Redemption Rights
An investor's right to force the company to repurchase their shares after a set period.
Definition
Redemption rights give preferred stockholders the ability to force the company to buy back their shares at the original purchase price (plus any accrued dividends) after a specified period, typically 5-7 years. This provides investors with a downside exit if the company is not growing fast enough for an IPO or acquisition. In practice, most startups cannot afford to honor redemption requests, making this right more of a negotiating tool.
Why it matters
If investors exercise redemption rights, the cash used to buy back their shares comes directly from the company's bank account, reducing runway and potentially threatening the business. This is a worst-case scenario that is rare but worth understanding.
Example
Five years after the Series A, investors with redemption rights request the company repurchase their $10M in preferred shares. The company has $15M in cash but needs it for operations. The board must negotiate an alternative arrangement.