SOUTH KOREA Law and Practice Contributed by: Ohryung Lee, Joceline Park, Maria Chang and Hakrae Cho, Bae, Kim & Lee LLC
• the application of capital gains tax (at the rate of 27.5%) at the time of transfer of shares acquired through the exercise of a stock option, rather than tax on earned income at the time of exercising the stock option. 5.4 Implementation If a company already has an employee incentive programme in place at the time of due diligence, or if a company plans to implement such pro - gramme during the investment process, such programme should be recognised as a dilution factor and reflected in the number of shares to be acquired before proceeding with the invest - ment. In contrast, if an employment incentive programme is to be introduced after the venture capital investment has already been made, the programme would be subject to the investor’s right to consent. Typically, an investor exits through an IPO or third-party sale. Depending on the specific situ - ation at the time of exit, the investor can choose either of these options, or consider a dual track by pursuing both options at the same time. In addition, RCPS investors may consider exercis - ing their redemption rights, or they may exercise a put option, if such options are provided in their investment agreements. In Korea, when an investor makes a venture cap - ital investment, it is not common for all share - holders to enter into a shareholders’ agreement; instead, it is more customary for each investor to execute an investment agreement only with the company and the largest shareholder/founder without other shareholders. As a result, there is often no one-size-fits-all contractual clause 6. Exits 6.1 Investor Exit Rights
applying to the relationship among all sharehold - ers in the event of an IPO or trade sale. More generally, each shareholder is entitled to exer - cise certain rights (eg, the right to demand a qualified IPO to be effected within a certain time period and/or a put option) against the company and/or its major shareholder/founder. It is not common for an investment agreement executed by a Korean venture capital investor to include an agreement to limit the disposal of venture capital investors’ shares, but the inves - tor may sometimes be deprived of certain rights granted under the investment agreement (eg, consent right, consultation right or right to nomi - nate directors) if their shareholding percentage in the company falls below a certain threshold. 6.2 IPO Exits According to the 2024 Venture Capital Market Brief, published by the Korea Venture Capital Association, 54.4% of the investments recov - ered by venture capital investors were recovered through third-party sales, whereas 30.6% of investments were recovered through IPOs. Many start-ups have an IPO as their ultimate goal, and the average time for start-ups to successfully go public is generally thought to be about 10 to 14 years. The reason why it takes so long is not due to any legal hurdles, but because it takes a significant amount of time, commercially and practically, for a start-up to grow into a compa - ny that satisfies the qualitative and quantitative requirements to pass the listing eligibility review by the Korea Exchange (KRX). Since KRX listing is relatively attractive in terms of initial cost and maintenance costs, almost all Korean start-ups established under Korean law choose to be listed in Korea, unless there is a particular need to raise capital overseas. As of 2024, the proportion of venture capital-backed
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