[Startup Must-Know Laws] Legal Responsibilities of Founders in Investment Agreements

Key Legal Points Every Startup Founder Must Know About Share Subscription Agreements
Understanding the Hidden Legal Responsibilities and Risks
Why Thorough Review Is Crucial Before Signing with Investors

Heecheol Ahn, Attorney at Law, DLG Law Firm

While a share subscription agreement signed during a startup's fundraising may appear to be a simple financing contract, in reality, it is structured to impose significant legal responsibilities on "stakeholders," including the founders. Stakeholders typically include co-founders and major shareholders, and as parties to the investment agreement, they assume various responsibilities alongside the company, such as representations and warranties, performance of obligations, and indemnification.

This structure was designed to compensate for investment risks arising from the principle of "separation of ownership and management" under commercial law. Since, under the law, the company is liable even if the founder trusted by the investor leaves the company after signing the contract or misuses the investment funds, it is difficult to hold the individual founder personally responsible. To address this, investment agreements include stakeholders such as founders as parties to the contract and insert clauses for joint and several liability.

If the information provided by stakeholders about the company is inaccurate or incomplete, investors may claim damages for breach of representations and warranties by the stakeholders. Investors must also be granted rights of first refusal or tag-along rights when shares are sold, and stakeholders are restricted from engaging in similar industries for a certain period. In addition, major decisions such as follow-on investments or board composition require the investor’s prior written consent.

Many founders, in their haste to secure investment, often sign contracts without thoroughly reviewing them. However, a contract containing joint and several liability clauses is not merely a funding agreement but a legal document that imposes substantial personal responsibility on the founder. Founders must check the following four points: first, whether they are specifically designated as stakeholders; second, whether there are clauses that impose personal liability; third, whether strict liability is included; and fourth, whether there are provisions that could hinder future management plans.

For founders, a share subscription agreement is not simply a contract to receive funds, but a promise to establish a partnership with investors and to accept the corresponding responsibilities. Founders must remember that signing such a contract without understanding its structure and content?which can determine the survival and growth of the startup?only increases their own future legal risks.