How to read a Japanese startup financing agreement
When a startup raises money, attention goes to the headline: at what valuation, and for what percentage of the company.
Valuation and dilution do matter.
But an investment agreement settles a good deal more than the numbers: which management decisions will require the investor's consent, who may participate in the next round, how the proceeds of an M&A are divided, what happens if a founder steps down, and whether anyone is obliged to buy the shares back if the agreement is breached.
And the same ¥10 million can be raised through ordinary shares, preferred shares or J-KISS — three quite different legal structures.
The short version
- "The investment agreement" is often not one document. The functions are split between an investment agreement, a shareholders' agreement and a distribution agreement.
- Ordinary shares, class shares and J-KISS differ in when the valuation is fixed and what rights the investor receives.
- With preferred shares, the liquidation preference and the deemed liquidation clause decide directly what the founders receive on an M&A.
- J-KISS simplifies the paperwork. It does not mean there is nothing to decide.
- On investor put rights — especially a put against a founder personally — recent government guidance asks for the practice to be reconsidered.
1. First, decide what you are raising with
Equity financing for a Japanese startup broadly takes three forms: ordinary shares, class shares (preferred shares), and convertible equity such as J-KISS. All three end up connected to the value of the company's shares, but the legal mechanics are not the same.
Ordinary shares
The simplest route: the investor subscribes and ordinary shares are issued at that point. That requires the price per share — and so the valuation of the company — to be fixed now.
Class shares and preferred shares
For a round of any size with venture capital, the company often issues class shares carrying rights that differ from the ordinary shares. Typically they give the investor a degree of priority over the ordinary shareholders in the economics of a liquidation or an M&A.
J-KISS
J-KISS is a convertible-equity instrument published by Coral Capital, implemented under Japanese law using share options issued for consideration. METI treats it as the representative example of a convertible investment instrument. Its defining feature is that the valuation is, in principle, not fully fixed at the time of investment: conversion into shares happens at a later equity round.
2. Why J-KISS is used at seed stage
For a company that has just been founded, trying to settle precisely whether it is worth ¥300 million or ¥500 million can be an exercise with almost no objective material behind it.
Raising on ordinary shares nonetheless requires a valuation to be set.
The point of a convertible instrument is that this decision can be deferred to the next round, when there is more information.
METI describes convertible instruments in similar terms: valuation and shareholder arrangements are deferred, and funding can be supplied flexibly through bilateral deals with individual investors.
That fits the situation of a company that has only just started trading, cannot sensibly be valued, and needs tens of millions of yen now.
3. Even with J-KISS, the valuation cap is critical
Deferring the valuation does not mean nothing is agreed about the price at which the investor will eventually acquire shares. One of the key terms is the valuation cap.
In simple terms, it means that however high the company's valuation turns out to be later, the conversion price for the investor who took the early risk is calculated against a ceiling.
Suppose ¥30 million is invested now and the company is valued at ¥3 billion in the next round. With a cap in place, the J-KISS investor does not simply convert at ¥3 billion but at a more favourable conversion price.
For the investor that is the economic reward for early risk. For the founders it is direct future dilution. So when reading a J-KISS, the question is not only how much is being raised now, but what percentage the instrument may become on conversion.
In the current J-KISS 2.0, the valuation cap is set on a post-money basis, which makes the dilution in each round easier to follow.
4. J-KISS does not mean there is nothing to negotiate
The great advantage of J-KISS is standardisation. If both sides work from the same template, nobody has to draft an investment agreement from scratch, and the time and cost of the round come down.
At the same time, the valuation cap, the discount, the conditions for the next equity round, the treatment on an M&A, the treatment on an IPO and the conversion triggers are the economic terms themselves.
And heavily amending the published template gives away the very benefit of standardisation — that the content does not have to be re-examined line by line.
METI makes the same point: where a template such as J-KISS is used, keeping the speed advantage of convertible equity means avoiding unnecessary additions and amendments, and narrowing the points under negotiation.
5. Preferred shares are not "shares with stronger voting rights"
The word "preferred" leads people to assume the investor's votes outweigh the ordinary shareholders'. But "preference" means more than one thing.
Class shares can differ from ordinary shares in their dividend rights, their share of residual assets, their voting rights, and the terms on which they may be acquired.
What matters most in startup investment is the economics: how the value of the company is ultimately divided between the shareholders.
If the company is acquired for ¥1 billion, that ¥1 billion is not necessarily divided in proportion to shareholdings. Where the investor has a liquidation preference, and a deemed liquidation clause treats an M&A in the same way as a liquidation, the proceeds are distributed according to those terms.
So "we only gave away 10%, so the investor takes 10% on an exit" is a dangerous assumption.
6. What "1x, participating, non-participating" changes
Two things drive the preference: the multiple — how much of the investment comes back first — and whether, having taken the preference, the investor also shares in what remains alongside the ordinary shareholders. The latter is the participating / non-participating question.
If an investor puts in ¥100 million, the amount left for the founders and employee shareholders on an M&A differs depending on whether the investor takes ¥100 million and then participates in the balance, or takes the ¥100 million alone, or converts to ordinary shares and takes a pro-rata share.
When reading the documents, do not stop at the words "preferred shares": calculate the exit waterfall with actual numbers.
7. The investment agreement, the shareholders' agreement and the distribution agreement do different jobs
A financing rarely settles everything in one document. METI's guidelines on startup investment agreements separate the functions into three.
Investment agreement
The terms of this issue of shares and of completion: the number of shares, the price, the payment date, the use of proceeds, the representations and warranties, and the conditions precedent.
