Founder Vesting Clauses in South Korea: Four-Year Vesting, the One-Year Cliff and Call Options on Departure

Co-founders A and B set up a company and split the equity 50/50. Six months later, B changes their mind and leaves. Without a vesting clause in the shareholders agreement, B stays on as a 50% shareholder without contributing anything further to the company. (This is a hypothetical example for illustration.)

A stake held by a shareholder who no longer works for the company is called dead equity, and vesting clauses exist to prevent it. But the structure commonly described in startup guides causes problems if it is simply transplanted into a Korean company. Shares do not disappear on departure. A company buying a departing person’s shares directly is subject to treasury share rules. And a price set too low can lead to claims of invalidity or to tax issues.

This article first explains how vesting works and how to calculate it, and then sets out how actual Korean judgments have treated agreements to transfer shares on departure. The lower court judgments cited may be changed on appeal, and we were not able to confirm whether all of them are final.

What is vesting, and why put it in a shareholders agreement in South Korea?

Vesting means that the equity promised to a founder or employee is not fully recognized on day one. Final rights are recognized gradually, as the person serves for a set period or reaches certain milestones. Korean startup circles often call it “locking up equity” or an “anti-cash-and-run device.”

Vesting between shareholders is something the parties create by contract, so the result depends on the wording of the agreement.

A Korean court has explained why these clauses are used. The Seoul Central District Court stated that “the departure of co-founders is one of the greatest risk factors for a startup company, and the departure of key personnel who share technology and ideas while holding a meaningful stake threatens the growth of the company; it therefore appears natural that, to prevent this, a founders agreement like this one is concluded, setting a mandatory period of service and providing that on breach a certain stake is transferred to the company at par value according to length of service” (Seoul Central District Court, June 25, 2020, 2019Na4532).

In that case, institutional investors were the first to ask the founders to sign the agreement (Seoul Central District Court, June 25, 2020, 2019Na4532). When a shareholder who no longer works for the company holds a large stake, decision-making can become difficult and later investors may be concerned.

Similar clauses are used for employee shareholders. Another judgment explains that “in so-called startup-type companies, there is a need to prevent the loss of human resources in advance, so to encourage long service by employee shareholders, many include a share purchase demand clause requiring shares to be transferred on breach of the service obligation” (Seoul Central District Court, July 15, 2025, 2024Na67353).

How are four-year vesting and a one-year cliff calculated?

The widely described structure is four-year vesting with a one-year cliff. After one year, 25% vests at once, and the remaining 75% vests at about 2.08% per month over the following 36 months (75% ÷ 36 months).

A cliff is the minimum period of service before any rights arise. With a one-year cliff, a person who leaves before completing one year has no vested shares.

Vested percentage by date of departure

The guide published by Stripe Atlas, a US startup formation service, says that most founders use four-year vesting with a one-year cliff, starting from the date of incorporation. This is not a standard set by law.

The clauses in actual Korean judgments differ

In the judgments in the table above, the service period ranged from three years to a period running past listing. We did not find a judgment that dealt with a clause vesting shares month by month.

Do unvested shares disappear automatically on departure?

No. Shares are property that can be transferred to others (Article 335(1) of the Korean Commercial Act), and leaving a company does not by itself end a person’s status as a shareholder. What a vesting clause creates is a contractual duty to transfer shares.

So the statement that “if you leave before one year, your stake goes to 0%” describes the result once shares have been transferred under the contract. Because the shares are issued first and bought back on departure, this structure is sometimes called reverse vesting.

What Korean courts order is also a transfer of shares. A judgment left in place by the Supreme Court ordered the departed directors to transfer their shares in exchange for payment of amounts calculated at par value (KRW 4,441,500, KRW 2,680,000 and KRW 2,680,000) and to notify the company of the transfer (Seoul Central District Court, June 25, 2020, 2019Na4532; Supreme Court of Korea, March 11, 2021, 2020Da253430).

