[Startup Must-Know Laws] Performance-Based Stock System for Venture Companies under the Venture Business Act

Attorney Ahn Hee-cheol

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The most widely used method for employee stock compensation in startups has been stock options, also known as 'stock options.' However, in the US and other countries, Restricted Stock (RS) has been more actively utilized to attract and reward top talent. Through the amendment to the Special Act on the Promotion of Venture Businesses, which came into effect on July 10 last year, a performance-based stock system similar to the RS system used in the US has been introduced in South Korea. This system is designed to grant shares to employees upon meeting certain conditions, providing a more substantial incentive effect than traditional stock options.

The amendment to the Venture Business Act relaxed requirements to allow venture companies under the Act to acquire treasury shares for the purpose of granting performance-based stocks within limits where no capital impairment occurs, even if there are no distributable profits, and established a legal basis for utilizing performance-based stocks.

To grant performance-based stocks, the following procedures must be followed. First, the venture company must include related provisions in its articles of incorporation (such as whether a performance-based stock grant contract can be concluded, the type and number of shares to be granted, eligibility criteria for recipients, restrictions and conditions stipulated in the contract, conditions for contract cancellation or termination, etc.) and register them. Second, a special resolution of the general shareholders' meeting must be passed to grant performance-based stocks. The special resolution must include the names of the recipients, the type and quantity of shares for each recipient, and the restrictions and conditions stipulated in the contract. Third, after the special resolution of the shareholders' meeting, the venture company and the recipient must enter into a performance-based stock grant contract. Finally, the venture company must report this to the Minister of SMEs and Startups.

Performance-based stocks can only be granted to employees of the venture company and cannot be given to outsiders. Additionally, recipients must remain employed for at least two years from the date of the shareholders' meeting resolution to acquire or transfer the shares. This is designed to prevent individuals who leave after a short period from receiving shares. The performance-based stock system is an incentive designed to help venture companies retain key personnel long-term. It complements the limitations of traditional stock options by providing substantial compensation effects and is expected to be an effective system for attracting talent and encouraging long-term employment of employees.

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