Startup Investment Contracts: Key Clauses Every Founder Must Review
You've probably heard it before: "Always have your term sheet reviewed before signing."
Yet in practice, founders sign under pressure all the time — tight on cash, eager not to upset the investor, telling themselves they'll sort out the details later. It's one of the most common and costly mistakes in early-stage fundraising.
Today's investment agreements are no longer simple documents. Milestone-based funding, KPIs, valuation adjustments, anti-dilution provisions, and redemption rights are all interconnected — and if you don't understand how they work together, you can lose meaningful equity and control without ever realizing it.
This guide breaks down the trends we're seeing in Korean startup investment contracts right now, and what founders need to watch out for before they sign.
1. Why the Structure of Investment Contracts Has Changed
Not long ago, founders could negotiate reasonably well by focusing on one question: how much equity for how much money?
That's no longer enough. Modern investment agreements tie together valuation, milestone-based disbursements, anti-dilution mechanisms, redemption and repurchase rights, preferred share structures, drag-along rights, and rights of first refusal — all within a single document. Looking at any one clause in isolation is where founders get into trouble.
As the funding environment has become more cautious, investors are building in more downside protection. That means founders need to be equally deliberate about guarding against excessive dilution and loss of operational control.
Understanding how these contracts are structured before you sit down to negotiate can make a significant difference in the outcome.
2. Milestone-Based Funding: When Capital Doesn't Come All at Once
One of the most notable shifts in recent Korean investment contracts is the move toward milestone-based disbursements. Rather than transferring the full investment amount upfront, investors release funds in tranches as the company hits pre-agreed targets.
A typical structure might look like this: KRW 300 million at signing, an additional KRW 200 million upon reaching a monthly revenue target, and a final KRW 200 million tied to a product launch milestone.
Before agreeing to this structure, founders should clarify three things. First, are the milestones defined precisely enough to be objectively measured? Vague language is a breeding ground for disputes. Second, what happens if a milestone is partially met — does disbursement pause entirely, or is there a proportional release? Third, who has the authority to determine whether a milestone has been achieved, and by what standard?
The question isn't just whether the milestones sound reasonable on paper. It's whether your team can realistically hit them given your current resources, market conditions, and execution capacity.
3. KPI Definitions: Where Disputes Are Born
As milestone structures have become more common, the question of which KPIs govern those milestones has become equally important.
Founders are increasingly seeing metrics like MRR/ARR, retention rates, repeat visit rates, and conversion rates written into contracts — not just headline numbers like downloads or registered users.
What matters more than the metric itself is how it's measured and over what time period. Take a seemingly straightforward target like "monthly revenue of KRW 100 million." Is that a one-time achievement, or does it need to be sustained for three consecutive months? Are refunds and discounts excluded from the calculation? Which data source governs — your internal accounting records or the settlement reports from your payment processor?
These details should be spelled out explicitly in the contract. Ambiguity here is not a minor issue — it's where investor-founder disputes actually start.
4. Valuation, Dilution, and Anti-Dilution: What's Behind the Number
Valuation is naturally where founders focus their attention. But the headline number matters far less than what happens to ownership percentages in subsequent funding rounds.
Anti-dilution provisions protect existing investors when a later round closes at a lower valuation than the current one. The two most common mechanisms — full ratchet and weighted average — produce very different outcomes for founders. Full ratchet adjustments can significantly increase dilution; weighted average formulas tend to be more founder-friendly. Knowing which applies to your contract is essential.
Refixing clauses deserve equal attention. These allow the per-share price to be retroactively adjusted if certain performance conditions aren't met. On the surface, your equity stake looks fixed. In practice, falling short of targets can trigger additional dilution you didn't plan for.
A high valuation is worth celebrating — but only after you understand the dilution and adjustment mechanisms attached to it.
5. Penalties for Missed Milestones: Repurchase, Redemption, and Termination
Wherever milestone structures exist, penalty provisions follow. Founders need to understand exactly what happens if targets aren't met.
✔️ Repurchase clauses require the founder to buy back the investor's shares if a milestone is missed. The key variable is price: is it the original investment amount, or does it include interest?
✔️ Redeemable Convertible Preferred Shares (RCPS) give investors the right to demand repayment under certain conditions, or to adjust the conversion ratio in their favor to protect their returns.
✔️ Contract termination clauses define how the agreement is unwound entirely if things go wrong, including how already-disbursed funds are settled.
From a founder's perspective, the critical question is whether a missed milestone leaves the company any room to maneuver — or whether it creates an immediate liquidity crisis with no exit. You may not be able to eliminate these protections entirely, but their severity and scope are almost always negotiable.
Before You Sign: Three Things to Check First
Are the milestones and KPIs genuinely achievable given your team's current capacity and market conditions? What dilution and adjustment mechanisms are attached to the valuation, and how do they interact? And if milestones are missed, how severe are the penalties — and where are the limits?
Getting clear on these three structural questions before you enter negotiations will put you in a materially stronger position.
If any clause raises a red flag, or if the overall structure feels difficult to parse, we recommend reviewing the full contract rather than relying on a clause-by-clause reading. The risks in these agreements are often in how the provisions connect, not in any single term read in isolation.
Decent Law Firm's Corporate Practice Team works with founders on investment contract reviews with a focus on practical risk — equity structure, dilution exposure, and penalty provisions. If you're approaching a closing, send us the key terms and we'll give you a clear, efficient assessment of where the real risks lie.
