Term sheet clauses
Also called put rights, redeemable preferred
A redemption right lets an investor require the company to buy back their shares after a defined period, usually at the original price plus accrued dividends, giving them an exit if no sale or IPO happens.
Venture funds have finite lives, typically ten years. An investment in a company that neither fails nor exits leaves the fund holding an asset it cannot return to its LPs. Redemption rights are the contractual answer.
The right normally becomes exercisable five to seven years after the investment, often requires a majority of the preferred to agree, and is paid over instalments rather than in one payment.
A company that has not exited usually does not have the cash to redeem. Enforcing the right can push it into insolvency, which serves nobody, and most jurisdictions restrict share buybacks to distributable reserves the company does not have.
The practical effect is leverage rather than liquidity. A live redemption right gives the investor a strong seat at the table in any conversation about a sale, a recapitalisation, or new terms.
They appear in a minority of venture deals and are more usual in growth rounds and in structures backed by investors with fixed fund lives or mandated return profiles.
Often it has no choice. Company law generally restricts buybacks to distributable reserves, so a company without them cannot legally redeem regardless of the contract.
They are worth resisting, and if unavoidable, worth limiting: a long runway before exercise, a cap on accrued dividends, and instalment payment all reduce the pressure they create.
Brouky tracks 43,000+ investors and the companies they have actually funded. Browse the investor directory, or see who backs a given sector, from fintech to biotech.