Whether you’ve only recently decided to seek out capital for your business or you’ve already received (or made) your first offer, the term sheet (or “letter of intent”) is an integral part of the process.
In this series we’ll look to shed some light on the legal language contained in that term sheet by taking a “deep dive” into the most often used terms and how choices made in selecting those terms can affect both Company and Investor. Check out an overview here.
Earlier in this series when we initially discussed the concept of dividends, we equated the idea to that of lenders receiving interest payments on the “loan” they made to the company. In that context, “Redemption Rights” are the rights held by a company’s investors to call that “loan”; to force the company to buy them out.
While redemption rights are rarely, if ever used by the Investors that hold them, like so many rights that we have discussed in this series (and will discuss in the future), they are important because they set the playing field for future discussions.
In other words, they establish leverage; the nature of which you can see indicated in the header image to this post.