adjustment of conversion price. Repricing is a mechanism that allows existing investors’ conversion prices to be adjusted if the company issues shares at a lower price after investment or certain conditions are met. The method previously used in practice could result in excessive dilution of founders’ equity during down-rounds. On the other hand, the weighted average method in this revision helps mitigate the decrease in conversion price, serving as an alternative that balances the protection of both investors and founders.

This revision of the standard venture investment agreement aims to systematically align existing and new contracts to each company’s stage of growth, making the relationships between parties more predictable so that both reasonable investor protection and sustainable challenges by founders are possible. A good investment agreement is not one-sidedly advantageous to either party, but a document that balances the interests of investors and founders so the company can grow to the next stage—and every investment should prioritize this principle above all.

This content was produced with the assistance of AI translation services.