Redemption Rights Beyond Enforceability: Risk Allocation in Venture Capital Contracts

Transplanting Venture Capital Contracts Across Jurisdictions

While many jurisdictions have adopted contractual structures similar to those originating in Silicon Valley, their interpretation and application often differ depending on local legal frameworks. As a result, identical provisions may give rise to distinct legal issues across jurisdictions. 

In line with the literature examining cross-border differences in venture capital contracting, a recent paper by Kailiang Ma, Redemption Rights in Chinese VC Deals, analyzes how redemption rights in venture capital agreements are treated differently in the United States and China and argues that uncertainties surrounding their enforceability—particularly in China—should be clarified. South Korea faces similar challenges in adopting flexible, contract-based venture capital arrangements due to its mandatory, rule-based corporate law framework. 

Redemption Rights in the Context of Korean Law

Redemption rights are commonly included as protective provisions in venture capital agreements, serving as exit mechanisms when liquidity events do not occur. Since liquidation preferences are typically triggered only upon a liquidity event, redemption rights provide an alternative exit if an acquisition or IPO seems unlikely. 

In Korea, as in China, redemption rights are frequently included in venture capital agreements as fallback exit mechanisms. While the paper explains that redemption rights in China are often implemented through earnout agreements or value adjustment mechanisms, Korean investors commonly rely on statutory and contractual redemption rights. Venture capital investors often invest through redeemable convertible preferred shares (RCPS), which grant them redemption rights under certain conditions. In practice, however, these rights are rarely exercised, mainly because startups often lack sufficient distributable profits, a statutory requirement for redemption. 

To address this limitation, investors frequently supplement redemption rights with put options or similar contractual arrangements involving founders. These provisions allow investors to recover their investments if founders breach contractual obligations, such as investors’ approval rights over important corporate decisions. Some agreements also require founders or companies to pay liquidated damages equal to the investors' original investment amount.

Similar Issues, Different Angles

Although redemption rights in Korea are structured similarly to those in China, the legal friction surrounding them arises from slightly different doctrinal concerns. While discussions in China focus more on the principle of capital maintenance, the Korean debate has centered on the principle of equal treatment of shareholders. 

In Korea, disputes often arise not directly from redemption rights themselves but from investors’ approval rights over corporate decisions. Because contractual redemption rights are typically triggered by breaches of these approval rights, the legal discussion has focused on whether granting such rights to investors violates the principle of equal treatment of shareholders. 

Amid these controversies, the Korean Supreme Court clarified the conditions under which such agreements may be permissible. The Court held that investors’ approval rights and related redemption mechanisms may be valid if (i) the company demonstrates a compelling need to secure funding through such arrangements, (ii) no harm is caused to other shareholders, and they may even derive indirect benefit from the arrangements, and (iii) the arrangements do not undermine statutory shareholder rights. The Court further held that obligations stemming from separate contractual arrangements do not necessarily violate the principle of capital maintenance. 

To what extent do VC investors need to bear investment risks?

 The Korean court’s decisions discussed above reflect judicial efforts to recognize contractual arrangements in investment agreements, free from constraints imposed by mandatory corporate law principles. The next key question is how redemption rights should be designed to strike an appropriate balance among the interests of VC investors, startup founders, and other common shareholders. 

While redemption rights serve as risk-management tools for investors, their exercise may create conflicts of interest with common shareholders, including founders and employees. Because the design of redemption rights often reflects the relative bargaining power of investors and founders, additional scrutiny may be warranted in markets where venture capital investors hold stronger leverage due to limited capital availability. Moreover, as venture capital investors frequently participate in startup governance by appointing directors, they are at least partially involved in decisions affecting a startup’s success or failure. 

Given that venture capital investors operate in a high-risk, high-return model, it is worth considering the extent to which investors should be protected against the downside risk through contractual mechanisms. 

Designing Well-Balanced Redemption Rights

 As courts in Korea and China continue to clarify the validity and enforceability of redemption rights, the next stage of discussion may focus on how to design these rights in a manner that mitigates conflicts of interest between venture capital investors and common shareholders. 

Given that freedom of contract is the cornerstone of venture capital investments, it may be impractical to mandate specific forms of redemption rights through hard-law rules. Instead, soft-law mechanisms—such as industry norms, model agreements, and best practices— may encourage stakeholders to adopt more balanced redemption rights ex ante. 

From an ex post perspective, fiduciary duty constraints may also play a role. As illustrated by the Delaware Court of Chancery in The Frederick Hsu Living Trust v. Oak Hill Capital Partners, fiduciary duty may restrain the excessive exercise of redemption rights to the detriment of common shareholders. Although fiduciary duty constraints may apply only when venture capital investors exercise control, they nevertheless provide an important complementary mechanism. 

This suggests that future discussions of redemption rights should move beyond questions of enforceability and instead focus on developing balanced governance frameworks that align investor protection with appropriate risk allocation in venture capital agreements.

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Narae Lee is a lawyer and an Adjunct Professor at Hanyang University School of Law.

This blog is based on a discussion held at the Sixth LawFin Workshop U.S. Venture Capital Contracting Goes Global: Perspectives from Asia and Latin America on 18th March 2026. Visit the event page to explore more conference-related blogs.

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