Glossary

Redemption Rights

Redemption rights allow Investors to sell their shares back to the Company for the original purchase price (plus dividends, if applicable) after a specified period of time (usually five years). This provision provides Investors with an exit plan out of a “sideways situation”, a situation in which the Company is successful enough to conduct ongoing business but not successful enough to launch an IPO or attract an acquisition. This would seem to provide the Investors with substantial downside protection and be Investor-friendly; however, a Company that isn’t successful enough to grow likely doesn’t have the cash to buy back shares, and state law typically prohibits companies from redeeming shares if they do not have the available capital. Redemption rights therefore rarely come into play and most deals do not include them.

If redemption rights are included in the Charter, the Company should be cautious of provisions that give Investors the right to a price greater than the original purchase price. The Company should also avoid language that gives Investors the right to redemption in the case of “a material adverse change” to its business. This language is vague and gives Investors unilateral control.

Term Sheet Language: Unless prohibited by applicable law governing distributions to stockholders, the Series A Preferred shall be redeemable at the option of the Requisite Holders commencing any time after the five (5) year anniversary of the Closing at a price equal to the Original Purchase Price [plus all accrued/declared but unpaid dividends]. Redemption shall occur in three equal annual portions. Upon a redemption request from the holders of the required percentage of the Series A Preferred, all Series A Preferred shares shall be redeemed [(except for any Series A holders who affirmatively opt-out)].