The standards for venture investment contracts are changing for the first time in three years.
On the 30th, the Ministry of SMEs and Startups and Korea Venture Investment held a 'Declaration Ceremony for the Development of Venture Investment Contract Culture' at Startup Venture Campus Seoul (SVC Seoul) and announced a revised 'Standard Venture Investment Contract' that reflects the global investment environment and the reality of domestic venture investment.
This revision marks the first comprehensive overhaul since 2023. It was formulated following discussions held since last December at the 'Venture Investment Contract Culture Development Forum,' which included startups, venture capital firms (VCs), accelerators (ACs), and legal experts. The core of this revision is to establish contract standards that can protect the rights and interests of investors while complementing the negotiating power of startups, which often lack investment experience.
The government expects that this standard contract will not merely stop at changing the contract format, but will become a new standard for creating an investment culture that both founders and investors can trust.
Infographic on Standard Venture Investment Agreements and Guidebooks (Source: Ministry of SMEs and Startups)
Keep contracts simple, and investment practices global.
The most notable change in this revision is the simplification of the contract system.
Previously, investment agreements and the rights and obligations between shareholders were combined into a single contract, and with as many as 32 types of contracts, it was difficult for startups to understand and utilize the contents. The new standard contract separates these into Investment Agreements (SPA) and Shareholder Agreements (SHA) and simplifies the contract types to five. The explanation is that the contract system has been made more intuitive by clearly distinguishing the purpose and roles of the contracts.
Investment terms have also been revised to reflect global investment practices. While RCPS (Redeemable Convertible Preferred Stock) has been used as the de facto standard in the domestic venture investment market, the amendment directs the use of CPS (Convertible Preferred Stock), which is commonly used in global markets, to be the primary focus.
The conversion right refixing process, which has been the subject of much controversy regarding founder equity dilution, has also been improved. Previously, conversion prices were frequently adjusted based on the lowest price (Full Ratchet) when corporate value declined; however, going forward, a weighted average method that considers both existing shareholders and investors has been proposed as the standard approach.
In addition, the IPO clause has also been changed from a 'result obligation' requiring the listing to be achieved unconditionally to a 'Best Effort' approach, where the company is expected to make sincere efforts toward the listing. This is evaluated as having reduced the burden on companies that previously had to bear responsibility for actual market conditions and has enhanced alignment with global investment contract practices.
In addition, the limitation on third-party joint liability has been more clearly defined to reflect the amendments to the Venture Investment Act. This is intended to prevent the practice of imposing excessive liability on the founder's family or interested parties.
In addition, the method of exercising the right of prior consent, which previously required the consent of all investors, will be changed to a collective consent method for each investment round. This is expected to reduce unnecessary delays that occurred during subsequent investments or major decision-making processes, and to more rationally reflect the interests of each investment stage.
Noh Yong-suk, First Vice Minister of the Ministry of SMEs and Startups, poses for a commemorative photo with attendees at the 'Declaration Ceremony for the Development of Venture Investment Contract Culture' held at the Startup Venture Campus Seoul (SVC Seoul) in Mapo-gu on the 30th. (From left) Kim Jae-won, Chairman of the Korea Startup Forum; Kang Ji-hoon, Vice Chairman of the Korea Venture Business Association; Lee Dae-hee, CEO of Korea Venture Investment; Noh Yong-suk, First Vice Minister of the Ministry of SMEs and Startups; Lee Jun-hee, Executive Vice Chairman of the Korea Venture Capital Association; Jeon Hwa-seong, Chairman of the Korea Early Stage Accelerator Association; and Yoo Dong-jun, Executive Vice Chairman of the Korea Angel Investment Association. (Photo courtesy of the Ministry of SMEs and Startups)
Going Beyond Standard Contracts to Change Investment Culture
The Ministry of SMEs and Startups and Korea Venture Investment Corporation are not stopping at revising the contract but are also pursuing follow-up work to enhance its actual usability in the field.
A separate 'Standard Venture Investment Contract and Commentary' has been produced to facilitate an easy understanding of the meaning, usage methods, and importance of each contract clause. The commentary will be available online starting June 30 through the Venture Investment Portal, the websites of Korea Venture Investment, the Korea Venture Capital Association, the Korea Venture Business Association, and the Korea Startup Forum, and will be distributed in booklet form at online and offline bookstores starting in July.
In addition, we plan to reflect the revised content in training programs such as the counseling staff training for the Startup One-Stop Support Center, venture capital specialist training, and Korea Venture Investment’s risk management workshops, so that founders and investors can utilize it in the actual contract process.
At the 'Venture Investment Contract Culture Development Forum' held after the proclamation ceremony, measures to expand standard contracts were discussed, along with plans to revitalize early-stage startup investment methods such as SAFE (Simple Agreement for Future Equity) and CN (Convertible Note). The Ministry of SMEs and Startups plans to continue the forum in the third quarter of this year to gather feedback from the venture investment field and identify additional tasks for institutional improvement.
Noh Yong-seok, First Vice Minister of the Ministry of SMEs and Startups, stated, “When a fair and sound venture investment contract culture takes root, founders can take on challenges with peace of mind, and investors can continue their investments while having their legitimate rights and interests protected.” He added, “We will support the rapid dissemination of the revised standard contracts and explanatory guides to the field, and we will continue to pursue institutional improvements to enhance trust in the venture investment market.”
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