A call option is a right, not a duty

An employee of a startup agreed with the representative director to stay for four years and to sell the shares “at the option of the representative director” in case of breach. One week after signing, the employee left and demanded that the representative director buy the shares for the acquisition cost of KRW 40.08 million. The appellate panel dismissed the claim, holding that the clause gave the representative director a right to buy, not a duty to buy (Seoul Central District Court, July 15, 2025, 2024Na67353).

In a similar case, the court of first instance found that the departing person had a right to demand a purchase and ordered payment of KRW 103 million (Uijeongbu District Court, October 24, 2025, 2023Gadan125567), but the appellate court set that aside. It read the clause as allowing a demand for return of the shares on payment of a fixed amount if the shares were to be recovered, and held that the price could not be claimed unless return was demanded (Seoul High Court, June 25, 2026, 2025Na211490).

Seen from the other side, if the holder of the buying right does not exercise it, the unvested shares also stay with the departing person. A departing person who wants the right to sell needs a separate put option.

If no exercise period is stated, how long can the option be exercised?

Call options are usually designed as a right that creates a sale by one party’s declaration of intent (see Article 564(1) of the Korean Civil Act). The Supreme Court of Korea treats the exercise period of a contractual share purchase right as an exclusion period. If the parties agreed on a period, the right must be exercised within it; if not, the period is determined by considering the nature and purpose of the contract and similar factors. The Court applied five years to the share purchase right in an investment agreement (Supreme Court of Korea, July 14, 2022, 2019Da271661). For a right to complete a land sale under a sale reservation, the period is ten years from the date the reservation was made, absent agreement (Supreme Court of Korea, November 10, 1995, 94Da22682, 22699).

We did not find a judgment deciding whether the exercise period of a departure-linked call option had expired. To reduce disputes, it is safer to state the period and the method, for example “by written notice within ○ months of the departure date.”

Until the option is exercised, the departing person remains a shareholder. The parties should also decide how to handle voting rights and dividends on unvested shares. The contract in the Supreme Court case provided that the representative director would hold the transferred shares temporarily for use in recruiting talent, and it also mentioned possible limits on voting rights (Supreme Court of Korea, March 11, 2021, 2020Da253430).

What if the departing person will not cooperate?

You can sue for a declaration of intent to transfer the shares and for notice of the transfer to the company (Seoul Central District Court, June 25, 2020, 2019Na4532). For electronically registered shares, you can sue for completion of the account transfer procedure (Suwon District Court, June 10, 2026, 2025Gahap11788).

Shares for which no certificates have been issued can be transferred by the parties’ declaration of intent alone, but to assert the transfer against third parties other than the company, the company must be notified, or must consent, by an instrument bearing a certified date. The transferor has a duty to give that notice. If the same shares are transferred to two people, the party whose certified-date notice reaches the company first, or who first receives certified-date consent, generally prevails (Supreme Court of Korea, September 14, 2006, 2005Da45537).

A transfer made without share certificates before six months have passed since the company’s incorporation or the payment date for new shares has no effect against the company (Article 335(3) of the Commercial Act). This period also needs checking if someone leaves right after incorporation.

Can the company itself buy back a departing person’s shares?

It is safer not to name the company as the buyer. An agreement to acquire treasury shares that does not follow the statutory requirements and procedures has no effect (Supreme Court of Korea, October 28, 2021, 2020Da208058).

To buy its own shares, a Korean company must act within the limit of distributable profits, must buy on an exchange or on equal terms according to the number of shares each shareholder holds, and must first obtain a resolution of the general meeting of shareholders (or of the board, if the articles of incorporation allow the board to resolve on dividends) (Article 341(1) and (2) of the Commercial Act). The exceptions for specific purposes (Article 341-2) are mergers and acquisitions of an entire business, the exercise of rights, the handling of fractional shares, and the exercise of shareholders’ appraisal rights.

An early-stage company that has not yet accumulated profits often has no distributable profits, and buying from one departing person alone does not fit the equal-terms requirement.

