Redeemable Convertible Preferred Stock (RCPS) Investment and Shareholders Agreements in South Korea
(RCPS) Agreements in South Korea
Contents
In Korean venture investment, saying “we raised on RCPS” is almost a default — redeemable convertible preferred stock is the most common instrument.
On top of the preference and conversion rights of convertible preferred stock, RCPS adds a redemption right to “get the investment back under certain conditions,” giving investors the strongest protection. That, in turn, creates a potential redemption burden for the company. This article explains how the redemption right works, the key contract clauses, and what founders should watch, with the 2026 revised KVCA standard forms available below.
- 2026 Amendments: What Changed
- Convertible Preferred Stock (CPS) Agreements
- Redeemable CPS (RCPS) Agreements (this article)
- Common Stock Agreements
- Convertible Bond (CB) Agreement
- Bond with Warrant (BW) Agreement
- [In depth] Refixing (Conversion Price Adjustment)
1. What is RCPS, and why is it the most used?
Redeemable convertible preferred stock (RCPS) is convertible preferred stock (CPS) with an added redemption right. That is, on top of (i) priority in dividends and liquidation and (ii) a conversion right into common stock, it carries (iii) a right to demand redemption of the investment from the company under certain conditions.
Investors can convert to common stock to capture upside as the company grows, or exercise redemption to seek a return of principal if growth stalls. Because it manages both downside and upside, RCPS is the most widely used instrument in Korean VC investment.
2. When is the redemption right exercised?
The redemption right is typically designed to be exercisable after a set period, upon the occurrence of specified events. The contract sets the time from which redemption may be sought, the events that trigger it (e.g., failure to IPO by an agreed deadline, a material breach), and the redemption procedure.
An important point: having a redemption right does not guarantee return of principal at any time. Under the Korean Commercial Act, redemption is possible only within the company’s distributable profits, so if profits are insufficient, redemption may not actually occur even if the right exists.
3. How are the redemption price and source set?
The redemption price is usually set as the investment principal plus an agreed rate of return (compounded). The source of redemption is limited to distributable profits under Article 345 of the Korean Commercial Act.
| Item | Typical design |
|---|---|
| Redemption price | Principal + agreed return (an IRR basis is common) |
| Redemption source | Within distributable profits (Commercial Act Article 345) |
| If the source is insufficient | Often addressed by carry-forward or installment redemption |
Note too that RCPS may be classified as debt rather than equity for accounting (e.g., for companies applying K-IFRS), which affects the financial statements and should be considered.
4. What do you look at in the SPA vs. the SHA?
Under the 2026 split structure, the “issuance terms” for redemption, conversion, and preferred dividends sit in the Investment Agreement (SPA), while the “shareholder relationship” around exercising the redemption right, together with consent and transfer rights, sits in the Shareholders Agreement (SHA).
- Investment Agreement (SPA) — share issuance terms, preferred dividend, the basic terms of conversion and redemption, reps & warranties, conditions precedent.
- Shareholders Agreement (SHA) — prior consent rights, director designation, first refusal/co-sale, drag-along, and procedures related to exercising the redemption right.
Because it is a split structure, it is important to cross-check that the redemption and conversion definitions and terms do not conflict between the two contracts.
5. What should founders watch out for?
The key point is that RCPS leaves the company with a potential redemption burden. If the redemption return is set high, the burden at redemption grows even as the company succeeds; if the redemption triggers are broad, a redemption demand can arrive at an unexpected time.
When this combines with the joint and several liability of the interested party (founder), the burden can extend beyond the company to the founder personally. Confirm the redemption return, the range of redemption triggers, and the limits of joint-and-several liability before signing. Atlas Legal reviews these clauses one by one during an RCPS fundraise and helps build a negotiation strategy.
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. What is the difference between RCPS and CPS?
A. RCPS is convertible preferred stock (CPS) with an added redemption right. RCPS lets the investor demand redemption of the investment under certain conditions, giving stronger protection.
Q. Does a redemption right always guarantee return of principal?
A. No. Under the Korean Commercial Act, redemption is possible only within the company’s distributable profits, so if profits are insufficient, redemption may not actually occur even if the right exists.
Q. How is the redemption price calculated?
A. It is generally the investment principal plus an agreed rate of return, commonly on a compound (IRR) basis. The specific rate and method are set in the contract.
Q. Is RCPS equity or debt for accounting?
A. Depending on the redemption terms, it may be classified as debt. In particular, for companies applying K-IFRS, it can affect the financial statements, so confirm in advance.
Q. What contracts does an RCPS investment require?
A. Under the 2026 split structure, an RCPS Investment Agreement (SPA) and a Shareholders Agreement (SHA) are used together. You can download both forms below.
To consult Atlas Legal on reviewing or negotiating an RCPS investment contract in South Korea, please contact us at +82-32-864-8300 or info@atlaw.kr.