Shareholders' agreement
How the company is run afterwards: matters requiring prior consent, the right to nominate a director, observer rights, information rights, pre-emption rights, the founders' commitment obligations, and cooperation on an exit.
Distribution agreement
Drag-along on an M&A, and how the sale proceeds are distributed.
Conflating the three is how a company ends up having granted broad veto rights over its own management while believing it was signing up to receive an investment.
8. "Prior consent" is not "consult the investor"
The clause to read closely in a shareholders' agreement is the list of matters requiring prior consent: issuing shares, substantial borrowing, transferring a business, an M&A, disposing of important intellectual property, changing the officers, materially changing the business plan.
This is not an information-sharing obligation. If consent is required, then the investor saying no may mean the company cannot act.
The useful question is not whether investors should be involved in important matters at all, but how far the veto needs to reach.
Extend the consent list to everyday management decisions and the speed of the company's decision-making goes with it. Conversely, allowing the investor a degree of involvement in matters that materially affect their interests — a large new issue, a sale of the company — is reasonable.
9. A put right can turn an investment in the company into a personal debt of the founder
Investment agreements often allow the investor to require its shares to be bought back if there is a serious breach. What matters most is who the demand can be made against.
If the founder is personally liable to buy the shares, then equity money — risk capital — has effectively been given a personal repayment guarantee.
The JFTC/METI Guideline on Business Collaboration with, and Investment in, Startups addresses this directly. The February 2026 amended version states that removing individuals such as management shareholders from the scope of put rights is desirable from the standpoint of competition policy, and that the trigger events should be clearly limited to serious breaches of representations and warranties or other serious breaches of the agreement. The guideline is also listed in the index for competition law.
So "if the agreement is breached the founder buys back the whole investment" is not a clause to accept as standard. Its necessity and its scope both deserve examination.
10. With J-KISS, check what happens on an M&A
A company may be acquired after issuing a J-KISS but before the next round. That raises the question of what happens to the share options.
METI's 2026 guidance on startup M&A covers convertible equity including J-KISS, and the need to settle in advance how conversion or cash redemption is handled on an acquisition.
In other words, a J-KISS is not only a bridge to Series A. What happens if the next round never arrives — an acquisition, an IPO, a liquidation — has to be checked as well.
11. Choosing between ordinary shares, preferred shares and J-KISS
Conceptually:
| Instrument | Characteristics | Where it fits |
|---|---|---|
| Ordinary shares | Relatively simple structure; valuation fixed at the time of the raise | Smaller angel investments |
| Preferred shares | The investor's economic and governance rights can be designed in detail | A substantial round with venture capital |
| J-KISS | Fixing the valuation can largely be deferred to the next round | Fast pre-seed and seed raises |
There is no rule of law that seed means J-KISS and Series A means preferred shares.
What drives the choice is the amount, whether the company can reasonably be valued today, the number of investors, the time until the next round, the rights the investor is asking for, the legal and registration costs, and the expected exit.
12. What to check at a financing
| Item | What to check |
|---|---|
| Instrument | Ordinary shares, preferred shares or J-KISS |
| Valuation | Fixed now, or deferred |
| Dilution | The founders' holding on a fully diluted basis |
| Valuation cap | The ceiling valuation on conversion of a J-KISS |
| Discount | How favourably it prices against the next round's investors |
| Liquidation preference | What the investor takes first on an exit |
| Deemed liquidation | Whether an M&A is treated as a liquidation |
| Prior consent | Which management decisions need the investor's consent |
| Board seat | Whether the investor can appoint a director |
| Information rights | What is reported monthly or quarterly |
| Pre-emption | Whether there is a right to join the next round |
| Put right | Against whom, and on what trigger |
| Founder liability | Whether an individual is effectively guaranteeing the company's obligations |
| M&A | How the instrument converts and how proceeds are distributed |
| IPO | How the contractual rights are unwound on listing |
13. In conclusion: read which rights you are giving, not what percentage
Valuation is the most legible number in a financing, so terms tend to be assessed as "¥100 million at a ¥1 billion valuation, so about 10% dilution".
But the same 10% investment produces very different outcomes for the business and for the exit depending on the liquidation preference, the deemed liquidation clause, the consent list, the board appointment right, the pre-emption right and the put right.
At the same time, treating every investor right as something to be stripped out because it disadvantages the founders is not the right approach either. The investor is providing money while it is still unknown whether the company will succeed. A degree of economic priority, access to information and involvement in important matters is a reasonable response to that risk.
What matters is asking, clause by clause, whether this particular scope of right is really necessary to protect this particular investor.
A financing agreement is not a document for the day the money arrives. It designs the relationship between the investor and the company through the next round, the running of the business, an IPO and an M&A.
What the founders should settle between themselves before the investors arrive is covered in what a founders' agreement should decide.
Principal sources
- METI, guidelines on startup investment agreements (expanded edition) (September 2025)
- METI, guidelines on the use of convertible investment instruments (December 2020)
- JFTC and METI, Guideline on Business Collaboration with, and Investment in, Startups (31 March 2022, amended 19 February 2026)
- METI, guidance on startup M&A (21 May 2026)
- Coral Capital, J-KISS (the J-KISS 2.0 documents and commentary)
- Coral Capital, release of J-KISS 2.0 (post-money cap) (13 April 2022)
- e-Gov, Companies Act
Most of these documents are published in Japanese.
This article is general information, not legal advice on any specific matter. What is appropriate depends on the amount raised, the investor, the business plan and the exit you have in mind. For review of an investment or shareholders' agreement under Japanese law, please use the contact form.