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Do Venture Capitalist Ever Use Their Redemption Rights?

Q: Have you experienced a company which grows along nicely, but does not offer a liquidity event? In the funding agreement, there is a clause for redemption rights. Is this used so that the VC can get out of the investment?

A: (Jason). Yes, we’ve experienced companies growing nicely without liquidity events. And yes, we usually request redemption rights in our deals. That being said, we’ve not exercised them.

(For a primer on redemption rights, see our prior post)

So why ask for them? Theoretically, one can come up with a situation where a fund is late in life (funds are usually 10-12 years in term), you have a nice company, but no liquidity. In this event, it’s nice to have an “out” to get liquidity, or to have some leverage to have some control on the situation. That being said, redemption rights are pretty benign. They look scary, but I would hazard to guess that few VCs, if any, have ever actually used them.

I’d equate redemption rights similarly to registration rights: VCs rarely use them, but if you need them and didn’t ask for them, you are a chump.

May 30th, 2007 by     Categories: Term Sheets    
  • Saul Lieberman

    “I’d equate redemption rights similarly to registration rights: VCs rarely use them, but if you need them and didn’t ask for them, you are a chump.”
    Sure, it never it hurts to ask.
    But it also follows that if your lawyers are spending too much time on registration rights or redemption rights, both the VC and the company should be prepared to make the concession necessary to move on.

  • Saul Lieberman

    Considering that registration rights are rarely used, is it possible to usefully cover registration rights in a couple of paragraphs?

  • Jason

    I wish. There are three major types of reg rights – demand, S-3 and piggybacks. Unfortunately all of that language is needed – i’ve looked at it several times. The good news is that it’s boilerplate so it doesn’t really impact timing.

  • Sumitra Menon

    “VCs are only interested in coming to the rescue of victory.” Is this true? Read Strategy consultant Sramana Mitra’s interview series with leading entrepreneurs. Link: http://sramanamitra.com/articles/investment-thesis-interviews-with-vcs-angels/