Korea to Outlaw Unfair Startup Investment Contract Terms

South Korea will legally invalidate unfair startup investment contract terms — including excessive repricing after a failed IPO — and impose administrative sanctions on investors who use them, under an amendment to the Venture Investment Act that passed the Cabinet meeting on the 22nd, according to the Ministry of SMEs and Startups.

The amendment, scheduled for promulgation on the 29th and taking effect on March 30, 2027, shifts the government's approach from recommending desirable contract terms to prohibiting certain ones outright. It restricts conditions that allow early withdrawal of investment without justifiable grounds or fluctuations in management performance indicators, or the recovery of funds without a designated grace period. Excessive repricing of securities after a failed IPO is explicitly cited as an example of an unfair contract condition.

Repricing readjusts the conversion price of preferred shares into common shares when certain conditions are met after an investment. The mechanism protects investors when corporate value declines, but an excessive adjustment range increases the number of shares an investor secures with the same capital — and can sharply dilute the stakes of existing shareholders, including founders.

The IPO problem sits at the center of the reform. A startup's listing is not determined solely by the company's efforts; stock market conditions, industry valuations, and the follow-up investment environment all play a role. When failure to list by a specific date triggers contractual disadvantages, the company bears risks beyond management's control.

From guideline to statute

The amendment is the latest step in a staged overhaul of Korea's venture investment contract system. The Ministry of SMEs and Startups and Korea Venture Investment Corporation (KVI) established the "Venture Investment Contract Culture Development Forum" at the end of last year, bringing together startups, VCs, accelerators, and legal experts. The initiative responded to a structural problem: startups with less investment experience and expertise than their backers may accept unfavorable terms during negotiations. A forum session in March of this year addressed this bargaining-power disparity directly.

The result was a revised Standard Venture Investment Agreement released on June 30 — the first update in three years, since 2023. The revision cut the existing 32-type contract system down to five types, split between Investment Agreements (SPA) and Shareholder Agreements (SHA).

The terms changed substantially. The right of prior consent, which previously required agreement from all investors and could delay follow-on financing or major decisions, moved to a collective consent method for each investment round. On contract practices centered on Redeemable Convertible Preferred Stock (RCPS), the standard proposed a shift toward Convertible Preferred Stock (CPS). Repricing moved from the lowest-price method, which could heavily dilute founders when follow-on investments priced below existing shares, to a weighted average method balancing existing shareholders and investors. The standard also replaced the "result obligation" mandating an IPO with a "best-effort obligation" requiring diligent efforts to go public, and reformed mandatory IPO clauses and third-party joint liability.

A standard contract, however, remains a recommendation. Investors and companies can still negotiate different terms.

That is where the law changes the calculus. The amendment establishes grounds to refuse recognition of unfair contract conditions and to impose administrative sanctions — a shift from "such contracts are desirable" to "contracts that cross this line are not permitted."

Liability shifts already banned

Rules against shifting company liability onto individuals came first. Imposing joint liability on third parties — such as blameless chief representatives — was codified in management regulations in 2023 and legally prohibited through the Venture Investment Act, which took effect in December 2025. The Ministry of SMEs and Startups has stated the prohibition covers not only direct joint liability clauses but also clauses under different names that effectively impose the same liability on a company's representative.

The scope of the new amendment is narrower than it may appear. The direct target of the prohibition on unfair investment contracts is the managing partner — the general partner (GP) — of a venture investment fund. The amendment also prohibits the provision and acceptance of money and entertainment by major shareholders of venture investment companies seeking to exercise undue influence.

Enforcement details pending

How much the amendment changes actual dealmaking depends on subordinate regulations still to be drafted. The Ministry of SMEs and Startups plans to revise them before implementation. Key open questions include what constitutes a "legitimate reason" for early exit, how much repricing counts as "excessive," and what grace period is required for early recovery. The press release does not specify these criteria.

The ministry frames the reform as drawing a boundary between legitimate risk protection and excessive burden-shifting, not eliminating investors' rights. Venture capital inherently involves high risk and claims on future growth. But if risk-reduction contracts require founders to guarantee outcomes beyond their control, the nature of venture capital as risk capital weakens.

The test begins after March 2027. Early-stage companies desperate for funding can rarely negotiate as equals with investors, and individual founders cannot change established practices alone. Whether early-exit and repricing clauses actually evolve — and whether the standard contract becomes market practice — will be the first real measure of a fairer venture investment culture in Korea.