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The Ministry of SMEs and Startups is promoting the use of CPS (convertible preferred shares) and common shares in venture investments, offering incentives such as "bonus points when selecting fund of funds (Korea venture fund) investment operators" for using the standard contract. This effort comes amid a prevailing preference for RCPS (redeemable convertible preferred shares) in the venture investment market. The reason is that existing incentive measures by policy financial institutional investors, such as preferential performance-based compensation, have clearly reached their limits in changing this entrenched practice.
According to industry sources on the 9th, some policy financial institutional investors have begun offering incentives to encourage CPS and common share investments after facing criticism that RCPS investments hinder startup growth. RCPS is a security combining a redemption right, allowing investors to recover their capital when the company turns a profit, and a conversion right, enabling conversion into common shares. The redemption right of RCPS can only be exercised when there are distributable profits, making it practically ineffective for startups that frequently incur losses. Meanwhile, concerns have persistently been raised that RCPS may be recognized as debt in accounting, thereby distorting the financial structure of startups.
Korea Venture Corporation has been operating an incentive system since 2022 that provides preferential performance-based compensation up to a maximum of 10% of excess returns when investments in common shares or CPS account for more than 60% of the total in fund of funds (Korea venture fund) investment projects. The Agricultural Policy Insurance and Finance Corporation (Nonggeumwon) has also prepared measures to provide incentives within 10% of fund distribution payments if the proportion of new share common share investments exceeds 40%.
However, despite these public sector inducements, the adoption of CPS investment culture on the ground remains distant. Industry sources cited high thresholds for incentive conditions and the continued strong preference for RCPS among most LPs as key reasons. A VC industry representative stated, "While some LPs may increase CPS investments to align with offered incentives, other LPs from financial institutions still prefer RCPS, making it difficult to uniformly change investment structures." Another representative added, "Incentives such as preferential performance-based compensation were not attractive enough to overcome LPs' preference for RCPS."
From the perspective of LPs, the redemption right in RCPS is seen as a minimum safety net to attempt recovery in case of investment failure. For VCs, who must consider the demands of private and financial sector LPs when establishing funds, there are significant practical constraints in abandoning RCPS solely for additional performance-based compensation upon success and expanding CPS or common share investments. Of the total venture investment amount last year, which reached 6.8111 trillion won, approximately 70% was executed in the form of preferred shares, with industry reports indicating that most of these were RCPS investments.
LPs affiliated with financial institutions and major mutual aid associations have not yet established separate guidelines regarding CPS investments even after the introduction of the Ministry of SMEs and Startups standard contract. A representative from a mutual aid association stated, "The selection of investment target companies and investment methods are inherent rights of the GP (general partner) under the bylaws, and LPs cannot intervene in such matters."
Industry observers expect RCPS-centered investment practices to continue for the foreseeable future. Even among investments executed after the revision of the standard contract, cases have emerged where lead investors made capital contributions in the first half of the year, resulting in contracts being finalized as RCPS in line with established customs.
A VC investment screening officer noted, "If bonus points are granted for fund of funds (Korea venture fund) projects, there will be more room to persuade LPs who have traditionally preferred RCPS." He further predicted, "While it is difficult to uniformly change investment methods immediately, the use of CPS and common shares will gradually increase starting from new investments."
[MoneyToday startup media platform Unicorn Factory]
in FUTURE
