South Korea Overhauls Venture Investment Contracts to Shift from Redeemable to Convertible Preferred Stock

The Ministry of SMEs and Startups and the Korea Venture Investment Association announced a comprehensive revision to the standard venture investment contract on June 30, 2026. This update, the first in three years, replaces the previously dominant redeemable convertible preferred stock structure with a convertible preferred stock framework to align domestic practices with global standards. VentureSquare reported the story, highlighting how the new guidelines address accounting complexities and founder liability issues that have long plagued the startup ecosystem. The revision aims to balance investor protection with the operational autonomy of founders, particularly for companies preparing for an initial public offering. The changes were developed through a forum established in December 2025, which included participation from startups, venture capital firms, accelerators, and legal experts to identify practical issues in existing contract templates.

A primary driver for the revision was the accounting treatment of redeemable convertible preferred stock under Korean International Financial Reporting Standards. Under these standards, the redemption feature often classifies the investment as a financial liability rather than equity. This reclassification can severely distort a company's balance sheet, increasing the debt-to-equity ratio and potentially triggering additional scrutiny during the initial public offering review process. The new standard contract recommends convertible preferred stock as the default structure because it lacks a redemption right, making it more likely to be classified as equity. However, the guidelines note that if a convertible preferred stock includes a price adjustment mechanism known as refixing, the conversion feature may still be classified as a derivative liability, meaning the equity classification is not automatically guaranteed.

The revision also modifies the price adjustment mechanism for down rounds. The previous standard used a full-ratchet method, which adjusted the conversion price of existing investors to the lowest price in a new round, causing significant dilution for founders and other shareholders. The new contract adopts a weighted average method, which considers the number and price of newly issued shares alongside existing shares. This approach mitigates the dilution impact on existing shareholders and aligns with common practices in global startup investment contracts. This change is particularly significant for companies facing market downturns or industry-specific challenges that may lower their valuation during subsequent funding rounds.

Provisions regarding initial public offering obligations have been relaxed to reflect the external factors influencing listing timelines. Previously, contracts often required founders to guarantee a successful listing within a specific period, allowing investors to claim redemption or share buyback if the deadline was missed. The revised contract changes this to a best-efforts obligation, meaning founders are not in breach of contract if the listing is delayed or fails due to market conditions or regulatory schedules, provided they made reasonable efforts. This adjustment is especially relevant for deep-tech and biotech companies that require extended periods for development and regulatory approval before they can go public.

The new guidelines also limit the personal joint and several liability of founders. While previous contracts often held founders personally liable for company breaches, the revised standard contract reflects the amended Venture Investment Act, which took effect on December 30, 2025. This law generally prohibits third-party joint liability, protecting founders from personal financial ruin due to business failure. Exceptions apply only in cases of intentional misconduct, gross negligence, or specific breaches such as misuse of investment funds or violation of conditions precedent. The standard contract serves as a negotiation baseline rather than a mandatory legal requirement, allowing parties to agree on different terms, though mandatory legal restrictions on liability cannot be overridden by private agreement.