Redemption Rights: The Hidden Clause
Written by Harry Prabandham
Curated by Rubric Financial
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What Redemption Rights Are
- Redemption rights give investors the ability to force the company to repurchase their shares at the original investment price (or a multiple) after a set period, typically 5-7 years
- In theory, this provides investors with an exit if the company hasn't gone public or been acquired within a reasonable timeframe
- In practice, most startups don't have the cash to honor a redemption, but the legal obligation creates leverage for the investor
- Redemption rights are more common in later-stage deals and with corporate or international investors who need defined exit timelines
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About the author
Harry PrabandhamFounder & CEO
Founder and CEO of StartupCFO. MBA from Wharton, MS in Computer Science, and decades of experience building and advising venture-backed startups.
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GlossaryPro Rata Rights
Investor's contractual right to participate in future rounds at their existing ownership percentage to avoid dilution.
GlossaryDrag-Along Rights
Allows majority shareholders to force minority holders to sell their shares in an acquisition.
GlossaryTag-Along Rights
Allows minority shareholders to join a sale on the same terms as majority shareholders.
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