[Startup Must-Know Laws] Understanding the Differences Between Korean and Silicon Valley Investment Contracts

Key Differences Between Korean and Silicon Valley Investment Contracts
Essential Considerations for Overseas Investment and Global Expansion

Attorney Heecheol An, DLG Law Firm

As Korean startups increasingly receive investments from investors in places like Silicon Valley, USA, they often encounter both Korean-style and Silicon Valley-style investment contracts. Since there are significant differences between the two types of contracts, it is important for startups to fully understand these when receiving investments from overseas or expanding internationally.

First, when valuing a company, Korea often uses the 'Outstanding' method, while Silicon Valley commonly uses the 'Fully Diluted' method. The Outstanding method calculates equity based on the actual issued shares. The Fully Diluted method assumes that all convertible bonds, stock options, and other unissued securities are fully issued for the calculation.

Second, the types of shares that investors typically acquire through investment differ. In Korea, investors acquire redeemable convertible preferred shares, which include redemption rights, conversion rights, and preference rights, whereas in Silicon Valley, investors tend to acquire convertible preferred shares without redemption rights more frequently.

Third, regarding anti-dilution protection, Korea mainly uses the full ratchet method, while Silicon Valley primarily uses the weighted average method. The full ratchet method lowers the conversion price for existing investors to match the price per share of new investors, whereas the weighted average method adjusts the conversion price by considering multiple factors.

Fourth, differences appear in the distribution of residual assets upon liquidation. Silicon Valley contracts include the concept of 'deemed liquidation,' which encompasses mergers and acquisitions, changes in control, and other events within the scope of liquidation, granting investors the right to receive amounts exceeding their invested capital upon liquidation. However, such deemed liquidation provisions may violate the capital maintenance principle under Korean Commercial Law.

Fifth, tag-along rights clauses are rarely included in Korean investment contracts but are often present in Silicon Valley investment contracts. However, in Silicon Valley-style contracts, exercising tag-along rights typically requires the consent of a majority of shareholders and board approval, making it difficult for a single investor to exercise them unilaterally.

Finally, Korean investment contracts often include penalty clauses, stock purchase rights, and joint guarantees, whereas Silicon Valley contracts frequently do not include these provisions.