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Redemption Right

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What is a Redemption Right?

When an investor purchases preferred stock, the agreement occasionally includes a redemption right clause. This right indicates that the company must buy back the sold shares from the investor after a pre-determined amount of time passes. A redemption right is attractive to investors who wish to protect themselves from losing too much money in the deal.

Redemption Right Examples

Example of redemption right event:

  • Example 1. Sierra purchases preferred stock from a startup who is not an attractive acquisition. In exchange for her capital, she asks that the company add a redemption right that would require them to purchase back all the shares she acquires after 6 months. This protects Sierra from losing her initial investment.

This page also discusses a redemption right.

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