Investing in a Korean Startup Through RCPS: Key Terms Foreign Investors Should Include in the Investment Agreement

Redeemable convertible preferred shares are the standard instrument for venture investment in Korean startups. For foreign investors used to US-style preferred stock, RCPS looks familiar: a liquidation preference, conversion into common shares, anti-dilution protection, and a redemption right. Korean company law, however, places limits on several of these features. Recent Supreme Court decisions have also redrawn the line between investor protections that courts will enforce and those they will strike down. This article explains the terms a foreign investor should include in a Korean RCPS deal, and how to draft them so that they actually work.

1. Why RCPS Is the Default Instrument in Korea

Korean law allows companies to issue classes of shares with different rights to dividends, residual assets, voting, redemption, and conversion. RCPS combines three of these features:

• a preference over common shares for dividends and residual assets
• a redemption right, which lets the investor recover its investment if no exit occurs
• a conversion right into common shares, typically at an IPO or a sale

Korean venture capital funds and accelerators use RCPS almost universally, so founders and their advisors expect it. A foreign investor that proposes a US-style preferred stock term sheet will usually see it translated into RCPS terms.

2. Where the Terms Must Appear: Articles of Incorporation vs. Investment Agreement

A common mistake is to put the share terms only in the investment agreement.

• Share rights belong in the articles of incorporation. Under the Commercial Act, the rights attached to a class of shares must be set out in the articles. This includes the preference, the redemption price, period and method, and the conversion terms and ratio. A redemption or conversion term that appears only in the investment agreement may not bind the company as a right attached to the shares.
• New shares for an investor require a basis in the articles. Issuing new shares to a third party, rather than to existing shareholders pro rata, requires a provision in the articles. It also requires a managerial purpose, such as raising capital or introducing new technology, and notice to existing shareholders at least two weeks before the payment date.
• The investment agreement carries the contractual covenants. These include information rights, consent rights, founder undertakings, use-of-proceeds restrictions, and exit provisions.

In practice, the articles often need to be amended by special shareholder resolution before closing. The share terms are then registered with the corporate registry after issuance.

Key takeaway: Check the target’s articles before signing. If the RCPS terms are not authorized there, make the amendment a condition to closing.

3. Redemption: The Right That Often Cannot Be Exercised

The redemption right is the feature foreign investors most often overestimate.

• Redemption only out of distributable profits. Under the Commercial Act, a company may redeem redeemable shares only out of its distributable profits (배당가능이익). Most early-stage startups have accumulated losses and no distributable profits. Their investors therefore cannot be paid on redemption, even if the redemption date has arrived and the investor has demanded payment.
• Investor-requested redemption must be authorized. If the investor, rather than the company, is to have the right to demand redemption, the articles must provide for it.
• Guaranteed returns from the company are invalid. A separate agreement by the company to return the investment regardless of distributable profits will not save the position. The Supreme Court has held that such agreements are invalid against the company (see Section 6).

Drafting points:

• Redemption price. Define it as the investment amount plus a stated annual return, net of dividends already paid.
• Partial redemption and deferral. Provide that, if distributable profits are insufficient, redemption is made partially and the unpaid balance remains outstanding until profits become available. Late-payment interest should accrue on the unpaid amount.
• Leverage. Link a failure to redeem to other remedies, such as enhanced consent rights or a put option against the founders, within the limits discussed in Sections 6 and 7.
• Accounting treatment. Depending on its terms, RCPS may be classified as a liability rather than equity under Korean accounting standards. This can affect the company’s financial ratios and its eligibility for some government programs.

Key takeaway: Treat redemption as leverage, not a guaranteed exit. Price the investment accordingly.