In a case where a company and a departing officer agreed that the shares would be bought at a set price, the Supreme Court of Korea held that the part under which the company would buy directly, and the resulting sale contract, were void. It held that a shareholder exercising a right under such an agreement does not fall under the appraisal right in Article 341-2, item 4 of the Commercial Act (Supreme Court of Korea, October 28, 2021, 2020Da208058). The validity of the part requiring a third party designated by the company to buy the shares was not challenged in that case, and the company was held liable for damages for failing to perform that obligation. A void company purchase agreement does not necessarily remove all of the company’s exposure.

There is also a startup case. An employee who subscribed for new shares from a company agreed to return the shares to the company on departure. The court held that, whatever its name or form, the agreement in substance provided for an acquisition of treasury shares, and it was void as a violation of a mandatory rule (Uijeongbu District Court, October 24, 2025, 2023Gadan125567). No appeal was taken on this part as against the company, so it became final (Seoul High Court, June 25, 2026, 2025Na211490).

Is it fine if the remaining founder buys?

Contracts between shareholders are not subject to treasury share rules, and the principle of shareholder equality does not apply directly to them. The Supreme Court of Korea held that “the principle of shareholder equality does not apply directly to the legal relationship between a shareholder and another shareholder or an individual director of the company,” and treated the effect of the part agreed with other shareholders as, in principle, separate from any invalidity of the part agreed with the company (Supreme Court of Korea, July 13, 2023, 2022Da224986).

The position differs if the third party is one in name only and the company’s money pays for the shares. If the funds come from the company and the gains and losses belong to the company, it is a prohibited acquisition of treasury shares even in a third party’s name (Supreme Court of Korea, May 16, 2003, 2001Da44109).

What about the company taking the shares back for free?

The Supreme Court of Korea has held that acquisitions that do not endanger a company’s capital base, such as acquiring its own shares for no consideration, are exceptionally allowed (Supreme Court of Korea, June 25, 1996, 96Da12726; Supreme Court of Korea, May 16, 2003, 2001Da44109). These are judgments from the era of the former Commercial Act.

Article 341-4 of the Commercial Act, in force since March 6, 2026, requires a company that acquires treasury shares to cancel them within one year, while allowing them to be held or disposed of under a plan approved by the general meeting of shareholders in specified cases such as employee compensation. The subject of the provision is “the company,” and only the administrative fine provision is limited to listed companies (Article 635(3), items 9 and 10). We did not find a judgment applying this provision to shares taken back for free. Treasury share changes are covered in How to Dispose of Treasury Shares in South Korea.

Is an agreement to buy back shares at par value enforceable?

None of the judgments we read for this article held a par value agreement void. There is, however, a case where an agreement to buy back shares at acquisition cost was held void because of how it was concluded and the gap in value.

Share transfer restrictions among shareholders are valid in principle

The Supreme Court of Korea held that “where shareholders agree among themselves to restrict the transfer of shares in part, the agreement does not entirely deny a shareholder’s ability to recover invested capital, and unless it violates public policy, it is in principle valid between the parties” (Supreme Court of Korea, July 10, 2008, 2007Da14193). By contrast, it held void an agreement banning all share transfers for five years after incorporation, because it entirely denied the ability to recover invested capital (Supreme Court of Korea, September 26, 2000, 99Da48429).

If a vesting clause is combined with a clause banning all disposals of shares throughout the service period, it should be checked against this judgment.

Judgments upholding the agreement

• A service clause among co-founders. Inside directors argued that it was an unfair juristic act, but the court did not accept that. Although it found that the representative director had led the signing, it pointed out that institutional investors had first asked for the agreement, that investors were involved in its content, and that the founders had discussed the interpretation and risks of the clause (Seoul Central District Court, June 25, 2020, 2019Na4532). The Supreme Court’s judgment does not contain a ruling on this issue (Supreme Court of Korea, March 11, 2021, 2020Da253430).
• A four-year agreement between co-founders. The court rejected the argument that a clause requiring a sale of all shares to the representative director at par value on departure within four years violated good faith by infringing the freedom of occupation and property rights (Seoul Eastern District Court, December 18, 2019, 2018Gadan128105).
• A departure restriction on an executive brought in as representative director. The court treated a clause requiring a sale to the other shareholders at par value as a contractual penalty and held that it did not violate public policy. It pointed out that there was no abuse of a superior position, that other stakeholders had the same clause, that the shares had a compensatory character in that they would belong to the executive if the contract was honored, and that a fair price was hard to determine at the time of contracting because the company had not yet been listed. This executive left after the listing (Suwon District Court, June 10, 2026, 2025Gahap11788).

