More diverse corporate information on the startups mentioned in this article can be viewed at Unicorn Factory's big data platform 'Data Lab'.
Venture capital is designed on the premise of failure. The structure requires that even if nine out of ten investments fail, a single success can be large enough to offset them; hence it is called "risk capital." However, domestic venture investment practices are far from risky. Overly designed investor safety mechanisms directly link company failures to the personal bankruptcy of founders.
This is attributed to the domestic investment ecosystem, which makes it difficult to easily Yongin venture capital failures. The government has also recognized this issue and is making efforts such as revising standard contracts, but criticism arises that policy finance institutional investors' policy direction fails to keep pace with these measures.
In venture capital contracts, joint and several guarantees by founders were once standard practice. Although this system is gradually disappearing from a regulatory standpoint, a workaround remains in which major shareholders or management personnel effectively assume the same obligations under the guise of "interested parties." Other mechanisms designed to protect investors also impose burdens on founders, such as put options (the right to demand stock repurchase), which allow investors to force founders to sell their shares, and drag-along rights (co-sale rights), which require founders to sell their stakes if a majority of shareholders decide to sell the company.
In addition, practices such as repricing (adjusting the conversion price to lower the conversion price for existing investors and defend their shareholding ratio when receiving follow-on investment while corporate valuation has fallen) and penalty clauses that demand a pre-determined amount from investors regardless of the actual scale of damages are also cited as vicious habits that pressure founders.
The same applies to redeemable convertible preferred shares (RCPS), the most commonly used venture investment instrument in Korea. Investors hold both the right to recover their investment if conditions are not met (redemption right) and the right to convert into common stock at a favorable time (conversion right).
Kim Sung-hoon, a lawyer at Mission Law Firm, stated, "Redemption rights are only possible within the scope of distributable profits, and since startups do not have such profits, the actually destructive clauses involve conversion rights and repricing." He added, "When raising follow-on investment through a down round (a subsequent investment conducted at a lower corporate valuation), if repricing is triggered, the governance structure can be overturned. Consequently, requests for existing investors to waive or exempt repricing may go unanswered, leading to the collapse of the follow-on investment itself."
Unlike in Korea, there is a shared understanding in overseas venture investment circles such as Silicon Valley that most startup investments fail. This is why contracts that attribute individual failures solely to the entrepreneur's personal responsibility are difficult to establish. According to local investors, the U.S. venture capital (VC) industry never had joint and several liability clauses in the first place.
The situation in Korea is different. The spectrum of investors ranges from pure private venture capital firms to funds mixed with policy capital and investment companies affiliated with financial holding groups, each capable of absorbing losses to varying degrees. There is no uniform consensus across the entire ecosystem on what constitutes "failure."
A VC investment screening officer stated, "In one private investment fund, there were even cases where individual investors who could not distinguish between investment and loans grabbed the screening officer by the collar, shouting 'Give me back my money.'" The officer further pointed out, "It is not only individual investors; institutional investor managers also sometimes act like creditors rather than investors."
Cases where founders personally assume liability due to joint guarantee or related-party clauses in investment contracts continue to emerge. Urban Base, a proptech startup, faced conflicts with investor Shinhan Capital over joint guarantee issues. OhjiQ, a content startup founded by Shin Cheol-ho, found itself in a situation where it had to repay the invested amount of 90 billion won and accrued late fees from personal funds after being listed as a "related party" during the process of signing a conditional investment contract.
The government also recognizes the need to ease such investor protection measures. On the 30th last month, the Ministry of SMEs and Startups released a revised standard contract for venture investment that recommends using CPS (convertible preferred shares) instead of RCPS. Rather than defining an IPO as a mandatory result obligation, it has been changed to an obligation to make diligent efforts, thereby protecting entrepreneurs from penalty clauses triggered by external factors such as market stagnation.
However, the startup industry says that problems not included in contracts more often pressure actual founders. How put options and penalty clauses are actually exercised remain in a management blind spot. The reality of fund of funds (Korea venture fund) sub-funds exercising put options or penalty clauses against founders is also not being monitored.
Criticism arises that the policy direction of policy finance, including funds of funds (Korea Venture Fund), has encouraged investors' "self-preservationism." When a company in which they have invested faces insolvency, they pressure fund managers by raising issues regarding post-investment management. If the corporate valuation falls below the acquisition price, they impose impairment losses and reduce management fees. Fund managers, citing demands from limited partners for stricter oversight, require stronger safeguards from entrepreneurs, which ultimately returns as onerous clauses that strangle the entrepreneurs.
Lawyer Kim Sung-hoon stated, "It is true that VCs are not acting as venture capitalists but rather like creditors; however, this is not necessarily due to malicious intent on the part of the VCs." He added, "If policy LPs do not grant fund managers appropriate discretion and autonomy to make and execute judgments, fund managers will inevitably feel pressured and take excessive safety measures, ultimately creating a vicious cycle that damages the startup ecosystem."
[Money Today Startup Media Platform Unicorn Factory]
in FUTURE
