JAPAN Law and Practice Contributed by: Reid Monroe-Sheridan, Takahito Fujii, Haruya Suzuki, Yutaro Ito and Tomohiro Oshige, southgate
ment, the investor can offset it against capital gains from the previous three years. 4.3 Government Endorsement The Plan (see 4.1 Subsidy Programmes ) is a policy initiative aimed at boosting start-up investment in Japan, with the Japanese govern - ment taking the lead in promoting such invest - ments. As part of this initiative, the government seeks to stimulate private investment by actively encouraging government agencies to invest in VC funds, both domestic and international, that focus on start-up investments, as well as by pro - moting direct investments in start-ups through public-private funds. It is common to provide incentives that allow founders and employees to benefit from the long-term growth of the company through stock options or stock ownership. This includes set - ting a vesting period for stock options and stock grants. In addition, although it is not typical for founders’ initial equity ownership to be subject to vesting, it is fairly common for the founders’ agreement to provide the remaining founders a right to purchase all of a departing founder’s equity at a nominal price (or, alternatively, fair market value at the time of departure) if the departing founder leaves the company before an exit has been completed. 5. Employment Incentives 5.1 General It is also common for the founders to agree in the investment documentation to continue their current roles at the start-up following the invest - ment, most typically for an indefinite period. Under Japanese law, such agreements are gen - erally considered valid with respect to founders (who are serving as directors of the start-up) but
are considered invalid if applied to employees unless limited to a certain permissible period of time under Japanese employment law. 5.2 Securities Stock options and stock grants are the principal instruments with which founders and employees are typically incentivised. Start-ups typically allo - cate about 10-15% of their outstanding shares for stock options. For the tax-qualified stock options referred to in 5.3 Taxation of Instruments , the exercise period must be between two years and up to 15 years after the grant date (depending on the period of the start-up’s existence), and the exer - cise amount must not exceed JPY36 million per year (again, depending on the period of the start- up’s existence). In addition, it is common for the exercise conditions to require that the founders or employees to whom the options are granted are still providing services to the start-up at the time of exercise. As mentioned in 5.1 General , stock held by founders is sometimes subject to purchase by other founders at a nominal price (or, alternatively, fair market value at the time of departure) in the case of the stockholder’s departure from the start-up. 5.3 Taxation of Instruments In Japan, there are two types of stock options: tax-qualified (the capital gains rate applies and taxation is deferred until the shares underlying the option are disposed) and non-tax qualified (the ordinary income tax rate applies and the exercise of the stock options constitutes a tax - able event). Until recently, tax-qualified stock options had been impractical and were ill-suited for start-ups seeking M&A exits rather than IPO exits, but certain administrative and legislative actions taken in 2023 and 2024 have made stock
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