A judgment holding the agreement void

An employee acquired shares at KRW 12,500 per share. Immediately after the company attracted investment at a valuation of KRW 600,000 per share, the employee signed a shareholders agreement with the representative director. It provided that if the employee ceased to work for the company before a listing or similar event, the shares would be sold at acquisition cost, and that on breach the employee would pay a penalty of KRW 1 billion and return the entire sale price.

The court valued the shares at no less than KRW 450,000 at the time of the contract, a difference of about 36 times. It also pointed out that the employee placed a fingerprint on the document without properly checking its contents, did not receive a copy, and was in a position of having to follow the representative director’s word. It concluded that the agreement was void as an unfair juristic act under Article 104 of the Civil Act, and that the share transfer contract based on it was also void (Seoul Central District Court, February 14, 2023, 2022Na20732).

The circumstances considered in the judgments, side by side

The table below compares the circumstances the judgments mentioned. Having a given circumstance does not decide the result. Nor is every employee agreement void: there are judgments rejecting employees’ arguments (Seoul Central District Court, July 15, 2025, 2024Na67353; Seoul Central District Court, May 21, 2026, 2024Gadan5392350).

If it is a contractual penalty, will the court reduce it?

An agreed amount for breach is presumed to be liquidated damages (Article 398(4) of the Civil Act), so calling it a penalty does not make it one. The en banc Supreme Court of Korea, by majority, maintained the precedent that a contractual penalty cannot be reduced by applying Article 398(2) of the Civil Act by analogy (Supreme Court of Korea (en banc), July 21, 2022, 2018Da248855, 248862). However, if the penalty is excessively heavy compared with the creditor’s interest in enforcing the obligation, part or all of it may be void as contrary to public policy, although a large amount alone is not a reason to void it (Supreme Court of Korea, January 28, 2016, 2015Da239324). If the amount is treated as liquidated damages, the court may reduce it (Article 398(2) of the Civil Act). In one case, a lower court’s reduction of the penalty for breach of a transfer restriction agreement to 10% of the agreed amount was left in place (Supreme Court of Korea, July 10, 2008, 2007Da14193). Other examples of contractual penalties are discussed in IPO Penalty Clauses in South Korea.

This is not a court’s holding, but a clause that takes even vested shares at par value may be more vulnerable to an unfairness argument than one limited to unvested shares. It is worth considering separate prices for vested and unvested shares.

Do you have to give up your shares even if you are dismissed?

Depending on the wording, yes. The Supreme Court of Korea left in place a lower court judgment holding that a service clause applied even to a dismissal that was not the director’s fault (Supreme Court of Korea, March 11, 2021, 2020Da253430).

The contract in that case distinguished voluntary departure from “departure that is not voluntary.” Other clauses expressly made breach and fault the conditions for termination and forfeiture of rights, but the service clause had no such language. On that difference, the court held that the service clause applied even to a no-fault dismissal. Inside directors dismissed on September 17, 2014 from a company incorporated on September 21, 2011 fell into the “two to under three years” bracket and had to transfer 50% of their shares at the par value of KRW 500 (Supreme Court of Korea, March 11, 2021, 2020Da253430; Seoul Central District Court, June 25, 2020, 2019Na4532).

What if someone is pushed out so that their shares can be bought cheaply?

Article 150(2) of the Civil Act provides: “Where a party who would benefit from the fulfillment of a condition brings about its fulfillment contrary to good faith, the other party may claim that the condition has not been fulfilled.” The Supreme Court of Korea said that good faith may be found to have been violated “where, in an unexpected situation that the parties could not have foreseen when agreeing on the condition, a party fails to give due consideration to the other party’s interests or takes a position contrary to its earlier conduct on which the other party reasonably relied, bringing about a result that is inequitable or cannot be tolerated in light of justice” (Supreme Court of Korea, March 11, 2021, 2020Da253430).