4. Conversion and Anti-Dilution Adjustment

• Conversion ratio. RCPS normally converts into common shares at a 1:1 ratio, subject to adjustment. The conversion period and any automatic conversion trigger, such as an IPO, should be set out in the articles.
• Anti-dilution adjustment. Korean RCPS commonly adjusts the conversion price if the company issues shares at a lower price later (a down round). It can also adjust the price if the IPO price or the company’s performance falls below an agreed threshold.
• Choice of formula. Specify whether the adjustment is full ratchet or weighted average, and list the excluded issuances, such as employee stock options and conversions.
• Par value limit. On conversion, the total issue price of the new common shares must equal that of the converted preferred shares. Adjustments that would push the effective issue price per common share below par value raise company-law issues. This is relevant where the company’s par value is high.
• Basis in the articles. Refixing terms should have a clear basis in the articles and the board resolution approving the issuance, not only in the investment agreement.

5. Liquidation and Dividend Preferences

• Dividend preference. Specify whether the preference is cumulative or non-cumulative, and whether the shares participate in further dividends with common shares.
• Liquidation preference. Specify the amount, typically 1x the investment plus unpaid dividends, and whether the preference is participating or non-participating.
• Sale of the company. The preference over residual assets in the articles applies on a formal liquidation of the company. Many exits take the form of a share sale, so the investment agreement and a shareholders’ agreement among the main shareholders should include a deemed liquidation clause. This allocates sale proceeds according to the preference waterfall and should be supported by drag-along and tag-along rights.

6. Consent Rights and Covenants: What Korean Courts Will Enforce

Korean law applies the shareholder equality principle. An agreement giving one shareholder rights superior to other shareholders of the same class is, in principle, invalid against the company. Supreme Court decisions in July 2023 clarified how this applies to venture investment agreements.

Consent rights can be valid. In one decision, an investor in RCPS had a right to consent before the company issued new shares below the investor’s price, with early redemption and a penalty for breach. The Supreme Court held that differential treatment of shareholders can be justified in special circumstances. It considered:

• the content, background, and purpose of the arrangement
• its necessity for the company as a whole
• whether it infringes other shareholders’ essential rights
• whether the disadvantaged shareholders consented

Where the investment was essential to the company, the consent right was necessary to obtain it, and other shareholders suffered no real disadvantage, the consent right was valid. A pre-agreed damages amount for breach was also enforceable.

Guaranteed recovery of the investment is not. In other decisions in July 2023, the Supreme Court held two kinds of company obligations invalid against the company, even where all shareholders had consented:

• an obligation to return the investment if a business milestone was missed
• an obligation to pay the investment amount plus a premium regardless of the company’s fault

Such terms effectively guarantee the investor’s return of capital, which undermines the company’s capital base. The Court also held that the same obligations undertaken by the company’s representative director or major shareholder personally are not subject to the shareholder equality principle, and may be enforceable against those individuals.

Drafting points:

• Keep consent rights focused. Limit them to matters that genuinely protect the investment: new issuances, changes to the articles, mergers, disposal of key assets, related-party transactions, and insolvency filings. Record in the agreement why they are needed.
• Link remedies to breach. Tie remedies to a breach by the company, rather than to events outside its control.
• Separate obligations by party. Do not rely on the company to guarantee the return of capital. Where a guaranteed exit is commercially required, consider placing that obligation on the major shareholders, subject to the rules in Section 7.

7. Founder Obligations and the New Joint-Liability Rules

Korean investment agreements traditionally made the founder a party as an “interested person”, jointly liable with the company for its obligations. This practice has been restricted:

• Regulated investors. Since December 30, 2025, the Venture Investment Promotion Act prohibits venture investment companies, venture investment funds, individual investment associations, and accelerators from imposing joint liability on third parties, such as founders, for the company’s obligations.
• Exceptions. Joint liability remains possible for specified grounds, such as false representations or misuse of investment funds, where the founder acted intentionally or with gross negligence.
• Other investors. New technology business finance companies are subject to self-regulatory guidelines, and legislation is pending.

A foreign investor that is not one of these regulated entities may not be bound by the statutory restriction. However, these rules now set the market standard, and Korean founders and co-investors will expect the same treatment.

