Convertible Bond (CB) Investment Agreements in South Korea
Investment Agreements in South Korea
Contents
A convertible bond is an investment that “starts as debt and may end as equity.” That duality is the key to understanding the whole agreement.
Before conversion it is a bond with maturity and interest, so the investor holds the position of a creditor; only upon exercising the conversion right does the investor become a shareholder. Because of this character, CBs are often used for early-stage investments or bridge rounds that defer setting a valuation while raising funds. This article covers the key terms of a CB investment agreement and founder cautions, with the 2026 revised KVCA standard form available below.
1. What is a convertible bond (CB)?
A convertible bond (CB) is a security in which a bond (debt) issued by the company carries a right to convert into common stock. Article 513 and following of the Korean Commercial Act are the governing provisions. Before conversion, the investor is a creditor receiving interest; upon exercising the conversion right, the investor becomes a shareholder.
CBs are often used at an early stage where valuation is hard to fix, or as a bridge connecting funds to the next round. The structure combines the upside of a conversion right with the downside safety of a bond.
2. What are the key terms of a CB investment agreement?
The first things to check in a CB investment agreement are the basic bond terms and the conversion terms.
| Term | Content |
|---|---|
| Maturity / coupon | The bond’s repayment maturity and interest rate |
| Conversion price | The per-share price at which the bond converts into stock |
| Conversion period | The period during which the conversion right may be exercised |
| Yield to maturity (YTM) | The guaranteed return if held to maturity (set separately from the coupon in some cases) |
The coupon and the yield to maturity are often set differently, so calculate the total cost the company actually bears.
3. What are conversion price adjustment (refixing) and early redemption?
Conversion price adjustment (refixing) lowers the conversion price if a later round is done at a lower price, letting the investor convert into more shares — and diluting the founder that much more. ▶ See the methods, math, and regulation of refixing in the dedicated in-depth article.
An early redemption right (put option) lets the investor demand repayment of principal and interest before maturity under certain conditions, while a call option lets the company buy back the bond early. The trigger conditions and prices of these options directly affect the company’s cash burden, so confirm them.
4. How does it differ from an equity investment?
The biggest difference is that before conversion it is “debt.” Unlike an equity investment, the company bears a maturity repayment obligation and interest, and the investor is a creditor — not a shareholder — until conversion.
| Category | Convertible bond (CB) | Preferred (CPS/RCPS) |
|---|---|---|
| Legal nature (pre-conversion) | Bond (debt) | Stock (equity) |
| Investor status (pre-conversion) | Creditor | Shareholder |
| Maturity / interest | Yes | No (dividends are separate) |
| Governing provision | Commercial Act Article 513 et seq. | Commercial Act Article 344-2, etc. |
5. What should founders watch?
A CB leaves the company with a maturity repayment obligation. If conversion does not occur and maturity arrives, principal and interest must be repaid, so calculate the total burden of maturity, interest, and yield to maturity in advance.
In addition, the scope of conversion price adjustment (refixing) and the trigger conditions of the early redemption right can bring unexpected cash pressure or dilution to the founder. When this combines with the interested party’s (founder’s) joint-and-several liability, the burden can reach the individual. Atlas Legal reviews these terms clause by clause at the CB issuance stage and analyzes both the cash burden and the equity impact.
These files are the standard contract forms distributed by the Korea Venture Capital Association (KVCA), revised April 2026. The documents are in Korean. Actual transactions require review and tailoring to the specifics of each deal; these materials are provided as reference forms and do not constitute legal advice on any particular matter.
Frequently Asked Questions
Q. Is a convertible bond (CB) equity or debt?
A. Before conversion it is a bond (debt) and the investor is a creditor. Only upon exercising the conversion right does it become stock. Article 513 and following of the Korean Commercial Act are the governing provisions.
Q. When are convertible bonds mainly used?
A. They are often used at an early stage where valuation is hard to fix, or as a bridge connecting funds to the next round.
Q. What is refixing (conversion price adjustment)?
A. It lowers the conversion price when a later round is done at a lower price, letting the investor convert into more shares — diluting the founder that much more.
Q. How does an early redemption right (put) burden the company?
A. It lets the investor demand repayment of principal and interest before maturity under certain conditions, so if triggered it can create unexpected cash pressure for the company.
Q. Is a shareholders agreement also needed for a CB investment?
A. A CB is a debt investment, so the investment agreement is central. However, depending on the post-conversion shareholder relationship and the specifics of the deal, separate arrangements may be needed, so prior review is advisable.
To consult Atlas Legal on reviewing or negotiating a convertible bond (CB) investment contract in South Korea, please contact us at +82-32-864-8300 or info@atlaw.kr.
