This article is a contribution by Attorney Hee-chul Ahn of DLG Law Firm. If you would like to share quality content for startups in the form of a contribution, please contact the Venture Square editorial team at editor@venturesquare.net .
The recent court ruling that the founder of the proptech startup Urbanbase was liable for investors' right to purchase shares has shed new light on structural problems in Korean startup investment contracts. Shinhan Capital's 500 million won investment in Urbanbase included a clause stipulating that the founders could purchase the principal and interest in the event of bankruptcy, a clause the court found valid. This ruling has brought to light the imbalance in startup investment contracts surrounding the scope of founders' liability.
The issue in the Urbanbase case is the "stock purchase right" clause in the investment agreement. This clause gave investors the right to sell their shares to the founder at a set price. The purchase price was set at the principal amount plus 15% annual interest. When Urbanbase went bankrupt, Shinhan Capital demanded the founder and CEO purchase the shares in accordance with this clause, and the trial court granted this request. This reveals a structure in which the founder was responsible not only for the company's failure but also for the investor's losses, using his personal assets.
Reflecting this situation, the Ministry of SMEs and Startups has begun revising the law to limit joint liability for founders. The Act on Promotion of Venture Investment currently prohibits joint liability for founders when venture capital funds or venture capital firms invest in startups, with exceptions such as false statements or misappropriation of funds. However, in the Urbanbase case, the investor was Shinhan Capital, a new technology venture capital firm, so this protection provision did not apply. Accordingly, the government is currently reviewing a revision that would expand protection to include startup planners, private investment funds, and new technology venture capital firms.
In addition to the joint guarantee, there are also hidden shackles in the investment contract.
The problem is that the legal revision likely won't effectively protect founders. Current investment contracts, in addition to joint liability provisions, also include provisions for early repayment, penalty clauses, and stock purchase rights. In particular, stock purchase rights, even on their own, can impose excessive financial liability on founders. In the event of a breach of contract, bankruptcy, or business suspension, investors can force not only the company but also the founders themselves to purchase shares.
Prepayment clauses are also disadvantageous to founders. Even if the company has no distributable profits, they can be considered a breach of the investment agreement, giving investors a basis for exercising their right to purchase shares. In this way, the interplay of these clauses within the investment agreement creates a structure that imposes joint and several liability on founders, both legally and de facto.
Meanwhile, the investment agreements commonly used in Silicon Valley (generally referred to as the National Venture Capital Association (NVCA) investment agreement) have a different structure than those in Korea. Joint liability clauses for individual founders are rare, and stock purchase rights are often established only at the company level. In the US, a culture of "fail fast, recover fast" is entrenched, presupposing investors to take risks and fostering an environment where founders are encouraged to try again even if they fail. In contrast, a "fail once, fail forever" approach still dominates Korea.
Against this backdrop, experts point out that, in addition to banning joint guarantees for founders, the government should also implement institutional improvements to substantive risk clauses, such as stock purchase rights. Rather than simply banning such clauses, they argue, incentive policies—for example, eligibility for participation in mother funds or tax benefits—should be used to guide investor behavior.
The current structure, where startup founders bear full responsibility for their companies' failures and are left in a position of no return, is detrimental to the innovation ecosystem. If investors continue to embrace a risk-free investment culture, the startup market will struggle to maintain a healthy ecosystem.
Inquiry for information
Attorney Heechul Ahn 010-9135-4773 / heechul.an@dlglaw.co.kr
Simharu, Senior Manager, PR Marketing Team 010-9458-6068 / ru.sim@dlglaw.co.kr
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