That argument was not accepted in that case. The representative director could not freely dispose of the transferred shares, voting rights were limited, and the dismissal was decided at a general meeting by shareholders including institutional investors (Supreme Court of Korea, March 11, 2021, 2020Da253430). The result might be different in a structure where the representative director alone decides on the dismissal and may freely dispose of the transferred shares.

What if you left because of the company’s fault?

This is not a share transfer case, but one judgment is informative. A founder who sold a company and agreed to work there for ten years left early and was sued for a penalty of KRW 900 million. The court did not hold the clause itself void, but found that the founder left because of wage arrears, demands to change working conditions and rejected leave requests on the acquirer’s side, so the founder was not at fault, and it dismissed the claim (Seoul Central District Court, June 19, 2026, 2025Gahap10084).

By contrast, where a clause excluded “retirement by the company rather than of one’s own will,” a person who had submitted a resignation and argued that it was caused by workplace harassment was found to have insufficient evidence (Suwon District Court, June 10, 2026, 2025Gahap11788). A similar result was reached where a separation agreement stated that it had been agreed of the person’s free will (Seoul Central District Court, May 21, 2026, 2024Gadan5392350). The wording of departure documents can also become evidence later.

Set out departure types separately

Can the same clause be used for employees?

It can, but there is more to check than with founders. Article 20 of the Korean Labor Standards Act provides: “An employer shall not enter into a contract that stipulates in advance a penalty or an amount of damages for the non-performance of an employment contract.”

An agreement to pay KRW 1 billion on breaking a promise such as ten years of service is a typical penalty prohibited by this provision and has no effect (Supreme Court of Korea, October 23, 2008, 2006Da37274, under former Article 27 of the Labor Standards Act). By contrast, an agreement to pay a certain amount and have it returned if the person leaves within a mandatory service period is assessed by considering how the period is set, the nature and amount of the money, and the purpose and background of the agreement. If it cannot be said to restrict the freedom to resign or to unfairly compel work, it is not a prohibited agreement (Supreme Court of Korea, March 11, 2022, 2017Da202272). The ten-year service and KRW 900 million penalty case discussed above was not treated as a violation of the Labor Standards Act, on grounds including that it was a share purchase agreement negotiated by the founder on an equal footing (Seoul Central District Court, June 19, 2026, 2025Gahap10084).

In a share case, a clause required an employee who broke a four-year service commitment to sell shares to the representative director. The court held that the clause merely allowed shares to be sold and the investment recovered, so it could hardly be seen as an agreement on a penalty or liquidated damages. The same judgment also described the clause as a kind of sanction for breach of the service obligation (Seoul Central District Court, July 15, 2025, 2024Na67353). The price this employee would receive was the acquisition cost, so it cannot be assumed that an employee clause with a price below acquisition cost would come out the same way. We did not find a Supreme Court judgment applying Article 20 to a share sale clause.

Clauses that go beyond the transfer of shares and require additional payment call for care. In the case held void above, the KRW 1 billion penalty imposed on the employee was also taken into account in finding the agreement void (Seoul Central District Court, February 14, 2023, 2022Na20732).

Stock options follow separate rules

A stock option may be exercised only after at least two years in office or employment from the date of the general meeting resolution (Article 340-4(1) of the Commercial Act). The Supreme Court of Korea held that “relaxing the requirement of Article 340-4(1) of the Commercial Act is not permitted even through the articles of incorporation or a special resolution of the general meeting.” In a case involving an unlisted company, it held that a person who has not completed two years cannot exercise the option, even if the person left office for a reason not attributable to them (Supreme Court of Korea, March 24, 2011, 2010Da85027).