Drafting points: Limit founder liability to the founder’s own misconduct, such as fraud, intentional misrepresentation, misuse of funds, or breach of non-compete and lock-up obligations. Cap it, and address the founder’s personal obligations separately from the company’s.

8. Exit Rights

• Lock-up and right of first refusal. Prevent founders from selling shares without the investor’s consent, with a right of first refusal and a tag-along right if they do.
• Drag-along. Allow a qualified majority of investors to require all shareholders to join a sale, with the proceeds allocated according to the preference waterfall.
• IPO covenant. Set a target IPO period. If it is missed, the investor’s remedies, such as redemption or a put option against the major shareholders, become available.
• Put option. A put option against the major shareholders is commonly used where company-level redemption is uncertain. It must be drafted with the shareholder equality rulings and the joint-liability rules in mind.

9. Foreign Investment Filings and Tax

• Foreign investment report. Acquiring 10% or more of a Korean company with an investment of KRW 100 million or more is a foreign investment under the Foreign Investment Promotion Act. The investor must file a report with a designated foreign exchange bank before paying for new shares.
• Smaller investments. Investments below these thresholds are handled as securities acquisitions under the Foreign Exchange Transactions Act, through a foreign exchange bank.
• Conversion. Conversion of RCPS into common shares does not usually require a new investment report. However, changes in shareholding should be reported where required.
• Redemption payments. Any amount paid on redemption above the investor’s acquisition cost is generally treated as a deemed dividend for Korean tax purposes. It is subject to Korean withholding tax at the domestic rate, reduced under an applicable tax treaty.
• Share sales. Gains from selling the shares are Korean-source income and are subject to Korean tax unless a treaty provides an exemption. Securities transaction tax also applies to sales of unlisted shares.
• Remittance. Foreign investment registration supports the remittance of dividends, redemption amounts, and sale proceeds abroad. Make sure the filings are completed at the outset so that the exit is not delayed.

10. Governing Law and Dispute Resolution

The rights attached to the shares are governed by Korean company law, whatever the contract says. The investment agreement itself may choose a foreign governing law and international arbitration. However, provisions that depend on Korean corporate law, such as redemption, conversion, preferences, and consent rights, will be tested against Korean law in any case.

Many foreign investors choose:

• Korean law for the agreement, to avoid inconsistency
• arbitration seated in Seoul or Singapore for disputes

Both Korea and the main investor jurisdictions are parties to the New York Convention, so arbitral awards are enforceable in Korea.

11. Checklist

Item	Where it should appear	Key point
Class of shares and preferences	Articles of incorporation	Amend before closing if needed
Redemption price, period, method	Articles and agreement	Subject to distributable profits; provide for partial and deferred redemption
Conversion and refixing	Articles and board resolution	Define the formula and exclusions; check the par value limit
Deemed liquidation	Agreement and shareholders’ agreement	Allocate sale proceeds through the waterfall
Consent rights	Agreement	Limit to protective matters; record the justification
Remedies for breach	Agreement	Tie to company breach; avoid guaranteed return of capital
Founder obligations	Agreement	Limit to misconduct; align with the joint-liability rules
Exit rights	Agreement and shareholders’ agreement	Lock-up, ROFR, tag, drag, IPO covenant
Foreign investment report	Before payment	Required at 10% and KRW 100 million
Tax	Agreement and structuring	Deemed dividend on redemption; treaty relief

12. Conclusion

RCPS gives foreign investors in Korean startups familiar protections, but Korean law shapes how far they go:

• Redemption is limited by distributable profits.
• Conversion terms need a basis in the articles.
• Investor-specific rights against the company are valid only if they can be justified under the shareholder equality principle.
• Founder liability is now restricted by statute for most domestic investors.

Key takeaway: Draft the share terms and the investment agreement together. Make sure every protection you rely on has a basis that a Korean court will enforce.