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1Clear out junk files and repair common Windows errors2Scan for outdated or missing drivers - takes under a minute3Repair Windows errors before they cause bigger problemsA redemption right gives certain preferred-stock investors a contractual way to ask a company to repurchase their shares after specified conditions are met. It does not guarantee that investors can get their money back: the right depends on the final charter’s terms and on whether the company can legally make the payment.
What a redemption right does
In venture financing, a redemption right is a negotiated preferred-stock provision that can require a company to buy back shares when the stated trigger and other conditions are satisfied. The NVCA’s model legal documents page describes its documents as industry-embraced forms for venture financings and includes a model Certificate of Incorporation. Those documents are reference forms, not a mandatory term sheet or universal market formula.
The operative terms belong in the governing documents for the preferred stock, especially the certificate of incorporation. Delaware General Corporation Law §151(b) permits stock to be redeemable at the corporation’s option, at the holders’ option, or upon a specified event, with the timing, price, and other terms set out in the certificate or an authorized board resolution. See the Delaware statute.
What to compare in the term sheet and charter
A term sheet may summarize the intended right, but the final charter language controls how it works. Compare these points before relying on the headline phrase “redemption rights.”
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Who can request redemption?
Check whether redemption can be initiated by the company, by specified preferred holders, or upon a stated event. If holders can request it, identify the required percentage and which series or shares count toward that threshold. Delaware law allows holder-option redemption, but it does not supply the negotiated voting threshold; that is document-specific.
When can the right be exercised?
Look for the start date, notice procedure, and any deadlines or conditions. One illustrative clause discussed by Lawson Lundell begins after the fifth anniversary of closing; that is an example, not a default rule. See Lawson Lundell’s venture-financing commentary.
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How is the redemption price calculated?
The price can materially change the economics. The Lawson Lundell example uses the original purchase price plus accrued but unpaid dividends. A reproduction of the October 2025 NVCA model charter includes alternatives such as original issue price plus declared but unpaid dividends and, in one option, fair market value. These are drafting alternatives, not interchangeable assumptions. See the model-charter reproduction.
How and when is payment made?
Check whether payment is due all at once or over installments, and whether payment is made in cash or another form permitted by the documents. The Lawson Lundell sample divides redemption into three equal annual portions. The OpenAgreements reproduction also shows three annual installments following a request by the requisite holders. Neither example establishes a universal schedule.
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Some drafting alternatives exclude shares held by investors who do not want to participate. More importantly, read what happens if a redemption request is made but payment is unavailable or delayed. The model reproduction includes an excluded-shares alternative; the actual consequences depend on the final language and applicable law.
Why redemption is not a guaranteed repayment
A redemption right is a stock right, not an unconditional creditor-style demand for repayment of principal. The Delaware statute makes the right subject to charter terms and legal limits on distributions. In SV Investment Partners, LLC v. ThoughtWorks, Inc., the Delaware Court of Chancery addressed those limits and explained that preferred shares do not guarantee payment when legal restrictions prevent the company from paying. Read the ThoughtWorks decision.
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That limitation matters because an investor may request redemption precisely when the company is under financial pressure. A contractual request cannot itself create funds or override restrictions on lawful distributions. The governing documents should therefore be read for the process and consequences if the company cannot pay when redemption is requested.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How to read the clause in practice
- Find the operative documents. Compare the term sheet with the final Certificate of Incorporation and any related financing documents; do not rely on a summary label alone.
- Mark the trigger and threshold. Record who may act, which shares count, the required holder percentage, and when the right first becomes available.
- Calculate the stated price. Identify the price base, treatment of dividends, any fair-market-value option, and the valuation or determination process.
- Map the payment schedule. Note installments, payment form, notices, opt-outs, and any conditions for each payment.
- Read the nonpayment provisions alongside the right. Determine what the charter says about unavailable or deferred payment and how statutory distribution limits affect the request.
NVCA identifies its model documents as forms to be tailored to a financing, not as a guarantee that every transaction uses identical terms. Its model Certificate of Incorporation was updated in October 2025; other forms on the NVCA page have different revision dates. A deal-specific review should use the executed documents and applicable law.
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This is a general guide to interpreting a term-sheet provision, not an individualized legal conclusion. A startup or investor assessing a proposed redemption clause should have counsel review the final charter, the trigger and threshold, price formula, payment mechanics, and the consequences of legally unavailable payment.
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