Overview of Japanese Startup Investment for US Venture Capitalists
https://www.jetro.go.jp/ext_images/_Reports/02/2025/3c98e83bada0c50c/Overview_of_Japanese_Startup_Investment_for_US_Venture_Capitalists_r.pdf
[Contents]
1. Introduction
2. Legal Entities of Japanese Startups: Legal Entities, Forms and their Characteristics
(1) Japanese KKs
(2) Shares of Japanese KKs
(3) Restrictions on the Transfer of Shares in Japanese KKs
(4) Directors/Board of Directors/Representative Directors of Japanese KKs
(5) Auditors of a Japanese KK
(6) General Shareholders’ Meetings / Class Shareholders’ Meetings of Japanese KKs
(7) Tax Matters
3. Overview of Investment Approaches to Startups in Japan
(1) General Overview
(2) Methodology
① Common Stock
② Preferred Stock
③ Convertible Note: Bonds with stock acquisition rights
④ Convertible Equity: J-KISS
⑤ Other
(3) Stock Option Pool
(4) Language
4. Investment Process for Startups in Japan
(1) Initial Negotiations
(2) Preparation and Execution of Term Sheets
(3) Due diligence
(4) Preparation and Negotiation of Long Forms
(5) Signing of Long Forms
(6) Conducting a General Meeting of Shareholders
(7) Payment of Purchase Price
(8) Delivery of Closing Documents
(9) Registration Procedures with Corporate Registry
5. Compliance with the FEFTA (Startup Investment and the FEFTA)
(1) Overview
(2) Foreign Investor
(3) Transactions and Acts Regulated by the FEFTA
① Inward Direct Investment, etc.
② Specified Acquisition
(4) What is a Designated Industry?
(5) Required Procedures (Prior Notification and Post-closing Reporting)
① Prior Notification
② Post-Closing Report
③ Language
(6) Penalties for Violating the FEFTA
(7) Practical Tips
6. Details on Investment Approaches to Japanese Startups
(1) Preferred Stock Investment
① Details of Shares of Preferred Stock (Terms and Conditions of Issuance)
A) Dividend
B) Liquidation Preference
C) Optional Conversion Rights/Anti-Dilution Clauses
D) Mandatory Conversion Mechanism
E) Right to Monetary Redemption (Right to Demand Acquisition for Cash Consideration)
F) Right to Appoint Directors
G) Right of Veto
② Investment Agreement
A) Purchase of Shares
B) Representations and Warranties
C) Indemnity Provision
D) Put Option
③ The Shareholders’ Agreement
A) Matters Relating to the Operation of the Company
(a) Authority to Elect Directors
(b) Observer Rights
(c) Information Rights
(d) Inspection Rights
(e) Veto Rights
(i) “Prior Consent” Matters
(ii) “Prior Notice” Matters
(iii) “Prior Consultation” Matters
(iv) “Post Report” Matters
B) Matters Concerning Disposal of Shares
(a) Restriction on Transfer, Right of First Refusal, Co-Sale Right
(b) Preemptive Rights
C) Other Matters
(a) Obligation to Make Efforts To Be Listed
(b) Duty to Devote Oneself to Management and Non-competition
④ Agreement on Distribution
A) Distribution Agreement (Deemed Liquidation)
B) Drag-Along Right
⑤ Closing Procedures
A) Procedures for Issuance of Shares
B) Necessity of Registration of Changes
C) Notes When Signing (Electronic Signature Service)
(2) Notes on Payment
(3) Convertible Equity: J-KISS
① Overview
② Structure of the J-KISS
A) Discount Rate
B) Valuation Cap
C) Conversion Date
D) When Change of Control
③ Stock Acquisition Rights
④ Practical Measures at the Time of Conversion
⑤ Investment Agreement
⑥ Shareholders Agreement
⑦ Closing Procedures
(4) Convertible Note: Bonds with Stock Acquisition Rights
① Overview
② Structure (Corporate Bonds + Stock Acquisition Rights)
A) Discount Rate; Valuation Cap
B) Change of Control
C) Redemption Dates and Interest
③ Nature as a “Bond”
④ Subscription Agreement for Bonds with Stock Acquisition Rights
⑤ Shareholder/Creditor Agreement
⑥ Closing procedures
7. Post-investment Involvement with Japanese startups
(1) General Meeting of Shareholders
(2) Board of Directors
(3) Next Financing Round
≪Contact Information≫
TMI Associates Silicon Valley LLP
siliconvalley@tmi.gr.jp