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.