Explaining investment terms: Redemption
The right of redemption is the right to demand under certain conditions that the company buys back its own shares from its investors at a fixed price. This right may be included to require a company to buy back its shares if there has not been an exit within a pre-determined period. Failure to redeem shares when requested might result in the investors gaining improved rights, such as enhanced voting rights.
A right of redemption is not appropriate for every investment and is not allowed or is limited (e.g. to a certain percentage of the issued and outstanding shares) in some jurisdictions in Continental Europe. In those parts of Europe where it is allowed, subject to certain restrictions, redemption can be used to ensure that the venture capital investors recover some of their investment if a company has not been able to achieve a successful exit (see Exit) within a certain period of time. However, in the UK and certain other jurisdictions, there are legal requirements that must be satisfied before a company can redeem any of its shares.
A right of redemption can also be used by an investor where it needs to strongly discourage a company from breaching certain obligations, by providing a way for the investor to dispose quickly of its shareholding. In jurisdictions where redemption is not possible under local company law, an alternative is to negotiate a conditional right for the investors to put (sell) their shares to the founders at a fixed price.
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