SOUTH KOREA Law and Practice Contributed by: Ohryung Lee, Joceline Park, Maria Chang and Hakrae Cho, Bae, Kim & Lee LLC
funds, a fund of funds is often used in equity financing for innovative technology businesses, start-up companies, and privately held SMEs. In this way, the government indirectly supports equity financing activities.
Act now permits venture companies to purchase their own shares, even without distributable prof - its, provided that such purchases do not result in capital impairment. This change is expected to promote more active utilisation of RSUs by venture companies moving forward. 5.2 Securities The most commonly used method to align the interests of founders/key employees with the interests of the company is the grant of stock options. A recent development is the grant of RSUs to this end. In both cases, it is common to stipulate that the conditions for exercising/ granting stock options/RSUs are linked to the period of service. To take stock options as an example, when a stock option with the right to receive a total of 100 new shares is granted, a condition attached can be that the stock option with respect to the first 50 shares can be exer - cised after two years of service, and the stock option with respect to the remaining 50 shares can be exercised after four years of service. The conditions for exercising/granting stock options/ RSUs can also be linked to other performance indicators. 5.3 Taxation of Instruments Under Korean tax laws and regulations, in prin - ciple, the difference between the market price of shares at the time of exercising the stock option and the exercise price is taxed as earned income (at the rate of up to 49.5%), but special measures provide for tax benefits with respect to stock options granted to officers and employ - ees of a venture company registered with the Ministry of SMEs and Start-Ups. These special measures include: • a tax exemption (of KRW200 million per year); • payment in instalments (for five years); and
5. Employment Incentives 5.1 General
The most frequently used method to procure the founders’/key employees’ long-term com - mitment is the grant of stock options. Under the applicable laws and regulations of Korea, officers or employees must have worked at a company for a minimum of two years to exer - cise their stock options. A separate stock option agreement can be executed to require a longer period of service as a condition for exercising all or part of the stock options. In recent years, the grant of restricted stock units (RSUs) has been on the rise. An RSU refers to the right to receive treasury shares held by the company if certain conditions are met. In this case, a method typically used is the incremental grant of shares upon the fulfilment of conditions linked to the period of service. Effective 10 July 2024, an amendment to the Special Act on the Promotion of Venture Busi - nesses ( “Venture Business Act” ) was enacted, facilitating the use of restricted stock units (RSUs) by venture companies. To grant RSUs, a venture company must acquire treasury shares as the source of funding. However, under the Korean Commercial Code, the acquisition of treasury shares was previously limited to the extent of distributable profits, which posed a practical challenge for early-stage venture com - panies, which often struggle to generate profits. The recent amendment to the Venture Business
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