[Startup Must-Know Laws] Structure and Significance of Startup Investment Agreements

Heecheol Ahn, Attorney

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When a startup signs a share subscription agreement to attract external investment, it may appear to be a simple investment contract in which the company issues new shares and investors acquire them in exchange for funding. However, this agreement goes beyond a mere promise to purchase shares. The primary objective of a share subscription agreement is not simply the payment of investment funds. Instead, it is meticulously designed to specify how the company will be operated after the investment and to determine who bears which responsibilities. For this reason, share subscription agreements typically include not only the company but also key stakeholders such as the CEO, co-founders, and largest shareholders as parties to the agreement.

In a corporation, even though shareholders own the company, day-to-day management is handled by the board of directors and the CEO. Investors generally base their decisions not only on the company’s technology or business model but also on the capabilities, credibility, and execution of the founders and key management team. Nevertheless, if the contractual responsibilities are assigned solely to the company, the real decision-makers whom the investors trusted could be legally exempt from liability. For example, if critical information was omitted during the investment process, if the funds were used for purposes other than originally intended, or if a key founder suddenly left the company, investors would only be able to hold the company accountable unless there is a separate agreement.

Therefore, in practice, share subscription agreements are structured to impose obligations on stakeholders, such as representations and warranties, non-compete clauses, restrictions on share transfers, requirements for prior consent on management matters, as well as provisions for indemnification and joint liability. The core component is the representation and warranty clause. The company and its stakeholders must confirm that the information forming the basis of the investment decision is true and free of material omissions. If it is later revealed that this information was inaccurate, investors can claim damages on that basis. To prevent unauthorized departures or participation in competing businesses by stakeholders, non-compete and concurrent position restrictions are stipulated. To avoid sudden changes in the ownership structure, it is also standard to include restrictions on share transfers, rights of first refusal, and tag-along rights. Furthermore, by requiring the investor’s prior consent for significant management actions such as amendments to the articles of incorporation, follow-on investments, or the disposal of major assets, the investor is ensured a certain degree of control.

When a founder or CEO signs as a stakeholder, it means more than simply signing on behalf of the company; in some cases, it means they bear direct personal obligations and liabilities. Before executing the agreement, it is essential to confirm who will be designated as stakeholders, which provisions will entail personal liability, and whether there are any restrictions that may affect future share disposals, stock option grants, management decision-making, or personnel management.

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