Why it matters
Redemption rights give investors a put option on your business. If you haven't exited or IPO'd by year five, they can force a buyback at original cost plus accrued dividends. For a company that is profitable but not selling, this is a structural threat: you may need to sell, refinance, or take on debt to satisfy a redemption you can't afford. Redemption rights effectively convert preferred equity into a delayed loan.
How to negotiate
Push for full removal — most top-tier US firms have abandoned redemption since 2018. If retention is non-negotiable, lengthen the trigger to 7+ years, exclude the redemption right from triggering before a qualified financing window, and cap the redemption amount at original purchase price (no accruing dividends).
Example language
How this clause typically appears in a term sheet. Read it carefully — predatory language is often buried in routine paragraphs.
At any time after the fifth anniversary of the Closing, holders of a majority of the Series A Preferred may require the Company to redeem their shares at the original purchase price plus 8% per annum compounding dividends.
TURNSHEET provides intelligence, not legal advice. This page describes typical market behaviour and common negotiation tactics; your specific deal may have nuances that change the analysis. Always review your term sheet with qualified legal counsel before signing.