Term Sheet: Redemption Rights by Brad Feld

“Redemption at Option of Investors: At the election of the holders of at least majority of the Series A Preferred, the Company shall redeem the outstanding Series A Preferred in three annual installments beginning on the [fifth] anniversary of the Closing. Such redemptions shall be at a purchase price equal to the Original Purchase Price plus declared and unpaid dividends.”

  • Essentially lets the VCs to get a refund on their initial investment
  • This is a good provision for VCs in the case that the company is successful enough to become a sustainable business, but not attractive for IPO or to be acquired
    • VC doesn’t want to get locked into this situation
    • If a company isn’t attractive for acquire or ipo, it usually isn’t going to have enough cash for redemption rights
  • Most Venture funds have a life span of 5 years. If they make an investment year 5, it’s important to secure a guaranteed exit plan when the fund is winding down
  • Recently, accountants are arguing that redeemable preferred stock is a liability and not an equity feature
  • Don’t agree to “adverse change redemption”
    • Allows VC to force a refund if there is a negative change to the business environment/prospects/etc

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