A one-year cliff therefore cannot be applied to stock options as is. For venture businesses, two years is also the rule, with exceptions for death and for retirement or departure for reasons not attributable to the person, other than mandatory retirement age (Article 16-5(1) of the Special Act on the Promotion of Venture Businesses; Article 11-4(1) of its Enforcement Decree). Listed companies have separate rules as well (Article 542-3(4) of the Commercial Act). Under the Commercial Act, a shareholder holding 10% or more of total issued shares cannot receive stock options (Article 340-2(2)(i)), so vesting for founders with large stakes is usually set in a shareholders agreement.

Are there tax issues with a low buyback price?

There can be. If shares are transferred below market value, the buyer may face gift tax and the seller may face capital gains tax issues.

Whether co-founders are related parties for Korean tax purposes depends on their shareholdings and management relationship. Market value is also an issue for unlisted shares. We searched Korea’s National Law Information Center for judgments, tax tribunal decisions and official interpretations applying these provisions to a transfer of shares at par value on departure, and did not find any. It is safer to get tax advice before exercising a call option and, if possible, when the contract is drafted.

What should the contract say?

The checklist below is based on points actually disputed in the judgments.

One case shows why the start date matters. The contract said only that three years or more of service was required, and when the period started was disputed. Counting from the contract date meant less than two years, so all shares would be returned; counting from the hire date meant more than two years, so only 50% would be. The court took the hire date as the start and allowed only 50% (Seoul Central District Court, May 21, 2026, 2024Gadan5392350).

A vaguely worded term may be read narrowly. A clause required shares gifted to an executive to be gifted back to the company for free if the executive’s contract ended. The court found that applying it without any time limit would be very unfair, and limited it to terminations before a listing (Suwon District Court, June 10, 2026, 2025Gahap11788).

It also helps to settle how unvested shares are treated on a sale of the company (acceleration). The overall structure of investment contracts is covered in Common Stock Investment and Shareholders Agreements in South Korea and South Korea’s 2026 Standard Venture Investment Contracts: What Changed.

What does this mean for foreign founders and companies in IFEZ?

Foreign founders and foreign-invested startups in the Incheon Free Economic Zone (IFEZ), including Songdo International Business District, Cheongna International City and Yeongjong International City, often start from an overseas template. The points below are drawn from the Korean judgments above. This article does not cover foreign law.

• Check how the template treats unvested shares. Korean courts order a transfer of shares rather than treating them as having disappeared (Seoul Central District Court, June 25, 2020, 2019Na4532; Supreme Court of Korea, March 11, 2021, 2020Da253430), and a buying right that is not exercised leaves the shares with the departing person (Seoul High Court, June 25, 2026, 2025Na211490).
• Check who the buyer is. Naming the Korean company as the buyer risks invalidity under the treasury share rules (Supreme Court of Korea, October 28, 2021, 2020Da208058; Uijeongbu District Court, October 24, 2025, 2023Gadan125567). Naming another shareholder is the safer starting point (Supreme Court of Korea, July 13, 2023, 2022Da224986).
• Check the signing process when the person signing is an employee, particularly if the employee cannot read the contract easily. In the case held void, the court pointed to the employee’s failure to check the contents and to the absence of a copy (Seoul Central District Court, February 14, 2023, 2022Na20732).
• Check equity incentives separately. The two-year rule for stock options under the Commercial Act cannot be relaxed by the articles or a shareholder resolution (Supreme Court of Korea, March 24, 2011, 2010Da85027).

For help in English with a shareholders agreement in IFEZ, see English-Speaking Lawyer in Incheon Free Economic Zone.

Frequently asked questions

This article summarizes Korean court judgments and statutes on vesting clauses in shareholders agreements, based on published judgments and the statutes, and is not legal advice for any particular case. Quotations from Korean judgments and statutes are our English translations. Lower court judgments may be changed on appeal. If you are adding a vesting clause or changing an existing one, consider consulting Atlas Legal.

About the Author

Taejin Kim | Managing Partner

Corporate Counseling, Corporate Disputes, White-Collar Crime

Former Public Prosecutor | Judicial Research and Training Institute, 33rd Class

Korea University LL.B. & LL.M. (Criminal Law), University of California, Davis LL.M.

Atlas Legal | Incheon Songdo, South Korea

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