SOUTH KOREA Law and Practice Contributed by: Ohryung Lee, Joceline Park, Maria Chang and Hakrae Cho, Bae, Kim & Lee LLC
3. Investments in Venture Capital Portfolio Companies 3.1 Due Diligence In most cases, venture capital fund investors conduct a level of due diligence similar to that conducted for a typical M&A transaction. In the case of targets that obtain venture capital investments, funding typically occurs over mul - tiple rounds, so at each stage, it is necessary to take a close look at the terms of the investment agreement(s) executed in the previous round(s). In addition, due to the nature of venture capital investments, target companies are often start- ups that are tech-focused or based on online platforms, so IP and personal information pro - tection are often key areas of focus in due dili - gence. 3.2 Process It usually takes two to four months (including due diligence) for each round to be closed. However, it is difficult to determine a uniform timeline because the progression of a deal dif - fers for each investment, depending on various factors and requirements (the size of the invest - ment, whether existing investors participate in the new round with multiple investors, whether joint counsel is used, whether the consents of all existing shareholders are required, etc). 3.3 Investment Structure Venture capital firms prefer to invest in redeem - able convertible preferred stock (RCPS), which is a type of preferred stock with both redemption right and conversion right, or convertible pre - ferred stock (CPS), which is a type of preferred stock with conversion right only, at an early stage of a company’s development. In addition, ven - ture capital firms often make investments in the form of convertible bonds or bonds with warrant.
Securities with these characteristics are pre - ferred at an early stage because they provide better opportunities to (i) secure exit by providing the holder with a priority in payment of distribu - tions in the event of liquidation or occurrence of a redemption-triggering event, and (ii) realise the upside potential of the target company with the right to convert securities into common stock. 3.4 Documentation Historically, there was no standardised form of agreement for venture capital investment in South Korea. As a result, in many cases (espe - cially if start-ups did not hire professional legal advisors, which was often the case), investment agreements and other legal documents were often poorly drafted or created by the investors themselves without assistance from lawyers. There was therefore a demand for improvement in the quality of investment agreements, and, as a result, the Korea Venture Capital Association, in collaboration with the Korea Business Angels Association and the Korea Accelerator Associa - tion, prepared and published a standard set of venture investment agreements to be used for different stages of investment (early, mid-term, and late investments). At present, venture capi - tal firms in Korea tend to enter into investment agreements by using these standardised forms, which are then customised to meet the needs of a given investment. 3.5 Investor Safeguards In general, venture capital firms try to secure downside protection through liquidation/divi - dend distribution preferences, conversion rights (including customary adjustment to conversion price), redemption rights, anti-dilution protec - tion, consent rights over material matters, put options against the major/controlling sharehold - er of the target company, and information rights.
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