Venture Company Stock Options, Valuation Method Shifts to Market Price Focus

[Asia Economy Reporter Donghyun Choi] The valuation of stock options issued by venture companies will shift to a market price-based approach.

The Ministry of SMEs and Startups announced on the 15th that the revision of the Enforcement Decree of the "Special Measures for the Promotion of Venture Businesses Act," which includes this change, has passed the Cabinet meeting.

Until now, when venture companies granted stock options to their executives and employees or when these stock options were exercised, only the "supplementary valuation" method stipulated in Article 54 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act was recognized. This method evaluates stocks by considering assets, liabilities, and net profit or loss.

The venture industry has consistently pointed out the difficulty in reasonably pricing stock options. This is because venture companies often have weak financial structures in their early stages and cannot properly reflect rapidly changing corporate values during periods of high-speed growth after receiving investments. For example, for Company A, which develops online games, the per-share market price calculated using the supplementary valuation method as of December last year was 2,503 KRW. However, the market price calculated during an investment round in September last year was about 14 times higher at 34,237 KRW.

The Ministry of SMEs and Startups has improved the system to allow the use of various methods such as actual transaction prices stipulated in Article 60 of the Inheritance Tax and Gift Tax Act. In addition to the supplementary valuation method, methods such as transaction prices with actual sales and valuation methods for similar listed companies can now be used to evaluate the market price of unlisted stocks according to the company's circumstances.

This system improvement is part of the "Venture Supplementary Measures for Leapfrogging into the Global Top 4 Venture Nations," jointly announced by related ministries on August 26 last year. Based on this, the Ministry established and distributed a venture company stock option manual and standard contract in September last year. Furthermore, from this year, the tax-exempt limit on stock option exercise gains has been expanded from 30 million KRW to 50 million KRW. Tax benefits have also been expanded, including applying tax deferral special cases for stock options issued below market price. Additionally, amendments to the Venture Business Act are underway to improve the stock option system by distinguishing benefits for executives and employees from those for non-executives and employees.

Park Sang-yong, head of the Venture Innovation Policy Division at the Ministry of SMEs and Startups, said, “We are establishing an institutional foundation so that venture companies can attract talented personnel by utilizing stock options. We expect that the realistic market price valuation of stock options will enable venture companies to reasonably estimate market prices and thereby activate venture company stock options.”

This content was produced with the assistance of AI translation services.